-----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,
WZvqBPDtf8/KUxeULTPZe9nrkOxzgxNLTu2oj0JhfpsvP5bATYKT4EynQn/Dr8o8
tkILlh1qLpHjvo3gNcWhTQ==
0001047469-08-007807.txt : 20080626
0001047469-08-007807.hdr.sgml : 20080626
20080626173316
ACCESSION NUMBER: 0001047469-08-007807
CONFORMED SUBMISSION TYPE: 10-12B/A
PUBLIC DOCUMENT COUNT: 22
FILED AS OF DATE: 20080626
DATE AS OF CHANGE: 20080626
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TICKETMASTER
CENTRAL INDEX KEY: 0001006637
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990]
IRS NUMBER: 954546874
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-12B/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-34064
FILM NUMBER: 08920215
BUSINESS ADDRESS:
STREET 1: 8800 WEST SUNSET BLVD.
CITY: WEST HOLLYWOOD
STATE: CA
ZIP: 90069
BUSINESS PHONE: 310-360-3300
MAIL ADDRESS:
STREET 1: 8800 WEST SUNSET BLVD.
CITY: WEST HOLLYWOOD
STATE: CA
ZIP: 90069
FORMER COMPANY:
FORMER CONFORMED NAME: TICKETMASTER ONLINE CITYSEARCH INC
DATE OF NAME CHANGE: 19980923
FORMER COMPANY:
FORMER CONFORMED NAME: CITYSEARCH INC
DATE OF NAME CHANGE: 19980617
FORMER COMPANY:
FORMER CONFORMED NAME: PERFECTMARKET INC
DATE OF NAME CHANGE: 19960909
10-12B/A
1
a2186551z10-12ba.htm
10-12B/A
QuickLinks
-- Click here to rapidly navigate through this document
As filed with the Securities and Exchange Commission on June 26, 2008
Registration No. [ ]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
TICKETMASTER
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization) |
|
95-4546874
(I.R.S. Employer
Identification No.) |
8800 Sunset Blvd.,
West Hollywood, CA
(Address of Principal Executive Offices) |
|
90069
(Zip Code) |
(310) 360-3300
(Registrant's telephone number, including area code) |
Securities
to be registered pursuant to Section 12(b) of the Act:
Title of each class
to be so registered
|
|
Name of each exchange on which
each class is to be registered
|
Common Stock, par value $0.01 per share |
|
The NASDAQ Stock Market LLC |
Securities
to be registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
|
Accelerated filer o |
|
Non-accelerated filer ý (Do not check if a smaller
reporting company) |
|
Smaller reporting company o |
This Registration Statement has been prepared on a prospective basis on the assumption that, among other things, the spin-offs (as described in the
Information Statement which is a part of this Registration Statement) and the related transactions contemplated to occur prior to or contemporaneously with the spin-offs will be
consummated as contemplated by the Information Statement. There can be no assurance, however, that any or all of such transactions will
occur or will occur as so contemplated. Any significant modifications to or variations in the transactions contemplated will be reflected in an amendment or supplement to this Registration
Statement.
INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND
ITEMS OF FORM 10
This registration statement on Form 10 of Ticketmaster hereby incorporates by reference the information contained in the information statement filed as
Exhibit 99.1 to this Form 10 (the "Information Statement"). All information contained in the Information Statement concerning any of HSN, Inc., Tree.com or Interval Leisure
Group, Inc. (each, a "Spinco") has been provided by such Spinco and Ticketmaster takes no responsibility for the accuracy of any such information to the extent it does not relate to
Ticketmaster. For your convenience, Ticketmaster has provided below a cross-reference sheet identifying where the items required by Form 10 can be found in the Information Statement.
Item No.
|
|
Caption
|
|
Location in Information Statement
|
Item 1. |
|
Business |
|
See "Summary," "Risk Factors," "Certain Information With Respect To TicketmasterBusiness of Ticketmaster" and "Certain Relationships and Related Party Transactions" |
Item 1A. |
|
Risk Factors |
|
See "Risk Factors" and "Certain Information With Respect To TicketmasterRisk Factors Relating to the Business of Ticketmaster Following the Spin-Offs" |
Item 2. |
|
Financial Information |
|
See "Certain Information With Respect To TicketmasterCapitalization," "Certain Information With Respect To TicketmasterSelected Historical Financial Data," "Certain Information With Respect To
TicketmasterUnaudited Pro Forma Condensed Combined Financial Statements," "Certain Information With Respect To TicketmasterManagement's Discussion and Analysis of Financial Condition and Results of Operations of Ticketmaster," "Certain
Information With Respect To TicketmasterQuantitative and Qualitative Disclosures about Market Risk" and "Annex BTicketmaster Combined Financial Statements" |
Item 3. |
|
Properties |
|
See "Certain Information With Respect To TicketmasterBusiness of TicketmasterProperties" |
Item 4. |
|
Security Ownership of Certain Beneficial Owners and Management |
|
See "Certain Information With Respect To TicketmasterTicketmaster Security Ownership of Certain Beneficial Owners and Management" |
Item 5. |
|
Directors and Executive Officers |
|
See "Certain Information With Respect To TicketmasterManagement of Ticketmaster" |
Item 6. |
|
Executive Compensation |
|
See "Certain Information With Respect To TicketmasterTicketmaster Executive Compensation" and "Spinco Stock and Annual Incentive Plans" |
Item 7. |
|
Certain Relationships and Related Transactions, and Director Independence |
|
See "Certain Information With Respect To Ticketmaster" and "Certain Relationships and Related Party Transactions" |
Item 8. |
|
Legal Proceedings |
|
See "Certain Information With Respect To TicketmasterBusiness of TicketmasterTicketmaster Legal Proceedings" |
2
Item 9. |
|
Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters |
|
See "Summary," "The Separation," "Dividend Policy," "Certain Information With Respect To TicketmasterTicketmaster Executive Compensation," "Certain Information With Respect To TicketmasterTicketmaster Security
Ownership of Certain Beneficial Owners and Management," "Certain Information With Respect To TicketmasterCapitalization" and "Spinco Stock and Annual Incentive Plans" |
Item 10. |
|
Recent Sales of Unregistered Securities |
|
Not applicable |
Item 11. |
|
Description of Registrant's Securities to be Registered |
|
See "The Separation" and "Description of Capital Stock of the Spincos" |
Item 12. |
|
Indemnification of Directors and Officers |
|
See "Description of Capital Stock of the SpincosLimitation on Liability of Directors and Indemnification of Directors and Officers" and "Certain Relationships and Related Party Transactions" |
Item 13. |
|
Financial Statements and Supplementary Data |
|
See "Certain Information With Respect To TicketmasterSelected Historical Financial Data," "Certain Information With Respect To TicketmasterUnaudited Pro Forma Condensed Combined Financial Statements" and
"Annex BTicketmaster Combined Financial Statements" |
Item 14. |
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
|
Not applicable |
Item 15. |
|
Financial Statements and Exhibits |
|
See "Certain Information With Respect To TicketmasterUnaudited Pro Forma Condensed Combined Financial Statements" and "Annex BTicketmaster Combined Financial Statements" |
(a) List of Financial Statements and Schedules.
The
following financial statements are included in the Information Statement and filed as part of this Registration Statement on Form 10:
- (1)
- Unaudited
Pro Forma Condensed Combined Financial Statements of Ticketmaster; and
- (2)
- Ticketmaster
Combined Financial Statements, including Report of Independent Registered Public Accounting Firm
- (3)
- Schedule
of Valuation and Qualifying Accounts
(b) Exhibits.
Exhibit No.
|
|
Exhibit Description
|
2.1 |
|
Form of Separation and Distribution Agreement by and among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and IAC/InterActiveCorp* |
3
2.2 |
|
Agreement and Plan of Merger among Ticketmaster, V.I.P. Merger Sub Inc., The V.I.P. Tour Company, TNSH, LLC, and certain stockholders of The V.I.P. Tour Company, dated January 11, 2008* |
3.1 |
|
Form of Amended and Restated Certificate of Incorporation of Ticketmaster* |
3.2 |
|
Form of Amended and Restated By-laws of Ticketmaster* |
10.1 |
|
Form of Tax Sharing Agreement among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and IAC/InterActiveCorp* |
10.2 |
|
Form of Transition Services Agreement among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and IAC/InterActiveCorp* |
10.3 |
|
Form of Employee Matters Agreement among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and IAC/InterActiveCorp* |
10.4 |
|
Spinco Agreement, dated as of May 13, 2008, between IAC/InterActiveCorp, Liberty Media Corporation, LMC Silver King, Inc., Liberty HSN II, Inc., LMC USA VIII, Inc., LMC USA IX, Inc., LMC USA XI,
Inc., LMC USA XII, Inc., LMC USA XIII, Inc., LMC USA XIV, Inc., LMC USA XV, Inc., Liberty Tweety, Inc., BDTV Inc., BDTV II Inc., BDTV III Inc., BDTV IV Inc. and Barry Diller (filed as
Exhibit 10.1 to IAC/InterActiveCorp's Current Report on Form 8-K (SEC File No. 0-20570) dated May 13, 2008 and incorporated herein by reference) |
10.5 |
|
Employment Agreement between IAC/InterActiveCorp and Sean Moriarty, dated as of [ ], 2008* |
10.6 |
|
Employment Agreement between Ticketmaster L.L.C. and Ed Weiss, effective as of January 1, 2008 |
10.7 |
|
Employment Agreement between Ticketmaster L.L.C. and Eric Korman, effective as of April 10, 2006 |
10.8 |
|
Letter Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of July 31, 2006 |
10.9 |
|
Letter Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of February 6, 2006 |
10.10 |
|
Letter Agreement between Ticketmaster L.L.C. and Ticketmaster Group Limited Partnership, dated as of October 17, 2005 |
10.11 |
|
Letter Agreement between Ticketmaster and Clear Channel Entertainment, dated as of August 22, 2005* |
10.12 |
|
Term Sheet between Ticketmaster L.L.C. and Anschutz Entertainment Group, Inc., dated as of April 29, 2004 with Amendment to Term Sheet between Ticketmaster L.L.C. and Anschutz Entertainment Group,
Inc., dated as of July 1, 2005* |
10.13 |
|
Letter Agreement between Ticketmaster L.L.C. and Ticketmaster Group Limited Partnership, dated as of March 21, 2002 |
10.14 |
|
Letter Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of February 7, 2001 |
10.15 |
|
Amendment to License Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of August 31, 1999 |
10.16 |
|
Letter Agreement between Ticketmaster Corporation and SFX Entertainment Inc., dated as of November 13, 1998 |
10.17 |
|
Licensed User Agreement between Ticketmaster-California, Inc. and L.A. Arena Company, dated as of June 5, 1998* |
10.18 |
|
Letter Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of July 28, 1997 |
4
10.19 |
|
Consent and Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of January 5, 1996 |
10.20 |
|
License Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of May 23, 1991 |
10.21 |
|
Ticketmaster 2008 Stock and Annual Incentive Plan* |
10.22 |
|
Employment Agreement between Brian Regan and Ticketmaster L.L.C., dated as of May 2008 |
21.1 |
|
Subsidiaries of Ticketmaster* |
99.1 |
|
Preliminary Information Statement of HSN, Inc., Interval Leisure Group, Inc., Ticketmaster and Tree.com, Inc. subject to completion, dated May 13, 2008. |
99.2 |
|
Supplemental Quarterly Financial Data for the Year Ended December 31, 2007 |
- *
- To
be filed by amendment
-
- Reflects
management contracts and management and director compensatory plans
-
- Confidential
treatment has been granted with respect to portions of this exhibit
5
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Ticketmaster |
|
|
By: |
|
/s/ GREGORY R. BLATT
|
|
|
|
|
Name: Gregory R. Blatt |
|
|
|
|
Title: Vice President |
Dated: June 26, 2008
EXHIBIT INDEX
Exhibit No.
|
|
Exhibit Description
|
2.1 |
|
Form of Separation and Distribution Agreement by and among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and IAC/InterActiveCorp* |
2.2 |
|
Agreement and Plan of Merger among Ticketmaster, V.I.P. Merger Sub Inc., The V.I.P. Tour Company, TNSH, LLC, and certain stockholders of The V.I.P. Tour Company, dated January 11, 2008* |
3.1 |
|
Form of Amended and Restated Certificate of Incorporation of Ticketmaster* |
3.2 |
|
Form of Amended and Restated By-laws of Ticketmaster* |
10.1 |
|
Form of Tax Sharing Agreement among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and IAC/InterActiveCorp* |
10.2 |
|
Form of Transition Services Agreement among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and IAC/InterActiveCorp* |
10.3 |
|
Form of Employee Matters Agreement among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and IAC/InterActiveCorp* |
10.4 |
|
Spinco Agreement, dated as of May 13, 2008, between IAC/InterActiveCorp, Liberty Media Corporation, LMC Silver King, Inc., Liberty HSN II, Inc., LMC USA VIII, Inc., LMC USA IX, Inc., LMC USA XI, Inc., LMC USA XII,
Inc., LMC USA XIII, Inc., LMC USA XIV, Inc., LMC USA XV, Inc., Liberty Tweety, Inc., BDTV Inc., BDTV II Inc., BDTV III Inc., BDTV IV Inc. and Barry Diller (filed as Exhibit 10.1 to
IAC/InterActiveCorp's Current Report on Form 8-K (SEC File No. 0-20570) dated May 13, 2008 and incorporated herein by reference) |
10.5 |
|
Employment Agreement between IAC/InterActiveCorp and Sean Moriarty, dated as of [ ], 2008* |
10.6 |
|
Employment Agreement between Ticketmaster L.L.C. and Ed Weiss, effective as of January 1, 2008 |
10.7 |
|
Employment Agreement between Ticketmaster L.L.C. and Eric Korman, effective as of April 10, 2006 |
10.8 |
|
Letter Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of July 31, 2006 |
10.9 |
|
Letter Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of February 6, 2006 |
10.10 |
|
Letter Agreement between Ticketmaster L.L.C. and Ticketmaster Group Limited Partnership, dated as of October 17, 2005 |
10.11 |
|
Letter Agreement between Ticketmaster and Clear Channel Entertainment, dated as of August 22, 2005* |
10.12 |
|
Term Sheet between Ticketmaster L.L.C. and Anschutz Entertainment Group, Inc., dated as of April 29, 2004 with Amendment to Term Sheet between Ticketmaster L.L.C. and Anschutz Entertainment Group, Inc., dated as of
July 1, 2005* |
10.13 |
|
Letter Agreement between Ticketmaster L.L.C. and Ticketmaster Group Limited Partnership, dated as of March 21, 2002 |
10.14 |
|
Letter Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of February 7, 2001 |
10.15 |
|
Amendment to License Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of August 31, 1999 |
10.16 |
|
Letter Agreement between Ticketmaster Corporation and SFX Entertainment Inc., dated as of November 13, 1998 |
10.17 |
|
Licensed User Agreement between Ticketmaster-California, Inc. and L.A. Arena Company, dated as of June 5, 1998* |
10.18 |
|
Letter Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of July 28, 1997 |
10.19 |
|
Consent and Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of January 5, 1996 |
10.20 |
|
License Agreement between Ticketmaster Corporation and Ticketmaster Group Limited Partnership, dated as of May 23, 1991 |
10.21 |
|
Ticketmaster 2008 Stock and Annual Incentive Plan* |
10.22 |
|
Employment Agreement between Brian Regan and Ticketmaster L.L.C., dated as of May 2008 |
21.1 |
|
Subsidiaries of Ticketmaster* |
99.1 |
|
Preliminary Information Statement of HSN, Inc., Interval Leisure Group, Inc., Ticketmaster and Tree.com, Inc., subject to completion, dated May 13, 2008 |
99.2 |
|
Supplemental Quarterly Financial Data for the Year Ended December 31, 2007 |
- *
- To
be filed by amendment
-
- Reflects
management contracts and management and director compensatory plans
-
- Confidential
treatment has been granted with respect to portions of this exhibit
QuickLinks
INFORMATION REQUIRED IN REGISTRATION STATEMENT CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
SIGNATURES
EXHIBIT INDEX
EX-10.6
2
a2186551zex-10_6.htm
EXHIBIT 10.6
Exhibit 10.6
EMPLOYMENT AGREEMENT
THIS
EMPLOYMENT AGREEMENT (Agreement) is entered into by and between Edward J.
Weiss (Employee) and Ticketmaster L.L.C., a Virginia limited liability
company (the Company), and is effective January 1, 2008 (the Effective
Date).
WHEREAS, the
Company desires to establish its right to the services of Employee, in the
capacity described below, on the terms and conditions hereinafter set forth,
and Employee is willing to accept such employment on such terms and conditions.
NOW,
THEREFORE, in consideration of the mutual agreements hereinafter set forth, Employee
and the Company have agreed and do hereby agree as follows:
1A. EMPLOYMENT. During the Term (as defined below), the
Company shall employ Employee, and Employee shall be employed, as Executive
Vice President and Chief Counsel, or such other equivalent title as may be
agreed between Employee and the Company.
During Employees employment with the Company, Employee shall do and
perform all services and acts necessary or advisable to fulfill the duties and
responsibilities as are commensurate and consistent with Employees position
and shall render such services on the terms set forth herein. During Employees employment with the
Company, Employee shall report directly to the Chief Executive Officer of the
Company or such other person(s) as from time to time may be designated by
the Company (hereinafter referred to as the Reporting Officer). Employee shall have such powers and duties
with respect to the Company as may reasonably be assigned to Employee by the
Reporting Officer, to the extent consistent with Employees position. Employee agrees to devote all of Employees
working time, attention and efforts to the Company and to perform the duties of
Employees position in accordance with the Companys policies as in effect from
time to time.
2A. TERM. The term of this Agreement shall be two years
(the Term); provided, that certain terms and conditions herein may specify a
greater period of effectiveness.
3A. COMPENSATION.
(a) BASE SALARY. During the period that Employee is employed
with the Company hereunder, the Company shall pay Employee an annual base
salary of $335,000 (the Base Salary), payable in equal biweekly installments (or,
if different, in accordance with the Companys payroll practice as in effect
from time to time). For all purposes
under this Agreement, the term Base Salary shall refer to the Base Salary as
in effect from time to time.
(b) DISCRETIONARY BONUS. During the period that Employee is employed
with the Company hereunder, Employee shall be eligible to receive discretionary
annual bonuses.
(c) BENEFITS. From the Effective Date through the date of
termination of Employees employment with the Company for any reason, Employee shall
be entitled to participate in any welfare, health and life insurance and
pension benefit programs as may be adopted from time to time by the Company on
the same basis as that provided to similarly situated employees of the Company. Without limiting the generality of the
foregoing, Employee shall be entitled to the following benefits:
(i) Reimbursement
for Business Expenses. During the
period that Employee is employed with the Company hereunder, the Company shall
reimburse Employee for all reasonable, necessary and documented expenses
incurred by Employee in performing Employees duties for the Company, on the
same basis as similarly situated employees and in accordance with the Companys
policies as in effect from time to time.
(ii) Vacation. During the period that Employee is employed
with the Company hereunder, Employee shall be entitled to paid vacation each year,
in accordance with the plans, policies, programs and practices of the Company
applicable to similarly situated employees of the Company generally.
4A. NOTICES. All notices and other communications under
this Agreement shall be in writing and shall be given by first-class mail,
certified or registered with return receipt requested, or by hand delivery, or
by overnight delivery by a nationally recognized carrier, in each case to the applicable
address set forth below, and any such notice is deemed effectively given when
received by the recipient (or if receipt is refused by the recipient, when so
refused):
If to the
Company:
|
Ticketmaster
L.L.C.
|
|
8800 Sunset
Boulevard
|
|
West
Hollywood, CA 90069
|
|
Attention:
SVP, Chief People Officer
|
|
|
If to
Employee:
|
At the
most recent address for Employee on file at the Company.
|
Either party may change such partys address for notices by notice duly
given pursuant hereto.
5A. GOVERNING LAW; JURISDICTION. This Agreement and the legal relations thus
created between the parties hereto (including, without limitation, any dispute
arising out of or related to this Agreement) shall be governed by and construed
under and in accordance with the internal laws of the State of California
without reference to its principles of conflicts of laws. Any such dispute will be heard and determined
before an appropriate federal court located in the State of California in Los
Angeles County, or, if not maintainable therein, then in an appropriate California
state court located in Los Angeles County, and each party hereto submits itself
and its property to the non-exclusive jurisdiction of the foregoing courts with
respect to such disputes. Each party
hereto (i) agrees that service of process may be made by mailing a copy of
any relevant document to the address of the party set forth above, (ii) waives
to the fullest extent
2
permitted by law any objection which it may now or
hereafter have to the courts referred to above on the grounds of inconvenient
forum or otherwise as regards any dispute between the parties hereto arising
out of or related to this Agreement, (iii) waives to the fullest extent
permitted by law any objection which it may now or hereafter have to the laying
of venue in the courts referred to above as regards any dispute between the
parties hereto arising out of or related to this Agreement and (iv) agrees
that a judgment or order of any court referred to above in connection with any
dispute between the parties hereto arising out of or related to this Agreement
is conclusive and binding on it and may be enforced against it in the courts of
any other jurisdiction.
6A. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
7A. STANDARD TERMS AND CONDITIONS. Employee expressly understands and
acknowledges that the Standard Terms and Conditions attached hereto are
incorporated herein by reference, deemed a part of this Agreement and are
binding and enforceable provisions of this Agreement. References to this Agreement or the use of
the term hereof shall refer to this Agreement and the Standard Terms and
Conditions attached hereto, taken as a whole.
8A. SECTION 409A OF
THE INTERNAL REVENUE CODE. This
Agreement is not intended to constitute a nonqualified deferred compensation
plan within the meaning of Section 409A of the Internal Revenue Code of 1986,
as amended, and the rules and regulations issued thereunder (Section
409A). Notwithstanding the foregoing,
if this Agreement or any benefit paid to Employee hereunder is subject to
Section 409A and if Employee is a Specified Employee (as defined under
Section 409A) as of the date of Employees termination of employment hereunder,
then the payment of benefits, if any, scheduled to be paid by the Company to
Employee hereunder during the first six (6) month period beginning on the date
of a termination of employment hereunder shall be delayed during such six (6)
month period and shall commence immediately following the end of such six (6)
month period (and, if applicable, the period in which such payments were
scheduled to be made if not for such delay shall be extended accordingly). In no event shall the Company be required to
pay Employee any gross-up or other payment with respect to any taxes or
penalties imposed under Section 409A with respect to any benefit paid to
Employee hereunder.
[The Signature Page Follows]
3
IN WITNESS
WHEREOF, the Company has caused this Agreement to be executed and delivered by
its duly authorized officer and Employee has executed and delivered this
Agreement on ,
2008.
|
TICKETMASTER
L.L.C.
|
|
|
|
|
|
|
|
By:
|
|
Title:
|
|
|
|
|
|
|
|
EDWARD J.
WEISS
|
STANDARD TERMS AND CONDITIONS
1. TERMINATION OF EMPLOYEES EMPLOYMENT.
(a) DEATH. In the event Employees employment hereunder
is terminated by reason of Employees death, the Company shall pay Employees
designated beneficiary or beneficiaries, within thirty (30) days of Employees
death in a lump sum in cash, (i) Employees Base Salary through the end of
the month in which death occurs and (ii) any other Accrued Obligations (as
defined in paragraph 1(g) below).
(b) DISABILITY. If, as a result of Employees incapacity due
to physical or mental illness (Disability), Employee shall have been absent
from the full-time performance of Employees duties with the Company for a
period of four (4) consecutive months and, within thirty (30) days after
written notice is provided to Employee by the Company (in accordance with Section 4A
hereof), Employee shall not have returned to the full-time performance of Employees
duties, Employees employment under this Agreement may be terminated by the
Company for Disability. During any
period prior to such termination during which Employee is absent from the
full-time performance of Employees duties with the Company due to Disability,
the Company shall continue to pay Employees Base Salary at the rate in effect
at the commencement of such period of Disability, offset by any amounts payable
to Employee under any disability insurance plan or policy provided by the
Company. Upon termination of Employees
employment due to Disability, the Company shall pay Employee within thirty (30)
days of such termination (i) Employees Base Salary through the end of the
month in which termination occurs in a lump sum in cash, offset by any amounts
payable to Employee under any disability insurance plan or policy provided by
the Company; and (ii) any other Accrued Obligations (as defined in paragraph
1(g) below).
(c) TERMINATION FOR CAUSE. Upon the termination of Employees employment
by the Company for Cause (as defined below), the Company shall have no further
obligation hereunder, except for the payment of any Accrued Obligations (as defined
in paragraph 1(g) below). As used
herein, Cause shall mean: (i) the
plea of guilty or nolo contendere to, or conviction for, the commission of a
felony offense by Employee; provided, however, that after
indictment, the Company may suspend Employee from the rendition of services,
but without limiting or modifying in any other way the Companys obligations
under this Agreement; (ii) a material breach by Employee of a fiduciary
duty owed to the Company; (iii) a material breach by Employee of any of the
covenants made by Employee in Section 2 hereof; (iv) the willful or
gross neglect by Employee of the material duties required by this Agreement; or
(v) a violation by Employee of any Company policy pertaining to ethics,
wrongdoing or conflicts of interest.
(d) TERMINATION BY THE COMPANY OTHER THAN FOR
DEATH, DISABILITY OR CAUSE. If Employees
employment hereunder is terminated prior to the expiration of the Term by the
Company for any reason other than Employees death or Disability or for Cause,
then (i) the Company shall pay to Employee an amount equal to the Base
Salary that Employee would have been paid from the date of such termination through
the end of the Term had the Employees employment not terminated, payable in
equal biweekly installments
(or, if different, in accordance with the Companys payroll practice as
in effect from time to time) over the course of the then remaining Term (the Cash
Severance Payments); and (ii) the Company shall pay Employee within thirty
(30) days of the date of such termination in a lump sum in cash any Accrued
Obligations (as defined in paragraph 1(g) below). The payment to Employee of the severance
benefits described in this Section 1(d) shall be subject to Employees
execution and non-revocation of a general release of the Company and its
affiliates, in a form substantially similar to that used for similarly situated
executives of the Company and its affiliates, and Employees compliance with
the restrictive covenants set forth in Section 2 hereof. Employee acknowledges and agrees that the
severance benefits described in this Section 1(d) constitutes good
and valuable consideration for such release.
(e) RESIGNATION BY EMPLOYEE FOR CHANGE IN
REPORTING OFFICER. In the event that
a General Counsel or Chief Legal Officer of the Company is hired and made the
Reporting Officer (the Reporting Officer Change), and after a good faith
effort to work under such Reporting Officer, including discussing with senior
management of the Company any issues Employee has about such Reporting Officer,
Employee determines, in his sole discretion, that there is a significant style and/or personality conflict with such Reporting
Officer, then Employee may, conditioned upon his continued compliance with Section 2
of these Standard Terms and Conditions for their duration, resign from
employment by the Company and (i) the Company shall pay to Employee
the Cash Severance Payments; (ii) the Company shall pay Employee within
thirty (30) days of the date of such termination in a lump sum in cash any
Accrued Obligations (as defined in paragraph 1(g) below); and (iii) the vesting of all employee equity
awards granted prior to the Effective Date will be accelerated to the date of
resignation (the benefits provided under clauses (i)-(iii) of this Section 1(e) are
referred to as the Severance Benefits).
Any such resignation may be tendered after six months following the date
of the Reporting Officer Change, but no later than twelve months after such
date. If there is a Reporting Officer
Change, and within twelve months of that change Employees employment hereunder
is terminated prior to the expiration of the Term by the Company for any reason
other than Employees death or Disability or for Cause, then Employee shall, conditioned upon his continued compliance with Section 2
of these Standard Terms and Conditions for their duration, be entitled to the
Severance Benefits. The payment
to Employee of the Severance Benefits described in this Section 1(e) shall
be subject to Employees execution and non-revocation of a general release of
the Company and its affiliates, in a form substantially similar to that used
for similarly situated executives of the Company and its affiliates, and
Employees compliance with the restrictive covenants set forth in Section 2
hereof. Employee acknowledges and agrees
that the Severance Benefits described in this Section 1(e) constitutes
good and valuable consideration for such release.
(f) MITIGATION; OFFSET. In the event of termination of Employees
employment pursuant to Section 1(d) or his resignation pursuant to Section 1(e),
Employee shall use his reasonable
best efforts to seek other comparable employment and to take other reasonable
actions to mitigate the Cash Severance Payments. If Employee obtains other employment during
the period of time in which the Company is required to make Cash Severance
Payments, the amount of any such remaining payments or benefits to be provided
to Employee shall be reduced by the amount of compensation and benefits earned
by Employee from such other employment through the end of such period. For purposes of this Section 1(f), Employee
shall have an obligation to
2
inform the Company regarding Employees employment status following
termination and during the period of time in which the Company is making Cash
Severance Payments.
(g) ACCRUED OBLIGATIONS. As used in this Agreement, Accrued
Obligations shall mean the sum of (i) any portion of Employees accrued
but unpaid Base Salary through the date of death or termination of employment
for any reason, as the case may be; (ii) any compensation previously
earned but deferred by Employee (together with any interest or earnings
thereon) that has not yet been paid and that is not otherwise to be paid at a
later date pursuant to the executive deferred compensation plan of the Company,
if any, and (iii) any reimbursements that Employee is entitled to receive
under Section 3A(c)(i) of the Agreement.
(h) AMENDED
PLAN DEFINITION. Employee hereby
agrees and acknowledges that the following definition of Good Reason shall
apply to restricted stock units granted to Employee under the
IAC/InterActiveCorp 2005 Stock and Annual Incentive Plan (the Plan) and that
the following definition of Good Reason shall replace the definition of Good
Reason contained in Section 10 of the Plan: Good Reason means, without Employees prior
written consent: (1) a material reduction in your rate of annual base
salary from the rate of annual base salary in effect for you immediately prior
to the Change in Control (as defined in the Plan), (2) a relocation of
your principal place of business more than 35 miles from the city in which your
principal place of business was located immediately prior to the Change in
Control (as defined in the Plan) or (3) a material and demonstrable
adverse change in the nature and scope of your duties from those in effect
immediately prior to the Change in Control (as defined in the Plan). In order to invoke a Termination of
Employment (as defined in the Plan) for Good Reason under the Plan, Employee
shall provide written notice to the Company of the existence of one or more of
the conditions described in clauses (1) through (3) within 90 days
following your knowledge of the initial existence of such condition or
conditions, and the Company shall have 30 days following receipt of such
written notice (the Cure Period) during which it may remedy the
condition. In the event that the Company
fails to remedy the condition constituting Good Reason during the Cure Period,
Employee must terminate employment, if at all, within 90 days following the
Cure Period in order for such Termination of Employment under the Plan to
constitute a Termination of Employment for Good Reason under the Plan.
2. CONFIDENTIAL
INFORMATION; NON-SOLICITATION; AND PROPRIETARY RIGHTS.
(a) CONFIDENTIALITY. Employee acknowledges that, while employed by
the Company, Employee will occupy a position of trust and confidence. The Company, its subsidiaries and/or
affiliates shall provide Employee with Confidential Information as referred
to below. Employee shall not, except as
may be required to perform Employees duties hereunder or as required by
applicable law, without limitation in time, communicate, divulge, disseminate,
disclose to others or otherwise use, whether directly or indirectly, any
Confidential Information regarding the Company and/or any of its subsidiaries and/or
affiliates.
Confidential Information shall mean
information about the Company or any of its subsidiaries or affiliates, and
their respective businesses, employees, consultants, contractors, clients and
customers that is not disclosed by the Company or any of its subsidiaries or
affiliates
3
for financial
reporting purposes or otherwise generally made available to the public (other
than by Employees breach of the terms hereof) and that was learned or
developed by Employee in the course of employment by the Company or any of its
subsidiaries or affiliates, including (without limitation) any proprietary
knowledge, trade secrets, data, formulae, information and client and customer
lists and all papers, resumes, and records (including computer records) of the
documents containing such Confidential Information. Employee acknowledges that such Confidential
Information is specialized, unique in nature and of great value to the Company
and its subsidiaries or affiliates, and that such information gives the Company
and its subsidiaries or affiliates a competitive advantage. Employee agrees to deliver or return to the
Company, at the Companys request at any time or upon termination or expiration
of Employees employment or as soon thereafter as possible, all documents,
computer tapes and disks, records, lists, data, drawings, prints, notes and
written information (and all copies thereof) furnished by the Company and its
subsidiaries or affiliates or prepared by Employee in the course of Employees
employment by the Company and its subsidiaries or affiliates. As used in this Agreement, subsidiaries and
affiliates shall mean any company controlled by, controlling or under common
control with the Company.
(b) POST SEPARATION
COOPERATION. During the one year
period commencing immediately upon the termination of Employees employment for
any reason (other than termination resulting from Employees death), Employee shall
be available for consultation with the Company and its subsidiaries and
affiliates concerning their general operations and the industries in which they
engage in business, as maybe be reasonably required without jeopardizing
Employees then full-time, non-Ticketmaster employment opportunities; provided,
however, that Employee shall not be obligated to devote more than 24 hours during
such one year period to the performance of such duties. The Company agrees to reimburse Employee for
all reasonable and necessary business expenses incurred by Employee in the
performance of such consultation in accordance with the Companys reimbursement
policy, including, without limitation, the submission of supporting evidence as
reasonably required by the Company. If it
becomes clear, or the parties reasonably anticipate, that that consultation
required of Employee will exceed 24 hours, the parties shall agree on
appropriate reasonable compensation for Employee for such consulting services.
(c) NON-SOLICITATION OF EMPLOYEES. Employee recognizes that he will possess
Confidential Information about other employees, consultants and contractors of
the Company and its subsidiaries or affiliates relating to their education,
experience, skills, abilities, compensation and benefits, and inter-personal
relationships with suppliers to and customers of the Company and its
subsidiaries or affiliates. Employee
recognizes that the information he will possess about these other employees,
consultants and contractors is not generally known, is of substantial value to
the Company and its subsidiaries or affiliates in developing their respective
businesses and in securing and retaining customers, and will be acquired by Employee
because of Employees business position with the Company. Employee agrees that, during Employees
employment hereunder and for a period of eighteen (18) months thereafter, Employee
will not, directly or indirectly, hire or solicit or recruit any employee of (i) the
Company and/or (ii) its subsidiaries and/or affiliates with whom Employee has
had direct contact during his employment hereunder, in each case, for the
purpose of being employed by Employee or by any business, individual,
partnership, firm, corporation or other entity on whose behalf Employee is
acting as
4
an agent, representative or employee and that Employee will not convey
any such Confidential Information or trade secrets about employees of the
Company or any of its subsidiaries or affiliates to any other person except
within the scope of Employees duties hereunder.
(d) NON-SOLICITATION OF CLIENTS. During Employees employment hereunder and for
a period of eighteen (18) months thereafter, Employee shall not solicit any Clients
of the Company or any of its subsidiaries or affiliates or encourage
(regardless of who initiates the contact) any such customers to use the
facilities or services of any competitor of the Company or any of its subsidiaries
or affiliates. Client shall mean any
person who engages the Company or any of its subsidiaries or affiliates to
sell, on its Clients behalf as agent, tickets to the public.
(e) PROPRIETARY RIGHTS; ASSIGNMENT. All Employee Developments (defined below)
shall be considered works made for hire by Employee for the Company or, as
applicable, its subsidiaries or affiliates, and Employee agrees that all rights
of any kind in any Employee Developments belong exclusively to the
Company. In order to permit the Company
to exploit such Employee Developments, Employee shall promptly and fully report
all such Employee Developments to the Company.
Except in furtherance of his obligations as an employee of the Company,
Employee shall not use or reproduce any portion of any record associated with
any Employee Development without prior written consent of the Company or, as
applicable, its subsidiaries or affiliates.
Employee agrees that in the event actions of Employee are required to
ensure that such rights belong to the Company under applicable laws, Employee
will cooperate and take whatever such actions are reasonably requested by the
Company, whether during or after the Term, and without the need for separate or
additional compensation. Employee
Developments means any idea, know-how, discovery, invention, design, method,
technique, improvement, enhancement, development, computer program, machine,
algorithm or other work of authorship, whether developed, conceived or reduced
to practice during or following the period of employment, that (i) concerns
or relates to the actual or anticipated business, research or development
activities, or operations of the Company or any of its subsidiaries or affiliates,
or (ii) results from or is suggested by any undertaking assigned to Employee
or work performed by Employee for or on behalf of the Company or any of its
subsidiaries or affiliates, whether created alone or with others, during or
after working hours, or (iii) uses, incorporates or is based on Company
equipment, supplies, facilities, trade secrets or inventions of any form or
type. All Confidential Information and
all Employee Developments are and shall remain the sole property of the Company
or any of its subsidiaries or affiliates.
Employee shall acquire no proprietary interest in any Confidential
Information or Employee Developments developed or acquired during the
Term. To the extent Employee may, by
operation of law or otherwise, acquire any right, title or interest in or to
any Confidential Information or Employee Development, Employee hereby assigns
and covenants to assign to the Company all such proprietary rights without the
need for a separate writing or additional compensation. Employee shall, both during and after the
Term, upon the Companys request, promptly execute, acknowledge, and deliver to
the Company all such assignments, confirmations of assignment, certificates,
and instruments, and shall promptly perform such other acts, as the Company may
from time to time in its discretion deem necessary or desirable to evidence,
establish, maintain, perfect, enforce or defend the Companys rights in
Confidential Information and Employee Developments.
5
(f) COMPLIANCE WITH POLICIES AND PROCEDURES. During the period that Employee is employed
with the Company hereunder, Employee shall adhere to the policies and standards
of professionalism set forth in the Companys Policies and Procedures as they
may exist from time to time.
(g) SURVIVAL OF PROVISIONS. The obligations contained in this Section 2
shall, to the extent provided in this Section 2, survive the termination
or expiration of Employees employment with the Company and, as applicable,
shall be fully enforceable thereafter in accordance with the terms of this
Agreement. If it is determined by a
court of competent jurisdiction that any restriction in this Section 2 is
excessive in duration or scope or is unreasonable or unenforceable under applicable
law, it is the intention of the parties that such restriction may be modified
or amended by the court to render it enforceable to the maximum extent
permitted by applicable law.
3. TERMINATION OF PRIOR AGREEMENTS. This Agreement constitutes the entire
agreement between the parties and, as of the Effective Date, terminates and
supersedes any and all prior agreements and understandings (whether written or
oral) between the parties with respect to the subject matter of this
Agreement. Employee acknowledges and
agrees that neither the Company nor anyone acting on its behalf has made, and
is not making, and in executing this Agreement, Employee has not relied upon,
any representations, promises or inducements except to the extent the same is
expressly set forth in this Agreement.
4. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature and
none of the parties hereto shall, without the consent of the others, assign or
transfer this Agreement or any rights or obligations hereunder; provided, that
the Company may assign this Agreement to, or allow any of its obligations to be
fulfilled by, or take actions through, any affiliate of the Company and, in the
event of the merger, consolidation, transfer, or sale of all or substantially
all of the assets of the Company (a Transaction) with or to any other
individual or entity, this Agreement shall, subject to the provisions hereof,
be binding upon and inure to the benefit of such successor and such successor
shall discharge and perform all the promises, covenants, duties, and
obligations of the Company hereunder, and in the event of any such assignment
or Transaction, all references herein to the Company shall refer to the
Companys assignee or successor hereunder.
5. WITHHOLDING. The Company shall make such deductions and
withhold such amounts from each payment and benefit made or provided to Employee
hereunder, as may be required from time to time by applicable law, governmental
regulation or order.
6. HEADING REFERENCES. Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
References to this Agreement or the use of the term hereof shall
refer to these Standard Terms and Conditions and the Employment Agreement
attached hereto, taken as a whole.
7. REMEDIES FOR BREACH. Employee expressly agrees and understands
that Employee will notify the Company in writing of any alleged breach of this
Agreement by the Company, and
6
the Company will have thirty (30) days from
receipt of Employees notice to cure any such breach. Employment expressly agrees and understands
that in the event of any termination of Employees employment by the Company
during the Term, the Companys contractual obligations to Employee shall be
fulfilled through compliance with its obligations under Section 1 of the
Standard Terms and Conditions.
Employee
expressly agrees and understands that the remedy at law for any breach by Employee
of Section 2 of the Standard Terms and Conditions will be inadequate and
that damages flowing from such breach are not usually susceptible to being
measured in monetary terms. Accordingly,
it is acknowledged that, upon Employees violation of any provision of such Section 2,
the Company shall be entitled to obtain from any court of competent
jurisdiction immediate injunctive relief and obtain a temporary order
restraining any threatened or further breach as well as an equitable accounting
of all profits or benefits arising out of such violation. Nothing shall be deemed to limit the Companys
remedies at law or in equity for any breach by Employee of any of the
provisions of this Agreement, including Section 2, which may be pursued by
or available to the Company.
8. WAIVER; MODIFICATION. Failure to insist upon strict compliance with
any of the terms, covenants, or conditions hereof shall not be deemed a waiver
of such term, covenant, or condition, nor shall any waiver or relinquishment
of, or failure to insist upon strict compliance with, any right or power
hereunder at any one or more times be deemed a waiver or relinquishment of such
right or power at any other time or times.
This Agreement shall not be modified in any respect except by a writing
executed by each party hereto.
Notwithstanding anything to the contrary herein, a change in Employees
title, duties and/or level of responsibilities, including by way of the
assignment of Employment (in consultation with Employee) to another position
with the Company or any of its affiliates that does not result in a material reduction in Employees title, duties
and/or level of responsibilities as of the date of this Agreement, excluding for this purpose any such reduction that is
an isolated and inadvertent action not taken in bad faith or that is authorized
pursuant to this Agreement shall not constitute a modification or a
breach of this Agreement.
9. SEVERABILITY. In the event that a court of competent
jurisdiction determines that any portion of this Agreement is in violation of
any law or public policy, only the portions of this Agreement that violate such
law or public policy shall be stricken.
All portions of this Agreement that do not violate any statute or public
policy shall continue in full force and effect.
Further, any court order striking any portion of this Agreement shall
modify the stricken terms as narrowly as possible to give as much effect as
possible to the intentions of the parties under this Agreement.
10. INDEMNIFICATION. The Company shall indemnify and hold Employee
harmless for acts and omissions in Employees capacity as an officer, director
or employee of the Company to the maximum extent permitted under applicable
law; provided, however, that neither the Company, nor any of its
subsidiaries or affiliates shall indemnify Employee for any losses incurred by Employee
as a result of acts described in Section 1(c) of this Agreement.
[The Signature Page Follows]
7
ACKNOWLEDGED AND AGREED:
Date: ,
2008
|
TICKETMASTER
L.L.C.
|
|
|
|
|
|
|
|
By:
|
|
Title:
|
|
|
|
|
|
|
|
EDWARD J.
WEISS
|
EX-10.7
3
a2186551zex-10_7.htm
EXHIBIT 10.7
Exhibit 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement) is entered into by and between
Eric Korman (Employee) and Ticketmaster L.L.C., a Virginia limited liability
company (the Company), as of April 11th, 2006 and shall be effective as of April 10,
2006 (the Effective Date).
WHEREAS, the Company desires to establish its right to the services of
Employee, in the capacity described below, on the terms and conditions
hereinafter set forth, and Employee is willing to accept such employment on
such terms and conditions.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, Employee and the Company have agreed and do hereby agree as follows:
1A. EMPLOYMENT. The Company
agrees to employ Employee as Executive Vice President and Employee accepts and
agrees to such employment. During Employees employment with the Company,
Employee shall do and perform all services and acts necessary or advisable to
fulfill the duties and responsibilities as are commensurate and consistent with
Employees position and shall render such services on the terms set forth
herein. Employee shall render such other services for the Company and
corporations controlled by, under common control with or controlling, directly
or indirectly, the Company (other than Expedia, Inc. and its
subsidiaries), and to successor entities and assignees of the Company (each, a Company
Affiliate) as the Company may from time to time reasonably request and as
shall be consistent with the duties Employee is to perform for the Company and
with Employees position, status and experience. During Employees employment
with the Company, Employee shall report directly to the President and Chief
Operating Officer (hereinafter referred to as the Reporting Officer). Employee
shall have such powers and duties with respect to the Company as may reasonably
be assigned to Employee by the Reporting Officer, to the extent consistent with
Employees position and status. Employee agrees to devote all of Employees
working time, attention and efforts to the Company and to perform the duties of
Employees position in accordance with the Companys written policies as in
effect from time to time, which are generally applicable to all senior
executives of the Company. Employees principal
place of employment shall be the Companys offices in West Hollywood,
California.
2A. TERM OF
AGREEMENT. The term of this Agreement shall commence on the
Effective Date and shall continue for a period of three (3) years (the Term),
unless sooner terminated in accordance with the provisions of Section 1 of
the Standard Terms and Conditions attached hereto (the Standard Terms and
Conditions). For the avoidance of doubt, the parties post-termination
obligations including but not limited to the confidentiality, consulting,
non-solicitation of employees, and non-solicitation of clients provisions in
the Agreement shall survive the Term of Employees employment hereunder.
3A. COMPENSATION.
(a) BASE SALARY. During the Term, the
Company shall pay Employee an annual base salary of $350,000 (the Base Salary),
payable in equal biweekly installments or in accordance with the Companys
payroll practice as in effect from time to time. For all purposes under this
Agreement, the term Base Salary shall refer to Base Salary as in effect from
time to time. Employees salary shall be reviewed each February for an
increase (but not a decrease) during the Term in relation to Employees
responsibilities; provided, however, that the Company shall not
be required to increase Employees Base Salary.
(b) SIGNING BONUS. Upon execution of this
Agreement and within 10 days after the Effective Date, Company shall pay
Employee a one-time signing bonus in the amount of $150,000. In the event
Employee resigns without Good Reason or is terminated for Cause during the
first year of the Term, Employee shall refund to the Company a prorated portion
of the signing bonus, in the amount of $12,500.00 multiplied by the number of
whole calendar months from the date of such resignation or termination through
the end of the first year of the Term.
(c) RESTRICTED STOCK. In
consideration of Employees entering into this Agreement and as an inducement
to join the Company, Employee will
receive under IACs Stock & Annual Incentive Plan (the IAC Incentive
Plan) an award of restricted stock units (the Restricted Stock Units)
representing shares of common stock of IAC/InterActiveCorp valued at $250,000
subject to the approval of the Compensation/Benefits Committee of the Board of
Directors of IAC/InterActiveCorp. The award will be governed by a Restricted
Stock Unit agreement. The value of Employees award will be converted into the
number of units Employee will receive based on the average of the closing
prices of IAC stock for the 30 trading days ending on the trading day prior to
the Effective Date, and will be rounded down to the nearest whole unit. This
Restricted Stock Unit grant shall be in addition to, and not in lieu of, the
annual grant which the Executive is eligible to receive under the IAC Incentive
Plan, which annual grant is to be determined by the Committee (as defined in
the IAC Incentive Plan) of the Board of Directors of IAC as provided under the
terms of the Plan.
(d) DISCRETIONARY BONUS. During the
Term, Employee shall be eligible to receive discretionary annual bonuses.
(e) BENEFITS. From the
Effective Date through the date of termination of Employees employment with
the Company for any reason, Employee shall be entitled to participate in any
welfare, health and life insurance and pension benefit and incentive programs
as may be adopted from time to time by the Company for its
2
senior executives. Without limiting the generality
of the foregoing, Employee shall be entitled to the following benefits:
(i) Reimbursement for Business
Expenses. During the Term, the Company shall reimburse
Employee for all reasonable and necessary expenses incurred by Employee in
performing Employees duties for the Company, on the same basis as similarly
situated employees and in accordance with the Companys policies as in effect
from time to time.
(ii) Vacation. During the
Term, Employee shall be entitled to paid vacation in accordance with the plans,
policies, programs and practices of the Company applicable to similarly
situated employees of the Company generally.
4A. NOTICES. All notices
and other communications under this Agreement shall be in writing and shall be
given by first-class mail, certified or registered with return receipt
requested or hand delivery acknowledged in writing by the recipient personally,
and shall be deemed to have been duly given three days after mailing or
immediately upon duly acknowledged hand delivery to the respective persons
named below:
If
to the Company:
|
|
Ticketmaster
L.L.C.
|
|
|
8800
Sunset Boulevard
West Hollywood, CA 90069
Attention: General Counsel
|
|
|
|
With
a copy to:
|
|
InterActiveCorp.
|
|
|
152
West 57th Street
New York, NY 10019
Attention: General Counsel
|
|
|
|
If
to Employee:
|
|
Eric
Korman
|
|
|
911
Park Avenue
|
|
|
New
York, New York 10021
|
Either
party may change such partys address for notices by notice duly given pursuant
hereto.
5A. GOVERNING LAW;
JURISDICTION. This Agreement and the legal relations thus
created between the parties hereto shall be governed by and construed under and
in accordance with the internal laws of the State of California without
reference to the principles of conflicts of laws. Any and all disputes between
the parties which may arise pursuant to this Agreement will be heard and
determined before an appropriate federal court in California, or, if not
maintainable therein, then in an appropriate California state court. The
parties acknowledge that such courts have jurisdiction to interpret and enforce
the
3
provisions
of this Agreement, and the parties consent to, and waive any and all objections
that they may have as to, personal jurisdiction and/or venue in such courts.
6A. COUNTERPARTS. This
Agreement may be executed in several counterparts, each of which shall be
deemed to be an original but all of which together will constitute one and the same
instrument. Employee expressly understands and acknowledges that the Standard
Terms and Conditions attached hereto are incorporated herein by reference,
deemed a part of this Agreement and are binding and enforceable provisions of this
Agreement. References to this Agreement or the use of the term hereof shall
refer to this Agreement and the Standard Terms and Conditions attached hereto,
taken as a whole.
7A. RELOCATION.
(i) Except as
otherwise prohibited by applicable laws or regulations, the Company shall
reimburse Employee for his actual, reasonable and documented expenses relating
to relocating from New York to California, as provided by Company policy as
such policy may be amended from time to time, up to a total relocation
allowance consistent with the Executive Level of IAC corporate policy. Employee
must complete his relocation on or before April 10, 2007 in order to
receive the relocation allowance.
(ii) Should Employees
employment terminate for any reason other than Cause, as defined in the
Standard Terms and Conditions, at any time during the first year of the Term,
the Company shall relocate Employee to New York, New York on the same terms as
set forth in paragraph 7(A)(i) hereinabove.
8A. SECTION 409A. The benefits provided under this Agreement
shall comply with Section 409A of the Code and the regulations thereunder.
To the extent so required in order to comply with Section 409A of the
Code, (i) amounts and benefits to be paid or provided under this Agreement
shall be paid or provided to Employee in a single lump sum on the first
business day after the date that is six months following the date of termination
of Employees employment or shall begin six months and one day following the
date of termination, and (ii) the Company and Employee agree to amend or
modify this Agreement and any agreements relating hereto as may be necessary to
comply with Section 409A of the Code.
4
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and delivered by its duly authorized officer and Employee has executed
and delivered this Agreement as of April 11th, 2006.
|
TICKETMASTER
L.L.C.
8800 Sunset Boulevard
West Hollywood, CA 90069
|
|
|
|
|
|
By:
|
/s/
[ILLEGIBLE]
|
|
|
|
Title:
|
Evp, GC
|
|
|
|
/s/
[ILLEGIBLE]
|
|
EMPLOYEE
|
|
|
|
|
5
STANDARD TERMS AND
CONDITIONS
1. TERMINATION OF
EMPLOYEES EMPLOYMENT.
(a) DEATH. In the event
Employees employment hereunder is terminated by reason of Employees death,
the Company shall pay Employees designated beneficiary or beneficiaries,
within 30 days of Employees death, in a lump sum in cash, Employees Base
Salary through the end of the month in which death occurs and any Accrued
Obligations (as defined in paragraph 1(g) below).
(b) DISABILITY. If, as a
result of Employees incapacity due to physical or mental illness (Disability),
Employee shall have been absent from the full-time performance of Employees
duties with the Company for a period of four consecutive months and, within 30
days after written notice is provided to Employee by the Company (in accordance
with Section 4A above), Employee shall not have returned to the full-time
performance of Employees duties, Employees employment under this Agreement
may be terminated by the Company for Disability. During any period prior to
such termination during which Employee is absent from the full-time performance
of Employees duties with the Company due to Disability, the Company shall
continue to pay Employees Base Salary at the rate in effect at the
commencement of such period of Disability, offset by any amounts payable to
Employee under any disability insurance plan or policy provided by the Company.
Upon termination of Employees employment due to Disability, the Company shall
pay Employee within 30 days of such termination (i) Employees Base Salary
through the end of the month in which termination occurs in a lump sum in cash,
offset by any amounts payable to Employee under any disability insurance plan
or policy provided by the Company; and (ii) any Accrued Obligations (as
defined in paragraph 1(g) below).
(c) TERMINATION FOR CAUSE;
RESIGNATION BY EMPLOYEE WITHOUT GOOD REASON. The Company may terminate
Employees employment under this Agreement for Cause at any time prior to the
expiration of the Term. The Employee may resign from his employment with the
Company without Good Reason upon 30 days written notice to the Company. In the
event of Employees termination for Cause or upon Employees resignation
without Good Reason, this Agreement shall terminate without further obligation
by the Company, except for the payment of any Accrued Obligations (as defined
in paragraph 1(g) below).
As used herein, Cause
shall mean: (i) the plea of guilty or nolo contendere to, or conviction
for, the commission of a felony offense by Employee; provided, however,
that after indictment, the Company may suspend Employee from the rendition of
services, but without limiting or modifying in any other way the Companys
obligations under this Agreement; (ii) a material breach by Employee of a
fiduciary duty owed to the Company; (iii) a material breach by Employee of
any of
6
the covenants made by Employee in Section 2 hereof; (iv) the
willful or gross neglect by Employee of the material duties and
responsibilities required by this Agreement; (v) a material breach by the
Employee of his duty not to engage in any transaction that represents, directly
or indirectly, self-dealing with the Company or any Company Affiliate which has
not been approved by a majority of the disinterested directors of the Companys
Board of Directors, if such material breach remains uncured after the lapse of
30 days following the date that the Company has given Employee written notice
thereof; (vi) any act of misappropriation, embezzlement, intentional fraud
or similar misconduct involving the Company or any Company Affiliate; (vii) a
material violation of any written Company policy pertaining to ethics,
wrongdoing or conflicts of interest; and (viii) the repeated
non-prescription abuse of any controlled substance which, in any case described
in this clause, the Companys Board of Directors reasonably determines renders
the Employee unfit to serve in his capacity as an officer or employee of the
Company or any Company Affiliate; provided that
before a cessation of Employees employment shall be deemed to be a termination
of Employees employment for Cause, (A) the Company shall provide written
notice to Employee that identifies the conduct described in clauses (ii), (iii) or
(iv) above, as applicable, and (B) in the event that the event or
condition is curable, Employee shall have failed to remedy such event or
condition within 30 days after Employee shall have received from the Company
the written notice described in clause (A) above.
As used herein, Good Reason
shall mean the occurrence of any of the following without Employees written
consent, (i) a material adverse change in Employees title, duties,
operational authorities or reporting responsibilities from those in effect
immediately following the Effective Date, excluding for this purpose any such
change that is an isolated and inadvertent action not taken in bad faith and
that is remedied by the Company promptly after receipt of notice thereof given
by the Employee or that is authorized pursuant to this Agreement; (ii) any
reduction in Base Salary or any of the benefits described in Section 3A of
this Agreement as described above; (iii) failure by the Company to pay
Employee his Signing Bonus or grant the Employee the Restricted Stock Units as
contemplated by Sections 3A(b) and 3A(c) of this Agreement,
respectively, on the terms and conditions provided in such sections; or (iv) a
relocation of Employees principal place of business more than 50 miles from
the Los Angeles, California metropolitan area.
(d) TERMINATION BY
THE COMPANY OTHER THAN FOR DEATH, DISABILITY OR CAUSE; RESIGNATION BY EMPLOYEE
FOR GOOD REASON. Upon termination of Employees employment prior to
expiration of the Term (A) by the Company for any reason other than
Employees death or Disability or for Cause or (B) upon Employees
resignation for Good Reason, the Company shall pay Employee, (i) in
accordance with its normal payroll practices, the Employees Base Salary
through the end of the Term and (ii) within 30 days of the date of such
termination in a lump sum in cash any Accrued Obligations (as defined in
paragraph 1(g) below). The payment to Employee of the severance benefits
7
described in this Section 1(d) shall be subject to Employees
execution and non-revocation of a general release of the Company and the
Company Affiliates in a form substantially similar: to that used for similarly
situated executives of the Company and the Company Affiliates and attached
hereto as Exhibit A.
(e) NOTICE OF TERMINATION. Any
termination of Employees employment, whether by the Company or by the
Employee, shall require a notice of termination to be issued by the Company or
the Employee to the other party. The notice of termination shall specify the
effective date of the termination and shall set forth in reasonable detail the
basis for such termination by the Company or the Employee.
(f) MITIGATION; OFFSET. In the event
of termination of Employees employment prior to the end of the Term, in no
event shall Employee be obligated to seek other employment or take any other
action by way of mitigation of severance benefits or other compensation or
benefits. If Employee obtains other employment during the Term, the amount of
any severance payments to be made to Employee under Section 1(d) hereof
after the date such employment is secured shall be offset by the amount of
compensation earned by Executive from such employment through the end of the
Term. For purposes of this Section 1(f), Employee shall have an obligation
to inform the Company promptly regarding Employees employment status following
termination and during the period encompassing the Term.
(g) ACCRUED OBLIGATIONS. As used in
this Agreement, Accrued Obligations shall mean the sum of (i) any
portion of Employees Base Salary through the date of death or termination of
employment for any reason, as the case may be, which has not yet been paid; (ii) any
compensation previously earned but deferred by Employee (together with any
interest or earnings thereon) that has not yet been paid; and (iii) any
unused vacation time accrued through the date of the Employees termination of
employment for any reason.
2. CONFIDENTIAL
INFORMATION; NON-SOLICITATION; AND PROPRIETARY RIGHTS.
(a) CONFIDENTIALITY. Employee
acknowledges that while employed by the Company Employee will occupy a position
of trust and confidence. Employee shall not, except (i) as may be required
to perform Employees duties hereunder, (ii) required by applicable law, (iii) as
may be required by a court of competent jurisdiction, or any governmental
agency having supervisory authority over the business of the Company or any
administrative body or legislative body (including a committee thereof) with
jurisdiction to order Employee to divulge, disclose or make accessible such
information or (iv) with the Companys consent, without limitation in time
or until such information shall have become public other than by Employees
unauthorized disclosure, disclose to others or use, whether directly or
indirectly, any Confidential Information regarding the Company or any of its
subsidiaries or
8
Company Affiliates. Confidential Information shall mean information
about the Company or any Company Affiliates, and their clients and customers
that is not disclosed by the Company or any Company Affiliates for financial
reporting purposes and that was learned by Employee in the course of employment
by the Company or any Company Affiliates, including (without limitation) any
proprietary knowledge, trade secrets, data, formulae, information and client
and customer lists and all papers, resumes, and records (including computer
records) of the documents containing such Confidential Information. Employee
acknowledges that such Confidential Information is specialized, unique in
nature and of great value to the Company and the Company Affiliates, and that
such information gives the Company and the Company Affiliates a competitive
advantage. Employee agrees to deliver or return to the Company, at the Companys
request at any time or upon termination or expiration of Employees employment
or as soon thereafter as possible, all documents, computer tapes and disks,
records, lists, data, drawings, prints, notes and written information (and all
copies thereof) furnished by the Company and the Company Affiliates or prepared
by Employee in the course of Employees employment by the Company and the
Company Affiliates.
(b) NON-SOLICITATION
OF EMPLOYEES. Employee recognizes that he will possess confidential
information about other employees of the Company and the Company Affiliates
relating to their education, experience, skills, abilities, compensation and
benefits, and inter-personal relationships with suppliers to and customers of
the Company and the Company Affiliates. Employee recognizes that the
information he will possess about these other employees is not generally known,
is of substantial value to the Company and the Company Affiliates in developing
their respective businesses and in securing and retaining customers, and will
be acquired by Employee because of Employees business position with the
Company. Employee agrees that, during Employees employment and during the
period commencing immediately upon the termination of Employees employment for
any reason and ending on the later of (i) the end of the Term and (ii) the
second anniversary of the date of termination of Employees employment (the Non-Solicit
Period), Employee will not, directly or indirectly, solicit or recruit any
employee of the Company or any of the Company Affiliates for the purpose of
being employed by Employee or by any business, individual, partnership, firm,
corporation or other entity on whose behalf Employee is acting as an agent,
representative or employee and that Employee will not convey any such
confidential information or trade secrets about other employees of the Company
or any of the Company Affiliates to any other person except within the scope of
Employees duties hereunder; provided, however, that the
restrictions in this paragraph shall not prohibit Employee (i) from
placing advertisements in newspapers or other media of general circulation
advertising employment opportunities and (ii) from hiring persons who
respond to such advertisements, provided that they were not otherwise solicited
by Employee in violation of this section. The mere fact that Employee is an
employee of a company, business, partnership, firm, corporation or other entity
soliciting employees of the Company,
9
without the Employees involvement in the solicitation, will not cause
Employee to violate this provision.
(c) NON-SOLICITATION OF
CUSTOMERS. During Employees employment and during the
Non-Solicit Period, Employee shall not induce or attempt to induce any Customer
of the Company or any Company Affiliate to cease doing business with the
Company or any Company Affiliate, or in any way interfere with the relationship
between any such Customer on the one hand, and the Company or any Company Affiliate,
on the other hand; provided, however, that, for the avoidance of doubt, nothing
in this paragraph shall be deemed to prohibit Employee from calling upon or
soliciting a Customer during the Non-Solicit Period if such action relates to a
product or service not sold or performed by the Company. The mere fact that
Employee is an employee of a company, business, partnership, firm, corporation
or other entity soliciting customers or suppliers of the Company, without the
Employees involvement, directly or indirectly, in the solicitation, will not
cause Employee to violate this provision. Customer shall mean any person who
engages the Company or any of the Company Affiliates to sell, on its behalf as
agent, tickets to the public.
(d) PROPRIETARY RIGHTS;
ASSIGNMENT. All Employee Developments shall be made for hire
by the Employee for the Company or any of the Company Affiliates. Employee
Developments means any idea, discovery, invention, design, method, technique,
improvement, enhancement, development, computer program, machine, algorithm or
other work or authorship that (i) relates to the business or operations of
the Company or any of the Company Affiliates, or (ii) results from or is
suggested by any undertaking assigned to the Employee or work performed by the
Employee for or on behalf of the Company or any of the Company Affiliates,
whether created alone or with others, during or after working hours. All
Confidential Information and all Employee Developments shall remain the sole
property of the Company or any of the Company Affiliates. The Employee shall
acquire no proprietary interest in any Confidential Information or Employee
Developments developed or acquired during the Term. To the extent the Employee
may, by operation of law or otherwise, acquire any right, title or interest in
or to any Confidential Information or Employee Development, the Employee hereby
assigns to the Company all such proprietary rights. The Employee shall, both
during and after the Term, upon the Companys request, promptly execute and
deliver to the Company all such assignments, certificates and instruments, and
shall promptly perform such other acts, as the Company may from time to time in
its discretion deem necessary or desirable to evidence, establish, maintain,
perfect, enforce or defend the Companys rights in Confidential Information and
Employee Developments.
(e) COMPLIANCE WITH POLICIES AND
PROCEDURES. During the Term, Employee shall adhere to the
policies and standards of professionalism set forth in the Companys written
Policies and Procedures of general applicability as they may exist from time to
time.
10
(f) REMEDIES FOR BREACH. Employee
expressly agrees and understands that Employee will notify the Company in writing
of any alleged breach of this Agreement by the Company, and the Company will
have 30 days from receipt of Employees notice to cure any such breach.
Employee expressly agrees and understands that the remedy at law for any breach
by Employee of this Section 2 will be inadequate and that damages flowing
from such breach are not usually susceptible to being measured in monetary
terms. Accordingly, it is acknowledged that upon Employees violation of any
provision of this Section 2 the Company shall be entitled to obtain from
any court of competent jurisdiction immediate injunctive relief and obtain a
temporary order restraining any threatened or further breach as well as an
equitable accounting of all profits or benefits arising out of such violation.
Nothing in this Section 2 shall be deemed to limit the Companys remedies
at law or in equity for any breach by Employee of any of the provisions of this
Section 2, which may be pursued by or available to the Company.
(g) SURVIVAL OF PROVISIONS. The obligations
contained in this Section 2 shall, to the extent provided in this Section 2,
survive the termination or expiration of Employees employment with the Company
and, as applicable, shall be fully enforceable thereafter in accordance with
the terms of this Agreement. If it is determined by a court of competent
jurisdiction in any state that any restriction in this Section 2 is
excessive in duration or scope or is unreasonable or unenforceable under the
laws of that state, it is the intention of the parties that such restriction
may be modified or amended by the court to render it enforceable to the maximum
extent permitted by the law of that state.
3. TERMINATION OF
PRIOR AGREEMENTS. This Agreement constitutes the entire agreement
between the parties and terminates and supersedes any and all prior agreements and
understandings (whether written or oral) between the parties with respect to
the subject matter of this Agreement. Employee acknowledges and agrees that
neither the Company nor anyone acting on its behalf has made, and is not
making, and in executing this Agreement, the Employee has not relied upon, any
representations, promises or inducements except to the extent the same is
expressly set forth in this Agreement. Employee hereby represents and warrants
that by entering into this Agreement, Employee will not rescind or otherwise
breach an employment agreement with Employees current employer prior to the
natural expiration date of such agreement.
4. ASSIGNMENT;
SUCCESSORS. This Agreement is personal in its nature and none of
the parties hereto shall, without the consent of the others, assign or transfer
this Agreement or any rights or obligations hereunder, provided that, in the
event of the merger, consolidation, transfer, or sale of all or substantially
all of the assets of the Company with or to any other individual or entity,
this Agreement shall, subject to the provisions hereof, be binding upon and
inure to the benefit of such successor and such successor shall discharge and
perform all the promises, covenants, duties, and obligations of the Company
hereunder, and all references herein to the Company shall refer to such
successor.
11
5. WITHHOLDING. The Company
shall make such deductions and withhold such amounts from each payment and
benefit made or provided to Employee hereunder, as may be required from time to
time by applicable law, governmental regulation or order.
6. HEADING
REFERENCES. Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose. References to this Agreement or
the use of the term hereof shall refer to these Standard Terms and Conditions
and the Employment Agreement attached hereto, taken as a whole.
7. WAIVER;
MODIFICATION. Failure to insist upon strict compliance with any
of the terms, covenants, or conditions hereof shall not be deemed a waiver of
such term, covenant, or condition, nor shall any waiver or relinquishment of,
or failure to insist upon strict compliance with, any right or power hereunder
at any one or more times be deemed a waiver or relinquishment of such right or
power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto. Notwithstanding
anything to the contrary herein, neither the assignment of Employee to a
different Reporting Officer due to a reorganization or an internal
restructuring of the Company or the Company Affiliates nor a change in the
title of the Reporting Officer shall constitute a modification or a breach of
this Agreement.
8. SEVERABILITY. In the event
that a court of competent jurisdiction determines that any portion of this
Agreement is in violation of any law or public policy, only the portions of
this Agreement that violate such law or public policy shall be stricken. All
portions of this Agreement that do not violate any statute or public policy
shall continue in full force and effect. Further, any court order striking any
portion of this Agreement shall modify the stricken terms as narrowly as
possible to give as much effect as possible to the intentions of the parties
under this Agreement.
9. INDEMNIFICATION. The Company
shall indemnify and hold Employee harmless for acts and omissions in Employees
capacity as an officer, director or employee of the Company, or any of the
Company Affiliates for which the Employee performs services, to the maximum
extent permitted under applicable law; provided, however, that
neither the Company, nor any of the Company Affiliates shall indemnify Employee
for any losses incurred by Employee as a result of acts described in Section 1(c) of
these Standard Terms and Conditions.
12
ACKNOWLEDGED
AND AGREED:
Dated as of: April 11th, 2006
|
TICKETMASTER
L.L.C.
8800 Sunset Boulevard
West Hollywood, CA 90069
|
|
|
|
|
|
By:
|
/s/
[ILLEGIBLE]
|
|
|
|
Title:
|
GC,
EVP
|
|
|
|
|
|
/s/
[ILLEGIBLE]
|
|
EMPLOYEE
|
|
|
|
|
13
EXHIBIT A
FORMS OF GENERAL RELEASE
14
RELEASE FOR CALIFORNIA EMPLOYEES UNDER AGE 40
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the Agreement) is entered into
by and between
for itself and all
of its affiliated, parent, related, and subsidiary companies, joint venturers
and partnerships, as well as their respective directors, officers, partners,
employees, agents, attorneys, successors, and assigns, past and present, and
each of them, including, but not limited to, Ticketmaster, a Delaware
corporation (collectively Ticketmaster), on the one hand, and ,
on behalf of himself/herself and his/her agents, representatives, heirs,
executors, trustees, and assigns (collectively, Employee), on the other hand.
AGREEMENTS
1. Severance of Employment Relationship.
Employee and Ticketmaster agree and acknowledge that Employee will cease to be
employed by Ticketmaster effective as of
,
200 (the Termination Date). Employee hereby confirms his/her agreement
and understanding that as of such Termination Date: (a) Employee will have no further
continuing right to be employed by Ticketmaster; (b) Employee will no
longer hold himself/herself out as an employee of Ticketmaster;
(c) Employee will have received all compensation, expense reimbursement
and other benefits to which he/she is or may be entitled to receive as an
employee of Ticketmaster through the Termination Date, including but not
limited to payment for all accrued but unused vacation time; and
(d) Employee will have returned to Ticketmaster any and all documents,
agreements, records, instruments, office equipment, keys and other property of
Ticketmaster (and copies thereof) that are in his/her possession or under
his/her control, if any. [Add if
Employee was previously granted stock options and was terminated for cause
after discussing with the General Counsel of Ticketmaster: Furthermore, Employee understands and
agrees that he/she has been terminated for cause, and that any stock options
that had been granted to him/her have been cancelled pursuant to the terms of
his/her stock option agreement.]
2. Payment of Consideration.
(a) Upon execution of this Agreement by Employee, in consideration
for the promises and representations made in this Agreement, and as full and
final settlement for any and all claims Employee has or may have against
Ticketmaster, Ticketmaster agrees to pay Employee a lump sum in the amount of
week(s) salary, minus all applicable withholdings. Employee understands
and agrees that such payment is not salary but rather severance and thus, among
other things, such payment will not be eligible for 401(k) deductions or
employer matching contributions and
15
Ticketmaster
may withhold Federal and state taxes at the rates applicable to unearned
income.
(b) After the
Termination Date, Employee will not receive or accrue any benefits. From the
Termination Date through ,
Ticketmaster will pay Employees COBRA payments.
3. Release of Known and Unknown Claims. In
consideration for the promises undertaken, Employee irrevocably and
unconditionally releases and forever discharges Ticketmaster, as defined above,
as well its affiliated, parent, related, and subsidiary companies, licensees,
joint venturers and partnerships, as well as their respective directors,
officers, shareholders, partners, employees, agents, attorneys, successors, and
assigns, past and present, and each of them, from any and all claims, demands,
liabilities, suits or damages of any type or kind, whether in law or in equity,
known or unknown, suspected or unsuspected, arising from or in any way related
to Employees employment with Ticketmaster, and/or the severance of such
employment from Ticketmaster and/or any events regarding Employees employment
occurring prior to the execution of the Agreement, including without
limitation, all of those based on allegations of discrimination or harassment
on the basis race, color, sex, national origin, ancestry, religion, disability,
handicap, medical condition, marital status, sexual orientation or any other
bases protected by federal, state or local laws; any claim under Title VII of
the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e, et seq.;
the Americans With Disabilities Act, 42 U.S.C. § 12101, et seq.; the
California Fair Employment & Housing Act, California Government Code §
12900, et seq.; violation of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA); violation of the Occupational Safety and
Health Act or any other safety and/or health laws, statutes or regulations;
violation of the Employment Retirement Income Security Act of 1974 (ERISA);
or any contract, tort, wage and hour law, and/or any federal, state or local
fair employment practice or civil rights law, ordinance or executive order, or
any other wrongdoing or improper conduct whatsoever, including but not limited
to: any claims for violation of any state or federal law or regulations; or for
breach of contract (express or implied); breach of the implied covenant of good
faith and fair dealing; wrongful discharge; retaliation; violation of public
policy; sexual assault and/or battery; invasion of privacy; misrepresentation;
defamation; fraud; fraudulent inducement; or emotional distress; and any and
all other claims or torts whatsoever, all to the fullest extent permitted by
law.
4. Waiver of California Civil Code Section 1542.
(a) In
executing this Agreement, Employee waives and relinquishes all rights and
benefits afforded by California Civil Code Section 1542 and does so
understanding and acknowledging the significance and consequences of the
specific waiver of Section 1542. Section 1542 states as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of
16
executing the release, which if known by him must have materially affected
his settlement with the debtor.
(b) Thus,
notwithstanding the provisions of Section 1542, Employee expressly
acknowledges that paragraph 3, above, is also intended to include in its
effect, without limitation, all such claims which Employee does not know or
suspect to exist at the time of the execution of this Agreement, and that this
Agreement contemplates the extinguishment of those claims.
(c) Employee
acknowledges and agrees that Employee may later discover facts different from
or in addition to those Employee now knows or believes to be true in entering
into this Agreement. Employee agrees to assume the risk of the possible
discovery of additional or different facts, including facts which may have been
concealed or hidden, and agrees that this Agreement shall remain effective
regardless of such additional or different facts.
5. Warranties. Employee specifically
represents that he/she has no pending complaints or charges against
Ticketmaster with any state or federal court or any local, state or federal
agency, division or department, based on any events occurring prior to the date
of execution of this Agreement. Employee further represents that he/she will
not in the future file, participate in, instigate or encourage the filing of
any lawsuit by any party in any state or federal court or any proceeding before
any local, state or federal agency, department or division, claiming that
Ticketmaster has violated any local, state or federal laws, statutes,
ordinances or regulations based upon events occurring prior to the date of the
execution of this Agreement.
6. Non-Disclosure of Proprietary Information. Employee
recognizes and acknowledges that the Proprietary Information of Ticketmaster
(as defined below), represents a valuable, special and unique asset of
Ticketmaster. Proprietary Information of Ticketmaster means all information
known or intended to be known only to employees of Ticketmaster or any of its
subsidiaries or affiliates in a confidential relationship with Ticketmaster
relating to Ticketmasters employees, executives, agents, representatives,
operations and clients, as well as technical matters pertaining to the business
of Ticketmaster or any of its subsidiaries or affiliates, including, but not
limited to, any information, business plans, financial information, design
specifications, programs, listings, documentation or other supporting or
related materials or information of any nature or description whatsoever
relating to Ticketmasters hardware, software, systems and equipment as it now
exists, including any and all improvements in the state of the art relative
hereto or applications, adaptations and modification thereof, whether now
existing or developed in the future, except for any information within the
public domain. Employee consents and agrees that Employee will not at any time
use or disclose any Proprietary Information of Company to any person, firm,
corporation, association or entity for any reason or purpose whatsoever. If
Employee is served with any subpoena, court order, or other legal process
seeking disclosure of any Proprietary Information
of Ticketmaster, or this Agreement, or any information or
17
documentation
regarding the severance of Employees employment from Ticketmaster, Employee
shall promptly send to the General Counsel of Ticketmaster within forty-eight
(48) hours via facsimile at (310) 360-3373, such subpoena, court order, or
other legal process so that Ticketmaster may exercise any applicable legal
remedies. Employee agrees not to remove any documents, records or other
information from the premises of Ticketmaster or any of its subsidiaries or
affiliates containing any such Proprietary Information of Ticketmaster and
acknowledges that such documents, records and other information are the
exclusive property of Ticketmaster or its subsidiaries or affiliates. The
confidentiality obligations imposed upon Employee by the terms of this
Agreement shall be continuing.
7. Non-Disparagement. Employee agrees
not to make any negative, disparaging, detrimental or derogatory comments to
any third party about Ticketmaster or about its businesses, employees,
executives, agents or representatives at any time whatsoever. Employee further
agrees not to make any statements that would adversely affect Ticketmasters
business reputation.
8. Non-Disclosure of this Agreement.
Employee agrees that this Agreement is confidential and Employee will not
disclose the existence of this Agreement, any of the terms of this Agreement or
any facts regarding Employees employment at Ticketmaster to any person or
entity, except: (1) to Employees attorneys, accountants or any
governmental taxing authority on a need to know basis only; or (2) in
response to an order or subpoena issued by a court or government agency;
provided, however, that notice of receipt of such judicial order, inquiry or
subpoena shall be communicated via facsimile within 72 hours to the General
Counsel for Ticketmaster, at (310) 360-3373 so that Ticketmaster will have the opportunity
to intervene to assert whatever rights it has to nondisclosure prior to
Employees response to the order, inquiry or subpoena. Employee further agrees
to inform any such attorneys, accountants and governmental authorities or
agencies about this confidentiality provision and that they will agree to be
bound by it.
9. Knowing and Voluntary. The parties
acknowledge and represent that they have carefully read and fully understand
all of the terms and conditions set forth in this Agreement. The parties
further acknowledge and represent that they enter into this Agreement freely,
knowingly and without coercion and based on their own judgment and not in
reliance upon any representation or promises made by any party or its attorneys
to any other party.
10. Attorneys Fees. Should any party
institute any action or proceeding to enforce, interpret or apply any provision
of this Agreement, or any released claims, the parties agree that the
prevailing party shall be entitled to reimbursement by the losing party of all
costs and expenses, including, but not limited to, all of its attorneys fees.
11. Governing Law. This Agreement shall
be construed and governed by the laws of the State of California, without
giving effect to its conflict of laws provisions.
18
12. Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, all of which together shall constitute one and the same instrument.
13. Severability. If any provision of
this Agreement is deemed to be illegal, invalid, or unenforceable, the
legality, validity and enforceability of the remaining parts shall not be
affected.
14. Entire Agreement. This Agreement,
together with that certain
dated
as of
[fill in
name and date of any confidentiality/nondisclosure agreement signed by the
Employee related to his/her employment with Ticketmaster], contains
all of the terms and conditions agreed upon by the parties regarding the
subject matter of this Agreement. Any prior agreements, promises, negotiations,
or representations, either oral or written, by either the parties hereto or
their attorneys, relating to the subject matter of this Agreement not expressly
set forth in this Agreement are of no force or effect. No modifications of this
Agreement can be made except in writing signed by Employee and an authorized
representative of Ticketmaster.
15. Denial of Liability. Employee
expressly recognizes that this Agreement shall not in any way be construed as
an admission by Ticketmaster of any unlawful or wrongful acts whatsoever.
Ticketmaster expressly denies any breach of any contracts, policies or
procedures, or a violation of any state or federal law or regulation.
16. Waiver. No waiver by any party of
any breach of any term or provision of this Agreement shall be a waiver of any
preceding, concurrent or succeeding breach of this Agreement or of any other
term or provision of this Agreement. No waiver shall be binding on the part of,
or on behalf of, any other party entering into this Agreement.
17. Ambiguities. Both parties have
participated in the negotiation of this Agreement and, thus, it is understood
and agreed that the general rule that ambiguities are to be construed
against the drafter shall not apply to this Agreement. In the event that any
language of this Agreement is found to be ambiguous, each party shall have an
opportunity to present evidence as to the actual intent of the parties with
respect to any such ambiguous language.
THE SIGNATORIES HAVE CAREFULLY READ THIS ENTIRE AGREEMENT. THE PARTIES
HAVE HAD THE OPPORTUNITY TO HAVE THE CONTENTS OF THIS AGREEMENT FULLY EXPLAINED
TO THEM BY THEIR ATTORNEYS. THE SIGNATORIES FULLY UNDERSTAND THE FINAL AND
BINDING EFFECT OF THIS AGREEMENT. THE ONLY PROMISES MADE TO ANY SIGNATORY ABOUT
THIS AGREEMENT, AND TO SIGN THIS AGREEMENT, ARE CONTAINED IN THIS AGREEMENT.
THE SIGNATORIES ARE SIGNING THIS AGREEMENT VOLUNTARILY.
19
PLEASE READ CAREFULLY
THIS SETTLEMENT AND RELEASE
AGREEMENT
INCLUDES A RELEASE OF KNOWN AND UNKNOWN CLAIMS.
IN WITNESS WHEREOF, the parties have executed this Settlement Agreement
and Release on the dates set forth below.
DATED: ,
|
|
|
|
|
|
|
|
|
|
[ ]
|
|
|
|
DATED: ,
|
|
By:
|
|
|
|
|
|
|
20
RELEASE FOR CALIFORNIA EMPLOYEES AGE 40 AND OVER
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (the Agreement) is entered into
by and between
for itself and all of its, affiliated, parent, related, and subsidiary
companies, joint venturers and partnerships, as well as their respective
directors, officers, partners, employees, agents, attorneys, successors, and
assigns, past and present, and each of them, including, but not limited to,
Ticketmaster, a Delaware corporation (collectively Ticketmaster), on the one
hand, and
,
on behalf of himself/herself and his/her agents, representatives, heirs,
executors, trustees, and assigns (collectively, Employee), on the other hand.
AGREEMENTS
1. Severance of Employment Relationship.
Employee and Ticketmaster agree and acknowledge that Employee will cease to be
employed by Ticketmaster effective as of ,
200 (the Termination Date). Employee hereby confirms his/her agreement
and understanding that as of such Termination Date: (a) Employee will have
no further continuing right to be employed by Ticketmaster; (b) Employee
will no longer hold himself/herself out as an employee of Ticketmaster;
(c) Employee will have received all compensation, expense reimbursement
and other benefits to which he/she is or may be entitled to receive as an
employee of Ticketmaster through the Termination Date, including but not
limited to payment for all accrued but unused vacation time; and (d) Employee
will have returned to Ticketmaster any and all documents, agreements, records,
instruments, office equipment, keys and other property of Ticketmaster (and
copies thereof) that are in his/her possession or under his/her control, if
any. [Add if Employee was previously granted stock options and was
terminated for cause after discussing with the General Counsel of Ticketmaster: Furthermore, Employee understands
and agrees that he/she has been terminated for cause, and that any stock
options that had been granted to him/her have been cancelled pursuant to the
terms of his/her stock option agreement.]
2. Payment of
Consideration.
(a) On the eighth day
after Employees execution of this Agreement, in consideration for the promises
and representations made in this Agreement, and as full and final settlement
for any and all claims Employee has or may have against Ticketmaster, Ticketmaster agrees to pay Employee a lump
sum in the amount of
week(s) salary,
minus all applicable withholdings. Employee understands and agrees that such
payment is not salary but rather severance and thus, among other things, such
payment will not be eligible for 401(k) deductions or employer matching
contributions and Ticketmaster may withhold Federal and state taxes at the
rates applicable to unearned income.
21
(b) After the Termination
Date, Employee will not receive or accrue any benefits. From the Termination
Date through ,
Ticketmaster will pay Employees COBRA payments.
3. Release of Known and Unknown Claims. In
consideration for the promises undertaken, Employee irrevocably and
unconditionally releases and forever discharges Ticketmaster, as defined above,
as well its affiliated, parent, related, and subsidiary companies, licensees,
joint venturers and partnerships, as well as their respective directors,
officers, shareholders, partners, employees, agents, attorneys, successors, and
assigns, past and present, and each of them, from any and all claims, demands,
liabilities, suits or damages of any type or kind, whether in law or in equity,
known or unknown, suspected or unsuspected, arising from or in any way related
to Employees employment with Ticketmaster, and/or the severance of such
employment from Ticketmaster and/or any events regarding Employees employment
occurring prior to the execution of the Agreement, including without
limitation, all of those based on allegations of discrimination or harassment
on the basis race, color, sex, age, national origin, ancestry, religion,
disability, handicap, medical condition, marital status, sexual orientation or
any other bases protected by federal, state or local laws; any claim under
Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e, et
seq.; the Age Discrimination in Employment Act, as amended by the Older
Workers Benefit Protection Act of 1990, 29 U.S.C. § 621 et seq.; the
Americans With Disabilities Act, 42 U.S.C. § 12101, et seq.; the
California Fair Employment & Housing Act, California Government Code §
12900, et seq.; violation of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA); violation of the Occupational Safety and
Health Act or any other safety and/or health laws, statutes or regulations;
violation of the Employment Retirement Income Security Act of 1974 (ERISA);
or any contract, tort, wage and hour law, and/or any federal, state or local
fair employment practice or civil rights law, ordinance or executive order, or
any other wrongdoing or improper conduct whatsoever, including but not limited to: any claims for
violation of any state or federal law or regulations; or for breach of contract
(express or implied); breach of the implied covenant of good faith and fair dealing;
wrongful discharge; retaliation; violation of public policy; sexual assault
and/or battery; invasion of privacy; misrepresentation; defamation; fraud;
fraudulent inducement; or emotional distress; and any and all other claims or
torts whatsoever, all to the fullest extent permitted by law.
4. Waiver of California Civil Code Section 1542.
(a) In
executing this Agreement, Employee waives and relinquishes all rights and
benefits afforded by California Civil Code Section 1542 and does so
understanding and acknowledging the significance and consequences of the
specific waiver of Section 1542. Section 1542 states as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of
22
executing the release, which if known by him must have materially
affected his settlement with the debtor.
(b) Thus,
notwithstanding the provisions of Section 1542, Employee expressly
acknowledges that paragraph 3, above, is also intended to include in its
effect, without limitation, all such claims which Employee does not know or
suspect to exist at the time of the execution of this Agreement, and that this
Agreement contemplates the extinguishment of those claims.
(c) Employee
acknowledges and agrees that Employee may later discover facts different from
or in addition to those Employee now knows or believes to be true in entering
into this Agreement. Employee agrees to assume the risk of the possible discovery
of additional or different facts, including facts which may have been concealed
or hidden, and agrees that this Agreement shall remain effective regardless of
such additional or different facts.
5. Right of
Attorney, Time to Consider, Revocations. Employee
acknowledges and agrees that Employee was provided twenty-one (21) days to
consider this Agreement and to consult with counsel and have the opportunity to
receive independent legal advice with respect to the matters hereinabove set
forth and the asserted rights arising out of said matters, and has been
encouraged to do so. To the extent that Employee has taken less than twenty-one
(21) days to consider this Agreement, Employee acknowledges that Employee has
had sufficient time to consider the Agreement and to consult with counsel and
that Employee did not desire or need additional time.
This Agreement is revocable by Employee for a period
of seven (7) calendar days following Employees execution of this
Agreement. The revocation must be in writing, must specifically revoke this
Agreement, and must be directed to the General Counsel of Ticketmaster at
facsimile number (310) 360-3373.
6. Warranties. Employee specifically
represents that he/she has no pending complaints or charges against
Ticketmaster with any state or federal court or any local, state or federal
agency, division or department, based on any events occurring prior to the date
of execution of this Agreement. Employee further represents that he/she will
not in the future file, participate in, instigate or encourage the filing of
any lawsuit by any party in any state or federal court or any proceeding before
any local, state or federal agency, department or division, claiming that
Ticketmaster has violated any local, state or federal laws, statutes,
ordinances or regulations based upon events occurring prior to the date of the execution
of this Agreement.
7. Non-Disclosure of Proprietary Information. Employee recognizes and acknowledges
that the Proprietary Information of Ticketmaster (as defined below), represents
23
a
valuable, special and unique asset of Ticketmaster. Proprietary Information of
Ticketmaster means all information known or intended to be known only to
employees of Ticketmaster or any of its subsidiaries or affiliates in a
confidential relationship with Ticketmaster relating to Ticketmasters
employees, executives, agents, representatives, operations and clients, as well
as technical matters pertaining to the business of Ticketmaster or any of its
subsidiaries or affiliates, including, but not limited to, any information,
business plans, financial information, design specifications, programs,
listings, documentation or other supporting or related materials or information
of any nature or description whatsoever relating to Ticketmasters hardware,
software, systems and equipment as it now exists, including any and all
improvements in the state of the art relative hereto or applications,
adaptations and modification thereof, whether now existing or developed in the
future, except for any information within the public domain. Employee consents
and agrees that Employee will not at any time use or disclose any Proprietary
Information of Company to any person, firm, corporation, association or entity
for any reason or purpose whatsoever. If Employee is served with any subpoena,
court order, or other legal process seeking disclosure of any Proprietary
Information of Ticketmaster, or this Agreement, or any information or
documentation regarding the severance of Employees employment from
Ticketmaster, Employee shall promptly send to the General Counsel of
Ticketmaster within forty-eight (48) hours via facsimile at (310) 360-3373,
such subpoena, court order, or other legal process so that Ticketmaster may
exercise any applicable legal remedies. Employee agrees not to remove any
documents, records or other information from the premises of Ticketmaster or
any of its subsidiaries or affiliates containing any such Proprietary
Information of Ticketmaster and acknowledges that such documents, records and
other information are the exclusive property of Ticketmaster or its
subsidiaries or affiliates. The confidentiality obligations imposed upon
Employee by the terms of this Agreement shall be continuing.
8. Non-Disparagement. Employee agrees
not to make any negative, disparaging, detrimental or derogatory comments to
any third party about Ticketmaster or about its businesses, employees,
executives, agents or representatives at any time whatsoever. Employee further
agrees not to make any statements that would adversely affect Ticketmasters
business reputation.
24
9. Non-Disclosure of this Agreement.
Employee agrees that this Agreement is confidential and Employee will not
disclose the existence of this Agreement, any of the terms of this Agreement or
any facts regarding Employees employment at Ticketmaster to any person or
entity, except: (1) to Employees attorneys, accountants or any governmental
taxing authority on a need to know basis only; or (2) in response to an
order or subpoena issued by a court or government agency; provided, however,
that notice of receipt of such judicial order, inquiry or subpoena shall be
communicated via facsimile within 72 hours to the General Counsel for
Ticketmaster, at (310) 360-3373 so that Ticketmaster will have the opportunity
to intervene to assert whatever rights it has to nondisclosure prior to
Employees response to the order, inquiry or subpoena. Employee further agrees
to inform any such attorneys, accountants and governmental authorities or
agencies about this confidentiality provision and that they will agree to be
bound by it.
10. Knowing and Voluntary. The parties
acknowledge and represent that they have carefully read and fully understand
all of the terms and conditions set forth in this Agreement. The parties
further acknowledge and represent that they enter into this Agreement freely,
knowingly and without coercion and based on their own judgment and not in
reliance upon any representation or promises made by any party or its attorneys
to any other party.
11. Attorneys Fees. Should any party
institute any action or proceeding to enforce, interpret or apply any provision
of this Agreement, or any released claims, the parties agree that the
prevailing party shall be entitled to reimbursement by the losing party of all
costs and expenses, including, but not limited to, all of its attorneys fees.
12. Governing Law. This Agreement shall
be construed and governed by the laws of the State of California, without
giving effect to its conflict of laws provisions.
13. Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, all of which together shall constitute one and the same instrument.
14. Severability. If any provision of
this Agreement is deemed to be illegal, invalid, or unenforceable, the
legality, validity and enforceability of the remaining parts shall not be
affected.
15. Entire Agreement. This Agreement,
together with that certain
dated
as of [fill in
name and date of any confidentiality/nondisclosure agreement signed by the
Employee related to his/her employment with Ticketmaster], contains
all of the terms and conditions agreed upon by the parties regarding the
subject matter of this Agreement. Any prior agreements, promises, negotiations,
or representations, either oral or written, by either the parties hereto or
their attorneys, relating to the subject matter of this Agreement not expressly
set forth in this
25
Agreement
are of no force or effect. No modifications of this Agreement can be made
except in writing signed by Employee and an authorized representative of
Ticketmaster.
16. Denial of Liability. Employee
expressly recognizes that this Agreement shall not in any way be construed as
an admission by Ticketmaster of any unlawful or wrongful acts whatsoever.
Ticketmaster expressly denies any breach of any contracts, policies or
procedures, or a violation of any state or federal law or regulation.
17. Waiver. No waiver by any party of
any breach of any term or provision of this Agreement shall be a waiver of any
preceding, concurrent or succeeding breach of this Agreement or of any other
term or provision of this Agreement. No waiver shall be binding on the part of,
or on behalf of, any other party entering into this Agreement.
18. Ambiguities. Both parties have
participated in the negotiation of this Agreement and, thus, it is understood
and agreed that the general rule that ambiguities are to be construed
against the drafter shall not apply to this Agreement. In the event that any
language of this Agreement is found to be ambiguous, each party shall have an
opportunity to present evidence as to the actual intent of the parties with
respect to any such ambiguous language.
THE SIGNATORIES HAVE CAREFULLY READ THIS ENTIRE AGREEMENT. THE PARTIES
HAVE HAD THE OPPORTUNITY TO HAVE THE CONTENTS OF THIS AGREEMENT FULLY EXPLAINED
TO THEM BY THEIR ATTORNEYS. THE SIGNATORIES FULLY UNDERSTAND THE FINAL AND
BINDING EFFECT OF THIS AGREEMENT. THE ONLY PROMISES MADE TO ANY SIGNATORY ABOUT
THIS AGREEMENT, AND TO SIGN THIS AGREEMENT, ARE CONTAINED IN THIS AGREEMENT.
THE SIGNATORIES ARE SIGNING THIS AGREEMENT VOLUNTARILY.
PLEASE READ CAREFULLY
THIS SETTLEMENT AND RELEASE
AGREEMENT
INCLUDES A RELEASE OF KNOWN AND UNKNOWN CLAIMS.
IN WITNESS WHEREOF, the parties have executed this Settlement Agreement
and Release on the dates set forth below.
DATED
: ,
|
|
|
|
|
|
|
|
|
|
[ ]
|
|
|
|
DATED
: ,
|
|
By:
|
|
|
|
|
|
|
EX-10.8
4
a2186551zex-10_8.htm
EXHIBIT 10.8
Exhibit 10.8
![](g133354kk05i001.jpg)
|
|
8800
West Sunset Boulevard, West Hollywood, CA 90069
|
July 31, 2006
Mr. Pat Darr
Ticketmaster Group Limited Partnership
821 Capital Centre Boulevard
Largo, Maryland 20774
Dear Pat:
Ticketmaster Corporation, an Illinois corporation (Ticketmaster) and
Ticketmaster Group Limited Partnership, a Maryland limited partnership (TGLP)
are parties to that certain License Agreement dated as of May 23, 1991, as
amended by the certain Amendment to License Agreement dated as of August 31,
1999 and that certain letter agreement dated as of October 17, 2005 (as
amended, License Agreement) pursuant to which Ticketmaster granted TGLP an
exclusive license and right to the Ticketmaster System, name, logo and Mark in
connection with TGLPs computerized event ticketing business in the Market
Area. Ticketmaster L.L.C., an affiliate of Ticketmaster, and TGLP are also
parties to a letter agreement dated as of March 21, 2002 regarding
Ticketmaster L.L.C.s license of Non-System Related Software to certain sports
teams. All terms used here and not otherwise defined shall have the meaning
assigned to them in the License Agreement.
Ticketmaster, Ticketmaster L.L.C. and TGLP acknowledge that the letter
agreement dated as of October 17, 2005 (the October 17 Letter
Agreement) was inadvertently drafted as being between Ticketmaster L.L.C. and
TGLP and the October 17 Letter Agreement should have been between
Ticketmaster Corporation and TGLP. Ticketmaster, Ticketmaster L.L.C. and TGLP
agree to amend the October 17 Letter Agreement to substitute Ticketmaster
Corporation for Ticketmaster L.L.C.
Ticketmaster is offering two new software products to use in connection
with its ticketing business. One product allows tickets to be sold via Internet
auctions on the Web Site (the Auctions Software) and the other product allows
ticket purchasers to post tickets purchased from TGLP off of the System for
sale to third parties on the Web Site (the TicketExchange Software). TGLP has
requested that Ticketmaster license the Auction Software and the TicketExchange
Software to it for use in the Market Area, and Ticketmaster has agreed to
license the Auction Software and the TicketExchange Software to TGLP in
accordance with the terms and conditions of this letter agreement.
1. Auction Software
a. License
of Auction Software
Ticketmaster grants to TGLP
an exclusive right and license to use the Auction Software for events in the
Market Area in accordance with the terms and conditions of this letter
agreement. TGLP shall comply with and shall require its clients and consumers
to comply with any rules and procedures related to Auction sales
promulgated by Ticketmaster. Ticketmaster shall provide any back-end System
work needed to affect such ticket sales via the Auction Software, including any
connections or coordination needed between the Auction Software and the System.
1
b. Fees Charged to Consumers
(i) Auction
Fees
TGLP shall require that each ticket to be sold using the Auction
Software initially go on sale with a Starting Bid. The formula to determine the
Starting Bid shall be determined by Ticketmaster from time to time. Currently,
the Starting Bid is equal to the face value of the ticket plus any facility
fees plus the convenience charge for such ticket that would otherwise be
charged pursuant to TGLPs ticketing agreement with the client, rounded up to
the nearest bid increment (e.g., If bids are made in $10 increments, then the
Starting Bid would be rounded up to the neared $10). TGLP shall charge the
client an additional service charge equal to Ticketmasters standard additional
service charge with respect to Auction Software transactions in the United
States, as such service charge may be modified by Ticketmaster from time to
time (Auction Fee). The current Auction Fee is equal to 12.9% of the Lift.
The Lift equals the difference between the ultimate selling price of the ticket
at the end of the auction less the Starting Bid.
(ii) Auction Taxes
Taxes on sales of tickets using the Auction Software shall be handled
in the same way as taxes for other sale of tickets. Ticketmaster shall not be
responsible for any taxes on auction ticket sales, other than taxes related to
the income Ticketmaster receives from such sales.
(iii) Delivery Fees
Delivery fees for tickets purchased via the Auction Software shall be
the same as tickets purchased from TGLP via ticketmaster.com, and delivery
shall be handled in the same way as for regular single tickets purchased at
ticketmaster.com. TGLP shall retain any such delivery fees as it would for any
regular single tickets purchased at ticketmaster.com, and any credit card
charges for the delivery fees shall be handled in the sale way as tickets
purchased from TGLP via the Internet.
(iv) Auction
Credit Card Fees
Included within the Auction Fee shall be the credit card company
charges equal to 2.9% of Lift, which rate is subject to automatic increase due
to increases in interbank rates (Auction Credit Card Fees). TGLP shall be
entitled to retain the Auction Credit Card Fees and shall be responsible for
paying any fees due to the credit card company and for any chargebacks assessed
by the merchant bank in connection with Auction Software transactions by
consumers.
c. Client Royalties
TGLP shall determine client royalties to be paid to TLGPs client from
the Auction Fees (Auction Royalties).
d. Ticketmasters Compensation
In exchange for licensing the Auction Software to TGLP and for the
services described above, Ticketmaster shall be entitled to (i) the Per
Ticket Amount (as defined
2
in the License Agreement) for each ticket sold via the Auction Software
and (ii) an amount per ticket equal to fifty percent (50%) of the Auction
Income per ticket. The Auction Income shall be an amount equal to the Auction
Fees less the Auction Credit Card Fees and any Auction Royalties.
e. Settlement and Fulfillment
TGLP shall (i) process the Auction Software transactions
contemplated by this letter agreement, (ii) provide settlement services
both to Ticketmaster and its clients with respect to Auction Software
transactions and (iii) shall provide fulfillment services for tickets sold
via the Auction Software. Payments to Ticketmaster of Ticketmasters compensation
in connection with Auction Software transactions shall be made in accordance
with schedule for Additional Payments set forth in the License Agreement.
f. Example
Assume the following facts are true for a ticket to be sold via the
Auction Software with $10 bid increments:
Face
Value:
|
|
$
|
50
|
|
Facility
Fee:
|
|
$
|
2
|
|
Convenience
Charge:
|
|
$
|
5
|
|
Usual
Royalty to TGLP client:
|
|
$
|
1
|
|
Price
Sold for at Auction:
|
|
$
|
100
|
|
Based on the above assumptions, current fees and assuming no taxes, the
following would be the fees and income related to such ticket sold via the
Auction Software:
Starting
Bid:
|
|
$60
($50 + $2 + $5 = $57, rounded up to $60)
|
|
|
Lift:
|
|
$40
($100 - 60 = $40)
|
|
|
Auction
Fee:
|
|
$5.16
(12.9% * $40 = $5.16)
|
|
|
Auction
Credit Card Fee:
|
|
$1.16
(2.9% * $40 = $1.16)
|
|
|
Auction
Income:
|
|
$3.00
($5.16 - $1.16 - $1 = $3.00)
|
|
|
Ticketmaster
Compensation:
|
|
Per
Ticket Amount + $1.50 (50% * $3.00)
|
|
|
2. TicketExchange Software
a. License of TicketExchange Software
Ticketmaster grants to TGLP an exclusive right and license to use the
TicketExchange Software for events in the Market Area in accordance with the
terms and conditions of this letter agreement. TGLP shall comply and shall
require its clients and consumers to comply with any rules and procedures
related to sales via the TicketExchange Software promulgated by Ticketmaster.
TGLP shall also be responsible for obtaining any client consents or venue
consents required for sellers to sell tickets via the TicketExchange Software
for a price in excess of the original purchase price of the ticket.
Ticketmaster shall provide any back-end System work needed to effect such
ticket sales via the TicketExchange Software.
3
b. Fees
Charges to Consumers
(i) TicketExchange Fees
TGLP agrees that consumers will be charged Tlcketmasters standard fees
with respect to TicketExchange Software transactions in the United States (TicketExchange
Fees). The current TicketExchange Fees are as set forth below:
Type of
TicketExchange Fee
|
|
Amount of TicketExchange Fee
|
|
|
|
TicketExchange
Seller Fee (amount charged to sellers
to sell tickets)
|
|
10%
of TicketExchange Posting Price per ticket
(the TicketExchange Posting Price is the price of
a ticket listed for resale which shall be at least
equal to the purchase price of the
ticket when purchased and no more than
permitted by applicable law)
|
|
|
|
TicketExchange
Posting Fee (amount charged to sellers
to post tickets for sale)
|
|
$3.00 per
order
|
|
|
|
TicketExchange
Buyer Fee (amount charged to buyers to purchase tickets)
|
|
10%
of TicketExchange Posting Price per ticket
|
|
|
|
TicketExchange
Processing Fee (amount charged to buyers
for processing ticket sales)
|
|
$5.00 per
ticket
|
The TicketExchange Posting Fee and the
TicketExchange Processing Fee shall be automatically increased on January 1
of each year by five percent (5%) of such fees in effect during the prior year.
In addition to the automatic increases described above, Ticketmaster shall have
the right to change the TicketExchange Fees in its sole discretion and shall
notify TGLP of any such changes. Changes in TicketExchange Fees, other than
annual increases described above, shall not apply to TGLP clients then subject
to a contract requiring the certain TicketExchange Fees until the then current term
of the contract for that client expires.
(ii) TicketExchange Taxes
TGLP shall notify Ticketmaster of any applicable taxes that are
required to be assessed in connection with transactions via the TicketExchange
Software and shall require that any applicable taxes assessed against the
seller in connection with a TicketExchange Software transaction shall be paid
for by the seller, and any other applicable taxes required in connection with a
TicketExchange Software transaction shall be paid for by the buyer. Such taxes
shall be referred to herein as TicketExchange Taxes. Until such time as such
TicketExchange Taxes can be separately listed and assessed via the
TicketExchange Software, the TicketExchange
4
Buyer Fee shall be increased by the amount of such TicketExchange Taxes
to be paid for by the buyer.
(iii) TicketExchange
Delivery Fees
Delivery fees for tickets purchased via the TicketExchange Software
shall be determined by Ticketmaster and TGLP (TicketExchange Delivery Fees),
and Ticketmaster shall provide delivery of such tickets, Credit card charges
for the TicketExchange delivery fees shall be determined in accordance with
paragraph 2(iv) below.
(iv) TicketExchange Credit Card Fees
The credit card company charges for TicketExchange Software
transactions shall be an amount equal to 3.5% of the total of the
TicketExchange Posting Price, TicketExchange Buyer Fee, TicketExchange
Processing Fee, TicketExchange Taxes and TicketExchange Delivery Fee, which
rate is subject to increase due to increases in interbank rates (TicketExchange
Credit Card Fees). Ticketmaster shall be entitled to retain the TicketExchange
Credit Card Fees and shall be responsible for paying any fees due to the credit
card company and any chargebacks assessed by the merchant bank in connection
with the TicketExchange Software transactions by consumers.
c. Client Royalties
Ticketmaster and TGLP shall mutually agree on any royalties to be paid
to TGLPs clients from the TicketExchange Fees (TicketExchange Royalties).
d. Ticketmasters Compensation
In exchange for licensing the TicketExchange Software to TGLP and for
the services described above, Ticketmaster shall be entitled to an amount equal
to fifty percent (50%) of the TicketExchange Income from each ticket sale via
the TicketExchange Software. The TicketExchange Income shall be the amount
equal to the TicketExchange Fees plus the TicketExchange Delivery Fees less the
TicketExchange Credit Card Fees, any applicable TicketExchange Taxes and any
TicketExchange Royalties.
e. Settlement and
Fulfillment
Ticketmaster shall (i) process the TicketExchange Software
transactions contemplated by this letter agreement, (ii) provide
settlement services both to TGLP and to the sellers of tickets via the
TicketExchange Software and (iii) shall provide fulfillment services for
tickets sold via the TicketExchange Software. TGLP shall be responsible for
providing any required settlements to its clients.
f. Example
Assume the following facts are true for a ticket to be sold via the
TicketExchange Software:
TicketExchange Posting Price:
|
|
$
|
100
|
|
Royalty to TGLP client:
|
|
$
|
5
|
|
Delivery fee:
|
|
$
|
2.50
|
|
5
Based on the above assumptions, current fees and assuming no taxes, the
following would be the fees and income related to such ticket sold via the
TicketExchange Software:
TicketExchange
Seller Fee:
|
|
$10
(10% * $100 = $10)
|
|
|
TicketExchange
Buyer Fee:
|
|
$10
(10% * $100 = $10)
|
|
|
TicketExchange
Credit Card Fee:
|
|
$4.11
(3.5%*($100+$10+$5+$2.5) = $4.11))
|
|
|
Gross
Revenue from Fees
|
|
$30.50
($10+$3+$10+$5+$2.50 = $30.50)
|
|
|
TicketExchange
Income:
|
|
$21.39
($30.50 - $4.11 - $5 = $21.39)
|
|
|
Ticketmaster
Compensation:
|
|
$10.70
(50% * $21.39 = $10,695)
|
|
|
3. Access to Data
Ticketmaster shall have the right to confirm that Ticketmasters
compensation related to auctions paid by TGLP is correct, and Ticketmaster will
need access to sales of auction tickets by TGLP in the Market Area in order to
exercise that right. In addition, in order for Ticketmaster to provide
settlement and fulfillment functions related to TicketExchange Software
transactions, Ticketmaster will need ticket sales data for tickets sold via the
TicketExchange Software in the Market Area and the personally identifiable
information of persons who bought and sold tickets via the TicketExchange
Software in the Market Area. TGLP hereby consents to Ticketmaster accessing the
information described in this paragraph directly from the System. Ticketmaster
shall only use the personally identifiable information in connection with its
fulfillment services.
This letter agreement has been duly authorized, executed and delivered
by each party and constitutes the legal, valid and binding agreement of such
party, enforceable in accordance with its terms. No agreement or understanding
between TGLP or Ticketmaster and any third party contains or shall contain any
provision inconsistent with any provision or the purpose or intent of this
letter agreement. In the event of a conflict between this letter agreement and
the License Agreement, this letter agreement shall control. Except as
specifically set forth herein, all terms and conditions of the License
Agreement shall continue in full force and effect throughout the term and are
hereby ratified and confirmed by the parties. This letter agreement shall not
be amended without a writing signed by both parties.
If you agree with the terms and conditions of this letter agreement,
please acknowledge your agreement by signing in the space provided below and
returning a copy to me.
|
Best
regards,
|
|
|
|
|
|
/s/
David Goldberg
|
|
David
Goldberg
|
|
Ticketmaster
Corporation
|
6
ACCEPTED
AND AGREED
this 25 day of August 2006
TICKETMASTER
GROUP LIMITED PARTNERSHIP,
a Maryland limited partnership
By:
AP Tickets, Inc., its sole general partner
By:
|
/s/
Patrick R. Darr
|
|
Name:
|
Patrick
R. Darr
|
|
Title:
|
President
|
|
|
|
|
|
|
ACCEPTED AND AGREED WITH RESPECT TO
THE SECOND PARAGRAPH OF THIS LETTER AGREEMENT
TICKETMASTER L.L.C.
By:
|
/s/
David Goldberg
|
|
Name:
|
David
Goldberg
|
|
Title:
|
Executive
Vice President
|
|
|
|
|
|
|
7
EX-10.9
5
a2186551zex-10_9.htm
EXHIBIT 10.9
Exhibit 10.9
![](g133354kk07i001.jpg)
|
|
Patrick R.Darr
President
Centreplex Office Building
|
|
|
821 Copilot Centre Boulevard
|
|
|
Largo,
Maryland 20774
|
|
|
301-808-4330 - fax 301-808-4332
|
|
|
pdarr@tmtickets.com
|
February 6, 2006
By Telecopy and UPS
Ticketmaster Corporation
8800 Sunset Boulevard
West Hollywood, California 90069
Attention: Terry Barnes, Chairman and Ed Weiss, Executive Vice
President and General Counsel
Re: License
Agreement (the License Agreement) dated May 23, 1991 between
Ticketmaster Corporation (TM) and Ticketmaster Group Limited Partnership (TGLP),
as amended, and as previously extended pursuant to a notice dated February 7,
2001 (the Extension Notice)
Dear Terry:
The purpose of this letter is to notify TM,
pursuant to Section 2 of the License Agreement, that TGLP elects to renew
the License Agreement for a second, additional five (5)-year term, commencing
on July 1, 2006. We previously agreed in the Extension Notice that the
Operational Date under the License Agreement was July 1, 1991. Therefore, July 1,
2006 will be the fifteenth (15th) anniversary of the Operational
Date, and also the commencement date of the second, five (5)-year renewal term.
The second renewal term will expire on June 30, 2011.
Please sign, date and return this letter to
Patrick Darr by telecopy to acknowledge your receipt of this letter and to
signify your agreement that the term of the License Agreement has been renewed
until June 30, 2011 by this notice. In addition, we are sending via UPS two (2)
originals copies of this agreement signed by Patrick Darr. Please sign one (1) original
copy and return it to Patrick Darr. Thank you.
Very truly yours,
Ticketmaster Group Limited Partnership
By:
|
|
AP Tickets, Inc., Sole General Partner
|
|
|
|
|
|
By
|
/s/ Patrick R. Darr
|
|
|
|
|
Patrick R. Darr, President
|
|
|
|
cc:
|
|
Michael H. Leahy, Esq.
|
|
|
|
|
|
|
|
|
Receipt of Notice and Renewal of Term of License Agreement
Acknowledged and Agreed to:
|
|
|
|
Ticketmaster corporation
|
|
|
By
|
/s/ ILLEGIBLE
|
|
|
Dated: February 16, 2006
|
|
|
|
|
|
|
EX-10.10
6
a2186551zex-10_10.htm
EXHIBIT 10.10
Exhibit 10.10
October 17, 2005
Mr. Patrick Darr
Ticketmaster Group Limited Partnership
821 Capital Centre Boulevard
Largo, Maryland 20774
Dear Pat:
Ticketmaster L.L.C., a Delaware limited liability company (Ticketmaster)
and Ticketmaster Group Limited Partnership, a Maryland limited partnership (TGLP)
are parties to that certain License Agreement dated as of May 23,1991, as
amended by the certain Amendment to License Agreement dated as of August 31,
1999 (as amended, License Agreement) pursuant to which Ticketmaster granted
TGLP an exclusive license and right to the Ticketmaster System, name, logo and
Mark in connection with TGLPs computerized event ticketing business in the
Market Area. Ticketmaster is upgrading the operating system for the System (Operating
System) and is providing TGLP with the right to use such upgrade pursuant to
the terms of the License Agreement. In connection therewith, Ticketmaster has
agreed to host and manage the Operating System for TGLP, and TGLP has agreed to
purchase certain hardware related to the upgraded Operating System and to pay
certain operating expenses related to such hardware in accordance with the
terms and conditions of this letter agreement. All terms used herein and not
otherwise defined shall have the meaning assigned to them in the License
Agreement.
Ticketmaster shall manage
and host the upgraded Operating System on behalf of TGLP and warrants that it
shall exercise the same care in connection with such functions that it
exercises in connection with the management and hosting of its operating
systems on its own behalf.
TGLP agrees to purchase the hardware set forth under Section A of Exhibit A
attached hereto for use in connection with such upgraded Operating System for
$57,200 which equals Ticketmasters cost for such hardware plus 10%. The
purchase price of such hardware shall be due within thirty (30) days of receipt
of such hardware. Since Ticketmaster is managing the Operating System for TGLP,
whenever Ticketmaster introduces a new version or upgrades the Operating System
or other core ticketing components and such new version or upgrade requires any
upgrade or change to the infrastructure under TGLPs control, TGLP agrees to
make such changes to the infrastructure and purchase any new hardware as
required by Ticketmaster within sixty (60) days of notice from Ticketmaster.
Furthermore, as Ticketmaster upgrades its existing core Operating System or
Ticketing hardware, TGLP will reimburse Ticketmaster for the equivalent
reasonable upgrades to the hardware dedicated to TGLP.
The upgrade to the Operating System will also cause additional
Ticketmaster operating expenses related to additional operating services as
described under Section B of Exhibit A attached hereto. TGLP agrees
to pay the operating expenses for the required operating services by increasing
the Per Ticket Amount by $0.025 for each applicable period so that the Per
Ticket Amount is equal to $0.175 for the current
operational year. In the event TGLP decides to receive the optional operating
services, TGLP shall pay for such operating services by increasing the Per Ticket
Amount by an additional $0.025 for each applicable period so that the Per
Ticket Amount would be $0.20 for the current operational year. If changes to
the Operating System cause additional operating expenses, TGLP agrees to pay
any additional operating expenses reasonably determined by Ticketmaster either
by increasing the Per Ticket Amount or by paying such operating expenses
directly, as determined by Ticketmaster.
This letter agreement has been duly authorized, executed and delivered
by each party and constitutes the legal, valid and binding agreement of such
party, enforceable in accordance with its terms. No agreement or understanding
between TGLP or Ticketmaster and any third party contains or shall contain any
provision inconsistent with any provision or the purpose or intent of this
fetter agreement. In the event of a conflict between this letter agreement and
the License Agreement, this letter agreement shall control. Except as
specifically set forth herein, all terms and conditions of the License
Agreement shall continue in full force and effect throughout the term and are
hereby ratified and confirmed by the parties. This letter agreement shall not
be amended without a writing signed by both parties.
If you agree with the terms and conditions of this letter agreement,
please acknowledge your agreement by signing in the space provided below and
returning a copy to me.
|
Best
regards,
|
|
|
|
|
|
/s/ David Goldberg
|
|
David Goldberg
|
|
Ticketmaster
LLC.
|
|
|
ACCEPTED
AND AGREED
|
|
this
19 day of October 2005
|
|
|
|
TICKETMASTER
GROUP LIMITED PARTNERSHIP,
|
|
a
Maryland limited partnership
|
|
|
|
By:
AP Tickets, Inc., Its sole general partner
|
|
|
|
|
|
By:
|
/s/ Patrick R. Darr
|
|
Name:
|
Patrick R. Darr
|
|
Title:
|
PRESIDENT
|
|
|
|
|
|
|
Exhibit A
A. Hardware
Quantity
|
|
Description
|
|
Ticketmasters Cost
|
|
2
|
|
Monitoring
and Configuration Server
|
|
$
|
7,000
|
|
2
|
|
Switching
Equipment
|
|
$
|
7,000
|
|
1
|
|
Console
Server
|
|
$
|
3,000
|
|
2
|
|
IPTT Bridge
Servers
|
|
$
|
7,000
|
|
2
|
|
Media
Converter
|
|
$
|
2,000
|
|
2
|
|
Ticketing
Server
|
|
$
|
12,000
|
|
2
|
|
Authorization
Server
|
|
$
|
7,000
|
|
1
|
|
Reporting
Server
|
|
$
|
3,500
|
|
1
|
|
Ticketing
Server
|
|
$
|
3,500
|
|
B. Operating Services
Required Operating Services
Backups daily backups near line storage
Backups off site tape backups
Optional Operating Services
Nitrun Operations
Swing Shift Operations
Regional Programmer
EX-10.13
7
a2186551zex-10_13.htm
EXHIBIT 10.13
Exhibit 10.13
|
3701 Wilshire Blvd. -
9th Floor
|
![](g133354kn01i001.jpg)
|
Los Angeles, California
90010
213 639-6100 Tel
|
|
213 382-6210 Fax
|
March 21,
2002
Mr. Pat
Darr
Ticketmaster
Group Limited Partnership
One
Harry S. Truman Drive
Landover,
Maryland 20785
Re: System and Non System-Related Software Licensing Arrangements
Dear
Pat:
This
letter sets forth certain agreements between Ticketmaster L.L.C., a Delaware
limited liability company (Ticketmaster), and Ticketmaster Group Limited
Partnership, a Maryland limited partnership (TGLP), with respect to
Ticketmasters license of and the provision of related software maintenance and
support obligations for certain software products to the sports teams and venue
in the Market Area (as explained further below), all on the terms set forth
herein. The sports teams are the Washington Redskins, Washington Capitals,
Washington Wizards, Baltimore Orioles and Baltimore Ravens (Sports Teams),
and the venue is MCI Center (Venue). We shall have the right to add other
clients or venues provided we get your prior written approval.
Ticketmaster
Corporation (TM Corp), an Illinois corporation and affiliate of Ticketmaster,
and TGLP are party to that certain License Agreement dated as of May 23,
1991, as amended by that certain Amendment to License Agreement dated as of August 31,
1999 (as amended, the License Agreement). The License Agreement provides
certain terms and provisions regarding the license by TM Corp or Ticketmaster
to TGLP of software related to the System and the license by TM Corp or
Ticketmaster to TGLP of Non System-Related Software and TGLPs ability to
sublicense the same to its clients in the Market Area. All terms capitalized
and not defined herein shall have the meaning given those terms in the License
Agreement.
The
parties acknowledge and agree that TGLP has heretofore paid Ticketmaster
$120,000 as a license fee for the Non System-Related Software known as ARCHTICS
and $50,000 as a sublicense fee for ARCHTICS as related to the Baltimore
Orioles and that TGLP has not been required to pay, and has not paid, any
further license or sublicense fees as provided for or required by the License
Agreement as of the date of this letter agreement.
With
TGLPs knowledge and consent, Ticketmaster has met with, discussed, negotiated
and entered into contractual arrangements (both written and oral)
(collectively, Actions) with the Sports Teams and Venue related to the
following System and Non System-Related Software:
ARCHTICS,
FanTM, Ticketmaster AccountManager (formerly known as Online Subscriber
Services or OSS) (TM AccountManager), TM Charge, the Ticketmaster Marketplace
(which currently includes ticket forwarding, ticket selling, right of first
refusal and GroupManager features and which may be expanded to include future
features of which TGLP will be notified) and SIMS (Subscriber Interactive Voice
Management Services) (collectively, Software). We shall have the right to add
other software products provided we get your prior written approval.
Ticketmaster has described to TGLP the nature of such Actions taken by
Ticketmaster through the date hereof and described an outline of agreed terms,
and TGLP hereby ratifies its prior consent and ratifies all such Actions taken
and such outlined terms in regard to the Sports Teams and Venue and the license
to them of the Software (Approved Actions).
The
parties agree that Ticketmaster can continue such Approved Actions with the
Sports Teams and Venue and can directly enter into written agreements or
amendments or extensions with them as consistent with the Approved Actions. The
parties further agree to waive the provisions of Section 12(b) of the
License Agreement and Section 8 of the Amendment as they relate to the
payment of license and/or sublicense fees among the parties and right of TGLP
to sublicense the Non System-Related Software, except for the payment of
certain maintenance fees related to the Baltimore Orioles as covered by our
separate agreement.
Ticketmaster
and TGLP agree that TGLP shall be entitled to receive fifty percent (50%) of
all transaction fees as mutually agreed between Ticketmaster and TGLP collected
(and retained) by Ticketmaster under any TM AccountManager agreement with a
Sports Team or the Venue (including the Ticketmaster Marketplace) (TM
AccountManager Fees). Ticketmaster will deliver to TGLP regular payments
quarterly within thirty (30) days of the end of each calendar quarter of the TM
AccountManager Fees to which TGLP is entitled, as netted by any deductions or
offsets allowed hereunder, with each payment to be on account of TM
AccountManager Fees collected by Ticketmaster during the calendar quarter
preceding such payment due date. Each payment shall be accompanied by a written
accounting. In the event that Ticketmaster is required to refund any TM
AccountManager Fees (as a result of chargeback or otherwise) previously paid
out to TGLP, Ticketmaster shall have the right to deduct such refunded TM
AccountManager Fees against future disbursements owed to TGLP hereunder.
Ticketmaster
and TGLP further agree that TGLP shall be entitled to fees related to the
processing of the Sports Teams and the Venues VISA and MasterCard
transactions on the TM Charge system. TGLP will be entitled to the amount by
which the TM Charge rate charged to and collected from any Sports Team or Venue
(and retained by Ticketmaster) exceeds 2.2% (TM Charge Fees). The TM Charge
rate charged to the Sports Teams and the Venue shall be 2.5% unless otherwise
mutually agreed between Ticketmaster and TGLP. Ticketmaster will deliver to
TGLP regular payments quarterly within thirty (30) days of the end of each
calendar quarter of the TM Charge Fees to which TGLP is entitled, as netted by
any deductions allowed hereunder, with each payment to be on account of TM
Charge Fees collected by Ticketmaster during the calendar quarter preceding
such payment due date. Each payment shall be accompanied by a written
accounting. In the event that Ticketmaster is required to refund any TM Charge
Fees (as a result of chargeback or otherwise) previously paid out to TGLP,
Ticketmaster shall have the right to deduct such refunded TM Charge Fees
against future disbursements owed to TGLP hereunder.
2
Other
than as explicitly provided herein, TGLP shall have no right to any other fees
or revenue from the Software included as of the date of this letter agreement.
As to any System or Non System-Related Software that may be approved hereunder
in the future, it is the parties intent that TGLP shall be entitled to share
50/50 in any transaction fees but shall have no right to share in any license
or maintenance fees; provided that Ticketmaster agrees that the fee structure
offered in the Market Area shall be substantially similar to the fee structure
offered in the rest of the United States (Substantially Similar).
The
parties agree further that Ticketmaster can take actions similar to the
Approved Actions, and the parties will waive the fees and sublicense rights
waived herein, with regard to the Sports Teams, the Venue, future clients or
venues approved hereunder, and as to the Software and future software approved
hereunder, all on terms as mutually agreed, provided that TGLPs consent shall
not be unreasonably withheld if the terms are Substantially Similar.
This
letter agreement has been duly authorized, executed and delivered by each party
and constitutes the legal, valid, and binding agreement of such party,
enforceable in accordance with its terms. No agreement or understanding between
TGLP or Ticketmaster and any third party contains or shall contain any
provision inconsistent with any provision, or the purpose or intent, of this
letter agreement. In the event of a conflict between this letter agreement and
the terms and conditions of the License Agreement, the terms and conditions of
this letter agreement shall control. Except as specifically set forth herein to
the contrary, all of the terms and conditions of the License Agreement are in
full force and effect, shall continue in full force and effect throughout the
term and are hereby ratified and confirmed by the parties. This letter
agreement shall not be amended without a writing signed by both parties.
If
this letter agreement coincides with your understanding of matters related to
the System and Non System-Related Software, please acknowledge your agreement
by signing below and returning a copy to me, which may be done in counterparts.
Sincerely,
/s/ Dave Scarborough
|
|
Dave Scarborough
|
Executive
Vice President
|
Ticketmaster
L.L.C.
|
cc:
|
|
Tim
Wood
|
|
|
Brad
Serwin, Esq.
|
|
|
Paula
Atkinson, Esq.
|
3
AGREED
AND ACCEPTED
this
27 day of March, 2002:
Ticketmaster
Group Limited Partnership,
a
Maryland limited partnership
By:
AP Tickets, Inc., its sole general partner
By:
|
/s/
Patrick Darr
|
|
|
|
|
Name:
|
Patrick
Darr
|
|
|
|
|
Title:
|
President
|
|
|
|
|
|
|
4
EX-10.14
8
a2186551zex-10_14.htm
EXHIBIT 10.14
Exhibit
10.14
|
|
|
![](g133354kn03i001.jpg)
|
|
Paul dEustachio
President
|
|
|
EXECUTIVE OFFICES
|
|
|
One North Harry Truman Drive
|
|
|
Largo, Maryland 20774
|
February 7, 2001
|
|
301-808-4300 -
fax 301-808-4325
|
By Telecopy and Certified Mail
Ticketmaster
Corporation
|
|
|
3701
Wilshire Boulevard, 9th Floor
|
|
|
Los
Angeles, California 90010
|
|
|
Attention:
|
|
Terry Barnes, Chairman, and Daniel R. Goodman, Executive
|
|
|
Vice-President and General Counsel
|
|
|
|
Re:
|
|
License Agreement dated May 23,1991 between
Ticketmaster
|
|
|
Corporation and Ticketmaster Group Limited
Partnership, as amended
|
|
|
(the License Agreement)
|
|
|
|
|
|
Gentlemen:
The
purpose of this letter is to notify you, pursuant to Section 2 of the
License Agreement, that Ticketmaster Group Limited Partnership elects to renew
the License Agreement for an additional five (5)-year term. We believe the Operational
Date under the License Agreement is July 1, 1991 and that July 1,
2001 will be the tenth anniversary of such Operational Date. Therefore, the five (5)-year renewal term will commence
as of July 1, 2001 and will end on June 30,
2006.
We
believe that this notice is effective to renew the term of the License
Agreement for an additional five (5)-year term. However, we would be pleased to
have our counsel prepare an amendment to the License Agreement to evidence the
renewal if you would prefer.
Please
sign and return this letter to Paul dEustachio by telecopy to acknowledge your
receipt of this letter and to signify your agreement that the term of the
License Agreement has been renewed by this notice. Thank you.
Very truly yours,
Ticketmaster Group Limited Partnership
|
|
|
|
|
|
By:
|
AP Tickets, Inc., Sole General Partner
|
|
|
|
|
|
|
By
|
/s/ Paul dEustachio
|
|
|
|
Paul dEustachio, President
|
|
|
|
|
|
|
|
|
|
cc:
|
Norman J. Gantz, Esq.
Michael H. Leahy, Esq.
|
|
Ticketmaster Corporation
Attention:
|
|
Terry Barnes, Chairman, and Daniel R. Goodman,
Executive
|
|
|
Vice-President and General Counsel
|
CONCERTS · SPORTS · PERFORMING ARTS · MUSEUMS · GALLERIES · TOURIST ATTRACTIONS · FAMILY & SPECIAL EVENTS · CLUBS
Receipt
of Notice and Renewal of Term Of License Agreement Acknowledged and
Agreed to:
Ticketmaster Corporation
By
|
/s/ [ILLEGIBLE]
|
|
|
|
Dated:
February 26, 2001
|
|
2
EX-10.15
9
a2186551zex-10_15.htm
EXHIBIT 10.15
Exhibit
10.15
AMENDMENT TO
LICENSE AGREEMENT
THIS AMENDMENT TO LICENSE AGREEMENT (Amendment) is
entered into this 31st day of August, 1999, by and between Ticketmaster
Corporation (Ticketmaster) and Ticketmaster Group Limited Partnership (User),
with reference to the following facts:
A. Ticketmaster and User entered into that
certain License Agreement dated as of May 23, 1991 (License Agreement),
whereby Ticketmaster granted User an exclusive license and right to use the
Ticketmaster System, name, logo and Mark in connection with Users computerized
event ticketing business in the Market Area upon the terms and conditions set
forth in the License Agreement.
B. Ticketmaster and User hereby desire to amend
the License Agreement in certain respects as set forth herein.
NOW, THEREFORE, in consideration of the mutual
promises and covenants set forth herein, the parties hereby agree as follows:
1. Defined Term(s). For purposes of the License Agreement, as
hereby, amended, the following terms shall have the meanings set forth below:
System means and includes any software or hardware
or combination thereof which is owned or controlled by, or licensed to or
otherwise authorized for use by, Ticketmaster in connection with a computer
based system for distributing tickets used in the United States, including
related procedures established and maintained by Ticketmaster for the purpose
of voice and data communications or selling, accounting, auditing or
controlling the sale of tickets for events.
TM System User means and includes any person, sole
proprietorship, partnership corporation, joint venture or other legal entity
(other than Ticketmaster) operating the System within the United States. Any
such entity may be wholly owned or controlled by Ticketmaster, partially owned,
a joint venture or independent of Ticketmaster.
All other capitalized terms used and not otherwise
defined herein shall have the meanings ascribed to them in the License
Agreement.
2. Condition to Effectiveness. This Amendment shall not be effective
unless and until the parties have entered into and executed a definitive
settlement and release agreement with respect to claims asserted in and related
to that certain lawsuit entitled Ticketmaster Group Limited Partnership v.
Ticketmaster Corporation (and related counterclaim), USDC Case No. 97
C2337, filed on or about April 4, 1997 in United States District Court for
the Northern District of Illinois, and the Court shall have entered a final
non-appealable Order dismissing the lawsuit with prejudice. The Effective Date
of this Amendment shall be the same date as the Effective Date of the
Settlement Agreement being executed concurrently herewith, as defined in
paragraph 4 thereof.
3. Additional Payments. Effective as of September 1, 1997,
each of the Per Ticket Amounts set forth in the table in Section 4 of the License Agreement shall be increased
by an amount equal to $0.02. The amount of the Additional Payment for each
applicable period since September 1, 1997 shall be recalculated based upon
such increase in the Per Ticket Amounts, and the additional amount due through July 31,
1999, shall be paid by User to Ticketmaster no later than five days subsequent
to the Effective Date. All Additional Payments resulting from such $0.02 increase
to the Per Ticket Amount shall be in consideration of the settlement of the litigation
referred to in Section 2 above and Ticketmasters agreement to permit User
to continue to have the right and license to use the Mark within the Market
Area in accordance with the provisions of the License Agreement, as amended
hereby.
4. Upgrades. Sections 12(b), 12(c), 12(d) and 12(e) of
the License Agreement are hereby deleted in their entirety and the following
are hereby substituted in lieu thereof:
(b) Ticketmaster shall provide to User during the
term of this Agreement, at no additional cost to User (except as set forth in Section 12(e) below)
and at the request of User, any software used on, in connection with or as any
part of any System operated or used in the United States by Ticketmaster or any
TM System User. Such software shall include, without limitation, enhancements,
upgrades to the Systems operating software, new software products (including,
by way of example only, FANTm and IVR) and software embedded in or part of
any hardware. Notwithstanding the foregoing, Ticketmaster shall have no
obligation to provide User with (i) the beta versions of any software, or
developmental or experimental software, whether or not in use by Ticketmaster
or any TM System User in connection with any System or (ii) software
developed for special events or attractions (including, by way of example only,
the Olympics) and which is not practical for day-to-day use because of its
complexity or unique purpose and may not be cost effective for day-to-day use,
or which for other economic reasons is not made generally available to TM
System Users outside of the scope of a single use special event application and
therefore does not become a permanent part of the System. Notwithstanding the
foregoing, User shall have the right to such special event software pursuant to
the terms of this Section 12(b) should a comparable special event (i.e.,
the Summer Olympics occurs in the Washington/Baltimore region) be held in the
Market Area.
(c) If, at any time during the term of this
Agreement, User shall receive an upgrade to or improved version of the software
used in the System, the implementation of which would require a conversion of Users
database, Ticketmaster shall, upon Users request, promptly effect such
conversion on behalf of User and shall bill User for such efforts in accordance
with Section 12(e) below.
(d) In the event that User shall, at any time
during the term of this Agreement, request that Ticketmaster develop custom enhancements
to the System to meet certain specific performance criteria reasonably
requested by User, Ticketmaster shall use reasonable efforts to cause such
custom enhancements to be developed by its
2
programmers in consideration
of the payment by User to Ticketmaster of the costs set forth in Section 12(e) below.
(e) User shall be responsible for the direct and
actual out-of-pocket costs incurred by Ticketmaster in installing any provided
software and training Users personnel in the using of provided software under Section 12(b),
converting Users database under Section 12(c), and developing custom
enhancements under Section 12(d). Such direct and actual out-of-pocket
costs shall include transportation and lodging and actual hourly personnel
costs, but shall not include overhead, miscellaneous administrative costs and
other similar indirect costs. Pursuant to Section 14 of this Agreement,
User shall also be responsible for the costs of any and all hardware used by
User in connection with any software provided under this Section 12,
including, without limitation, all direct and actual costs for the installation
of such hardware,
In
addition, the second and third sentences of Section 8 of the License Agreement
are hereby deleted in their entirety, it being the intent of the parties that
User shall have access throughout the Term of the License Agreement to the most
current technology available from Ticketmaster for use in connection with the
System, and that Ticketmaster shall make available to User hardware and
software, such that User will have the ability to operate a system having performance
capabilities equal to those of any other TM System User.
5. Cooperation and Support. Section 12
of the License Agreement is hereby amended to add the following to the end of
such Section:
(g) At Ticketmasters request, User shall
cooperate with Ticketmaster and utilize reasonable efforts to participate in
Ticketmaster promotional campaigns, tours, events or other programs which are
conducted on a national or regional basis. Ticketmaster shall use its
reasonable efforts to offer User the opportunity to participate fully in all
such promotional campaigns, tours or other programs which involve the Market
Area. In the event that User shall agree, in writing, to participate fully in
any such program designated by Ticketmaster, then User shall receive a share of
revenues received by Ticketmaster (after deduction of actual costs to
Ticketmaster regarding the establishment of the program, including, without
limitation, legal fees, but exclusive of administrative costs) for its
participation in such programs that is reasonably proportionate to Users
participation, or a share of compensation that is otherwise mutually agreeable
to the parties,
(h) With Users prior consent, Ticketmaster
and/or a TM System User may sell tickets to events located or to take place
within the Market Area and, with Ticketmasters prior consent (or that of the
TM System User in the relevant geographic area), User may sell tickets to
events located or to take place outside of the Market Area, in which event
revenue due each party shall be calculated taking the per ticket gross revenue
received in excess of the ticket face price (expressly excluding any revenue
derived from handling charges), reducing such gross revenue by direct actual
sales costs
3
such as (but not necessarily limited to) credit card
processing fees and venue and promoter rebates and royalties, and splitting the
resulting net revenue equally between the parties, unless the parties shall
mutually agree to a different revenue distribution. User shall not receive a
share of revenues as contemplated by the immediately preceding sentence for
special events covered by Section 5 of this Agreement.
(i) Ticketmaster shall utilize reasonable efforts
to permit User to participate in (A) Ticketmaster s periodic national
technology support conference calls and meetings to the extent that those calls
and meetings take place, subject to Ticketmasters right to exclude User in
order to protect attorney/client privileged communications or confidential or
proprietary information, and (B) conference calls and meetings concerning
national or regional promotional, marketing, sales or similar campaigns in
which User has agreed to participate to the extent that those calls and
meetings take place. Ticketmaster shall also provide User with appropriate
documents relative to the administration of any such campaign in which User has
agreed to participate.
6. Internet Sales. Ticketmaster and/or Ticketmaster
Online-City Search shall integrate Users ticket sales information and ticket
sales transaction processing onto Ticketmasters Internet web site (currently
known as ticketmaster.com) (the Web Site), and shall enable User and its
clients to sell tickets through the Web Site in the same manner as other TM
System Users, it being agreed and understood that Ticketmaster will use
reasonable efforts, with Users cooperation, to perform its obligations
pursuant to this sentence within ten days after the date of this Amendment.
User agrees to reimburse Ticketmaster and/or Ticketmaster Online- City Search
for all out-of-pocket expenses incurred in connection with making such access
to the Web Site available to User, in accordance with Section 12(e) of
the License Agreement, as amended. In addition to any other payments due to
Ticketmaster under the License Agreement, as amended hereby, and in
consideration of Ticketmaster and/or Ticketmaster Online-City Search making the
Web Site available to User as aforesaid, User shall pay Ticketmaster an amount equal
to $0.25 per ticket for each ticket sold by User through the Web Site. Such
payments shall constitute Additional Payments as defined in Section 4 of
the License Agreement, as amended hereby. Upon completion of Ticketmasters
performance of its obligations pursuant to the first sentence of this Section 6,
User shall promptly discontinue the provision of ticket and merchandise sales
information and services on that certain web site currently known as ticketmasterwb.com.
7. Equipment. Section 14 of the License Agreement is
hereby deleted in its entirety and the following is substituted in lieu thereof:
During the term of this
Agreement, User shall have the right to purchase from Ticketmaster or from any
entity owned or controlled by Ticketmaster (i) any hardware, computer
equipment, voice or data communications equipment or other equipment developed
or manufactured by Ticketmaster or any entity owned or controlled by
Ticketmaster, or (ii) any third party hardware or equipment offered for
sale by Ticketmaster or any entity owned or controlled by Ticketmaster, where
such hardware
4
or equipment shall be used by User on or in connection with the System.
The obligations of this paragraph shall extend to all upgrades, advances or
other technological improvements, but Ticketmaster shall have no obligation to
sell to User developmental or experimental hardware or equipment, whether or
not in use by Ticketmaster or any TM System User in connection with the System.
The cost to User of any such provided hardware or equipment sold hereunder
shall be (i) 150% of Ticketmasters direct and actual cost for
Ticketmaster developed or manufactured hardware or equipment or (ii) 110%
of Ticketmasters cost for hardware and equipment developed or manufactured by
third parties. If requested by User, Ticketmaster shall assist User with the
installation, start-up, initial use and training on the use of said hardware
and equipment. User shall reimburse Ticketmaster for the cost of delivering,
installing, starting up and training User in the operation of such hardware and
equipment in accordance with Section 12(e) of this Agreement.
8. Non System-Related Software. The provisions of Section 12(b) of
the License Agreement, as amended hereby, shall not apply to software owned or
licensed by Ticketmaster or any entity owned or controlled by Ticketmaster that
does work with or rely on a connection (either periodic or continuous) to the
System for proper operation and which are offered by Ticketmaster or such other
entity for sale or license to third parties (Non System-Related Software).
Examples of software falling within the scope of Section 12(b) of the
License Agreement, as amended hereby (and not within the scope of this Section 8),
include, without limitation, bar coding (e.g., FANTm), IVR voice response
units, ticket sales kiosks, credit card authorization, client settlement and
similar accounting programs, PCI, disaster recovery programs, VRun reports,
offline archiving of accounts, niterun, TMWIN99 or similar Systems
communications software and fraud programs. Examples of software falling outside
of the scope of Section 12(b) of the License Agreement, as amended
hereby (and within the scope of this Section 8), include Archtics season
ticketing software and Foxmans FanTracker. Solely as a means of further
illustrating the intent of the parties, should Ticketmaster acquire the rights
to software sometimes known as Paceolan, the Paceolan software would be covered
by this Section 8 and not by Section 12(b) of the License
Agreement, as amended hereby, but any interface developed by Ticketmaster to connect
the system to the Paceolan software would be covered by Section 12(b), as
amended hereby. User shall have the right to license (if licensing is offered
as an option) or purchase (if purchasing is offered as an option) any and all
of such Non System-Related Software from Ticketmaster or such entity owned or
controlled by Ticketmaster for sublicense or sale to Users clients. The cost
to User of any such Non System-Related Software shall be equal to the lowest
generally prevailing fee charged from time to time to clients by Ticketmaster
or such entity owned or controlled by Ticketmaster for such Non Systems-Related
Software, it being agreed and understood that User may determine, in its sole
discretion, the amount to be charged to Users clients with respect to the
sublicense or sale of such Non Systems-Related Software to those clients. It is
further agreed and understood that User shall pay a separate fee to
Ticketmaster each time that the Non Systems-Related Software is sublicensed or
sold by User to a client (e.g., if the Archtics season ticketing software is
sublicensed or sold by User to ten venues, User shall pay Ticketmaster the
applicable fee times ten). No later
than five days subsequent to the Effective Date, User shall pay $50,000 to
5
Ticketmaster, being the fee payable with respect to the license by User
of the Archtics season ticketing software to be sublicensed by User to the
Baltimore Orioles. Notwithstanding the foregoing, such $50,000 license payment
shall not be applicable for the use of the Archtics season ticketing software,
alone or through Users System, by the Washington Redskins or the Baltimore
Ravens National Football League football teams or their respective successors
or assigns inasmuch as the purchase of the Archtics use license by those
entities occurred prior to the acquisition of Distributed Systems Architects,
Inc/Archtics by Ticketmaster.
9. Use of Ticketmaster Facilities.
(a) Except as otherwise provided in Section 9(b),
if Ticketmasters or its affiliates facilities are to be used by User in
connection with any software provided by Ticketmaster to User pursuant to the
License Agreement, as amended hereby, then User shall pay to Ticketmaster or
its affiliates, as applicable, such amounts as may be required by Sections 12(e) and
14 of the License Agreement, as amended hereby, together with an amount that
reflects Users proportionate share of costs of the use of the facility not
otherwise covered by said Sections 12(e) and 14.
(b) User shall have access to and use of
Ticketmasters disaster recovery facility (the Facility), currently located
at Ticketmasters Detroit data center, which access and use shall be pursuant
to such guidelines as Ticketmaster may reasonably establish for all similar
Facility users. In consideration of such access to and use of the Facility,
User shall pay Ticketmaster a fee of $40,000 for the first year of Users
access to and use of the Facility (which year shall commence as of the date of
Users access to the Facility) and $36,000 for each subsequent year of access
to and use of the Facility, payable in full, for each applicable year, no later
than 30 days after the commencement of such year, plus any direct and actual
out-of-pocket costs incurred by Ticketmaster in training Users personnel at
Users offices relative to the use of the Facility. In addition to the
foregoing, User shall be responsible for the cost of necessary data
communication equipment upgrades made by Ticketmaster on behalf of User (as
determined pursuant to Section 14 of the License Agreement, as amended
hereby); a proportionate share of future data communication cost increases
related to the operation of the Facility; and, the installation and operational
costs of the data communications line necessary to transmit Users System data
to the Facility. The Facility shall receive and save a continuous stream of
Users System data during all of Users operating hours. In the event that Users
System fails, for whatever reason, the Facility shall have the capability of
regenerating Users then-current System database onto hardware installed at the
Facility, and coming online through dial-up or other data communications to
Users clients, outlets, phonerooms and administrative offices, to provide
continuing ticket sales and other ticketing functions until full use of Users
System is restored.
10. Consent to Transfer.
Ticketmaster hereby consents to the transfer of Centre Group Limited
Partnerships interest in User to Washington Sports & Entertainment
Limited Partnership (or to a wholly-owned subsidiary of Washington Sports &
Entertainment Limited Partnership if such subsidiary agrees in writing to be
bound by the terms and conditions of Section 16 of the License Agreement);
provided, however, that such transfer is consummated
6
by December 31, 1999 and written verification of such transfer is
received by Ticketmaster by January 15,2000. Said transfer, if
consummated, shall have no impact on the parties respective rights and
obligations under the License Agreement or this Amendment, and User shall
remain liable for all of Users duties and obligations thereunder and
hereunder. By its execution of this Amendment in the space provided below,
Washington Sports & Entertainment Limited Partnership agrees to be
bound by the terms and conditions of Section 16 of the License Agreement
if such transfer to Washington Sports & Entertainment Limited
Partnership is consummated. User represents that Washington Sports &
Entertainment Limited Partnership is under common control with Centre Group
Limited Partnership, and prior to the Effective Date User has provided
Ticketmaster with a letter outlining the identity of and relationship between
the transferor and the transferee.
11. Remedies. The
intent of the parties is to cooperate to advance their mutual interests, and to
reduce the likelihood of future disputes. To that end, the parties amend as follows those provisions of the License
Agreement outlining their respective rights and remedies in the event of a
breach or default (including, without limitation, those governing termination).
Except for the provisions of Sections 10, 11(a) (i) and (ii), 11(b),
(11(c) and 11(d) of the License Agreement, which remain in full force
and effect, in the event of any breach or alleged breach of the License
Agreement, the complaining party shall give the other written notice of the
alleged breach and, if curable, of the proposed remedy or cure. The defaulting
party shall remedy said breach within seven days or (solely with respect to a
breach other than a failure to pay when due amounts owing to Ticketmaster under
the License Agreement) such longer period as may be reasonably required to
effectuate such remedy so long as remedial action is commenced within such
seven-day period and is actively and diligently pursued to completion. Except
as set forth in Sections 10, 11(a)(i) and (ii), 11(b), 11(c) and 11(d) of
the License Agreement, no breach shall justify termination of the License
Agreement unless there has been a material and substantial non-performance or
other breach of the License Agreement.
12. Use of the System:
In the event that the System is, at any time during the term of the License
Agreement, being operated by Ticketmaster or a TM System User outside of the
Market Area in connection with any independent or third-party computer system
(other than any such connection which is in the developmental, experimental or
testing stage), then Ticketmaster will authorize User (at no additional charge
to User by Ticketmaster solely to provide such authorization) to operate the
System within the Market Area in connection with such independent or
third-party computer system (if permitted by such independent or third-party
provider) in the same manner as being operated by Ticketmaster or such TM System
User. By way of example only:
If a theater uses the Paceolan ticketing system to
sell season tickets and walk up box office tickets, and interfaces the Paceolan
system to a TM System Users System, so that ticket inventory can be
transferred back and forth between the two systems to permit the sale of
telephone, outlet, or internet sales on the TM System Users System, then User
shall be permitted that use.
7
13. Representations and Warranties. Each party represents and warrants that (i) it has full and
exclusive power and authority to enter into and be bound by this Amendment and
that the person executing this Amendment on behalf of such party is duly
authorized to do so, and (ii) this Amendment is a duly authorized, valid
and binding agreement of such party, enforceable against such party in
accordance with its terms.
14. Notices. Section 22 of the License Agreement is amended to
change the addresses for notice to the following:
If to
Ticketmaster, to:
|
Ticketmaster
Corporation
|
|
3701
Wilshire Blvd., 9th Floor
|
|
Los
Angeles, CA 90010
|
|
|
|
Attn:
Terry Barnes, President and CEO,
|
|
and
Daniel R. Goodman, Executive V.P.
|
|
and
General Counsel
|
|
|
With a copy to:
|
Neal,
Gerber & Eisenberg
|
|
Two
North LaSalle Street
|
|
Suite 2100
|
|
Chicago,
Illinois 60602
|
|
Attn: Norman J, Gantz
|
|
|
If to User, to:
|
Ticketmaster
Group Limited Partnership
|
|
c/o
AP Tickets, Inc.
|
|
One
Harry S. Truman Drive
|
|
Landover,
Maryland 20785
|
|
Attn:
Abe Pollin
|
|
Paul dEustachio
|
|
|
With a copy to:
|
Arent
Fox Kintner Plotkin & Kahn, PLLC
|
|
1050
Connecticut Avenue, N.W.
|
|
Washington,
D.C. 20036-5339
|
|
Attn:
David M. Osnos
|
15. Conflicting Terms.
In the event a conflict arises between this Amendment and the terms and
conditions of the License Agreement, the terms and conditions of this Amendment
shall control. Except as specifically set forth herein to the contrary, all of
the terms and conditions of the License Agreement are in full force and effect,
shall continue in full force and effect throughout the term and are hereby
ratified and confirmed by the parties.
8
16. Counterparts.
This Amendment may be executed and delivered in multiple counterparts, each of
which, when so executed and delivered, shall be an original,
but such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the
parties have executed this Amendment as of the date first written above.
|
|
TICKETMASTER
CORPORATION,
|
TICKETMASTER
GROUP LIMITED PARTNERSHIP,
|
an
Illinois corporation
|
a
Maryland limited partnership
|
|
|
|
|
By:
|
AP
Tickets, Inc., its sole General Partner
|
|
|
|
|
|
|
|
|
By:
|
/s/
[ILLEGIBLE]
|
|
By:
|
|
|
|
|
|
Paul
dEustachio
|
|
|
|
|
|
|
|
|
|
|
Title:
|
/s/
[ILLEGIBLE]
|
|
Title:
|
|
|
|
|
|
President
|
|
|
|
|
|
|
|
AGREED TO AS OF THE DATE HEREOF FOR
PURPOSES OF SECTION 10.
WASHINGTON SPORTS & ENTERTAINMENT
LIMITED PARTNERSHIP
9
EX-10.16
10
a2186551zex-10_16.htm
EXHIBIT 10.16
EXHIBIT
10.16
Information
marked [XXX CONFIDENTIAL TREATMENT REQUESTED] has been
omitted pursuant to a request for confidential treatment. Such omitted
information
has been filed separately with the Securities and Exchange Commission.
[LETTERHEAD]
November 13,
1998
Ticketmaster
Corporation
3701 Wilshire Boulevard
Seventh Floor
Los Angeles, California 90010
Attn:
|
|
Mr. Terry
Barnes
|
|
|
President
and Chief Executive Officer
|
Gentlemen:
This
letter agreement (the Agreement) sets forth the mutually binding agreement
between SFX Entertainment, Inc., a Delaware corporation, on behalf of
itself and the SFX Affiliates (collectively, SFX), and Ticketmaster
Corporation, a Delaware corporation (Ticketmaster), for the amendment and
extension of the existing ticketing agreements with respect to each of SFXs
venues which are currently under contract with Ticketmaster, a ticketing
services agreement for those SFX venues which are not presently under contract
with Ticketmaster, and SFXs related promoters in the United States and
internationally.
Subject
to the terms and conditions set forth herein, and in consideration of the
mutual promises and covenants set forth herein, SFX and Ticketmaster hereby
agree as follows:
1. Definitions. As
used in this Agreement, the following capitalized terms shall have the
respective meanings set forth below, unless otherwise defined herein:
(a) Agreement
This letter agreement dated as of November 13, 1998, as this letter
agreement may be superseded, replaced or amended by the Master Agreement
intended to be negotiated and executed by the parties hereto.
(b) Attraction
A concert, theatrical presentation, motor sports or other sports event or other
entertainment feature to be held at a Facility in the continental United States
or internationally (provided Ticketmaster is providing ticket service
operations in the international location) in respect of which SFX owns or
Controls the Right to Sell Tickets to the public or which is held at an SFX
Facility or a Non-SFX Facility; provided, however, an Attraction shall not
include any event at the Lakewood Amphitheater located in Atlanta, Georgia, or
the Starplex Amphitheater located in Dallas, Texas.
(c) Business
Day Any day other than a Saturday, a Sunday or any other day on which the
banks in the State of New York are closed.
(d) Controls
the Right to Sell Tickets means that SFX has the ability, whether by
contract, ownership, management or otherwise, to determine the manner in which
and/or means by which Tickets may be sold to the public at any Facility. To the
extent that SFX does not have such ability, SFX shall use its reasonable best
efforts in its capacity as Facility manager, consultant, minority partner or
otherwise to recommend and secure the exclusive use of the TM System by such
Facility for such Attraction; provided, however, that after SFX exercises its
reasonable best efforts in the manner described above, on an Attraction by
Attraction basis, its failure to secure said rights shall not be deemed to be a
breach of this Agreement.
(e) Customer
Convenience Charge The amount charged to a Ticket purchaser by Ticketmaster
for the use of the TM System.
1
(f) Effective
Date means January 1, 1999.
(g) Facility(ies)
Any and all amphitheaters, theaters, arenas, stadiums and other facilities of
any nature whatsoever where an Attraction is to be held, including, but not
limited to, SFX Facilities and Non-SFX Facilities, whether now existing or
existing at any time during the term hereof.
(h) Non-SFX
Facility(ies) Any Facility other than an SFX Facility with which Ticketmaster
has a ticketing services agreement in effect at the time of the performance of
the Attraction.
(i) Outlet A
physically existing retail Ticket selling agency where Tickets for an
Attraction are made available through the TM System and are offered for sale to
the public.
(j) SFX
Affiliate(s) any entity or person which is directly or indirectly controlled
by, under common control with or controls SFX, or any other such entity or
person, including, but not limited to, the entities set forth on Exhibit A
hereto.
(k) SFX
Facility(ies) Any Facility (i) which SFX owns, operates, manages,
controls or leases, or for which any such entity otherwise has any other right
to sell, or Controls the Right to Sell Tickets, whether as of the date hereof
or at any time in the future during the term of the Agreement, and (ii) with
which, at the time of the performance of the Attraction, Ticketmaster does not
have a ticketing services agreement.
(l) Telephone
Sales All sales of Tickets through the TM System by telephone, television,
computer and/or the Internet.
(m) TM
Affiliate(s) Any entity which is directly or indirectly controlled by Ticketmaster,
other than any entity which is solely a licensee of the TM System and the
Ticketmaster mark and which does not otherwise satisfy any of the conditions
set forth in the first part of this sentence.
(n) TM System
The computer hardware, software, related procedures and personnel, repair and
maintenance services established and maintained by Ticketmaster for the purpose
of selling, auditing and controlling the sale of Tickets for Attractions.
(o) Ticket A
printed evidence of the right to occupy space at or to attend an Attraction.
2. Ticketing
Services Agreement. SFX hereby grants to Ticketmaster,
and Ticketmaster accepts from SFX, the exclusive right during the term
of this Agreement to sell, as SFXs agent, all Tickets made available generally
to the public through any and all means, including but not limited to at
Outlets and/or by Telephone Sales, for any Attraction scheduled or presented by
SFX at any Facility; provided, however, that SFX shall have the right to
conduct box office, season, subscription, affinity and club programs, box seats
and group sales of Tickets, but may not use the services of any third party
computerized or electronic ticketing service or entity to conduct such sales.
SFX and Ticketmaster shall use their respective reasonable best efforts to
draft and execute a long form Master Agreement to amend and extend the existing
Agreements on the terms and conditions contained herein, and to apply this
Agreement to any Facility not already under contract with Ticketmaster and as
set forth herein. In the event of any inconsistencies or conflicts between this
Agreement and any existing agreement between SFX and Ticketmaster, then the
terms of this Agreement shall prevail unless and until such Master Agreement is
executed. This Agreement shall constitute a legal, valid, binding and
enforceable agreement between the parties. All SFX Facilities which upon the
Effective Date of this Agreement either have existing ticket servicing
agreements with Ticketmaster or a Ticketmaster Affiliate, or which do not have
ticket servicing agreements with any third party, shall be subject to the terms
and conditions of this Agreement and the Master Agreement as of the Effective
Date. In the event that during the term of this Agreement, SFX or an SFX
Affiliate has or acquires any facility, company, promoter or other entity which
owns, has a contract with or is otherwise lawfully bound to any ticketing
2
service
or system other than the TM System, SFX shall not be obligated to change such
arrangement or to divest itself of, or to decline to enter into, any such
transaction; provided, however, that at such time as SFX or an SFX Affiliate is
no longer obligated to use the services of any third party ticketing provider,
or presently has or in the future may have the ability to enter into an
agreement with Ticketmaster, then any such applicable facility, company,
promoter or entity shall become an SFX Facility or SFX Affiliate, as
applicable, and shall be bound by the terms and conditions of this Agreement
and the Master Agreement.
3. Term
and Effective Date. This Agreement shall extend each of
the existing SFX agreements with Ticketmaster for a period from the current
respective expiration dates (as set forth on Exhibit B hereto) through December 31,
2005, respectively pursuant to the terms and conditions of this Agreement and
the Master Agreement. This Agreement shall be effective as of the Effective
Date and shall be for a term of seven (7) years commencing as of January 1,
1999. Ticketmaster shall have the option in its sole discretion to renew the
Agreement for an additional period of three (3) years on the terms and
conditions in effect in the last year of the Agreement, including any such
annual increases to the Customer Convenience Charges and handling fees provided
herein, provided that upon exercise of that option to extend the term,
Ticketmaster shall pay to SFX in consideration for the right to extend the
Agreement, a non-refundable payment in the amount of [XXX CONFIDENTIAL
TREATMENT REQUESTED] at any time within the six (6) month period prior to
the expiration of the initial term.
4. Revenue
Sharing Agreement. SFX and Ticketmaster agree to share
the per ticket Customer Convenience Charges, and the per order handling
fees with respect to the services provided by both Ticketmaster and SFX
(defined as the quotient of the total amount of handling fees collected by
Ticketmaster per year divided by the number of orders processed by Ticketmaster
per year) (collectively, Per-Order Ticket Revenues), on all Tickets for
Attractions for which such charges and fees are received and retained according
to the following methodology: The first [XXX CONFIDENTIAL TREATMENT REQUESTED]
of Per-Order Ticket Revenues shall be retained by Ticketmaster, and the next
[XXX CONFIDENTIAL TREATMENT REQUESTED] of Per-Order Ticket Revenues or portion
thereof shall be paid to SFX. All Per-Order Ticket Revenues above [XXX
CONFIDENTIAL TREATMENT REQUESTED] shall be divided equally between SFX and
Ticketmaster. Settlement and payment of all amounts owed to SFX under this Section 4
shall be made on a weekly basis, with a reconciliation and any adjustments made
on a quarterly basis. In the event that Ticketmaster does not receive a minimum
amount of [XXX CONFIDENTIAL TREATMENT REQUESTED] of Per-Order Ticket Revenues
per year on an annual blended basis for each of the initial [XXX CONFIDENTIAL
TREATMENT REQUESTED] years of the Agreement, then SFX shall pay to Ticketmaster
an amount equal to the total amount of any such shortfall (up to a maximum of
[XXX CONFIDENTIAL TREATMENT REQUESTED] per year and in an aggregate amount not
to exceed [XXX CONFIDENTIAL TREATMENT REQUESTED]). Commencing in year [XXX
CONFIDENTIAL TREATMENT REQUESTED] of this Agreement, SFX shall pay any amounts
to be paid hereunder ratably over years [XXX CONFIDENTIAL TREATMENT REQUESTED],
[XXX CONFIDENTIAL TREATMENT REQUESTED] and [XXX CONFIDENTIAL TREATMENT
REQUESTED] from the amounts otherwise payable to SFX under Sections 4, 5 and 6
of this Agreement. The parties shall mutually agree to the amount and timing of
any increases to be made to the Customer Convenience Charges and the handling
fees over the term of this Agreement. The initial Customer Convenience Charges,
the handling fees at an agreed to minimum of [XXX CONFIDENTIAL TREATMENT
REQUESTED] per order and minimal annual increases shall be set forth on a
schedule to be attached to the Master Agreement; provided, however, that in the
event the parties are unable to reach agreement on the amount of the annual
increases for the then existing Customer Convenience Charges and handling fees,
such increases each year commencing as of January 1, 1999 shall be the
greater of [XXX CONFIDENTIAL TREATMENT REQUESTED]% per annum or the percentage
increase in the national Consumer Price Index over the immediately
3
preceding
twelve months as promulgated by the United States Department of Labor, Bureau
of Labor Statistics.
5. Rights
to Premium Service Charge. The amount of any additional
service charge with respect to VIP or premium Tickets sold to Attractions which
entitle the purchaser to additional services or perquisites at any Facility
(i.e., premium parking, special entrances, priority seating, wait service,
etc.), or with respect to special events for which such additional service
charge is separately negotiated by SFX and agreed to by the owner or operator
of the Facility, and which are in excess of the applicable base Customer
Convenience Charge per Ticket for that Attraction, shall be divided as follows:
[XXX CONFIDENTIAL TREATMENT REQUESTED]% shall be retained by Ticketmaster, and
[XXX CONFIDENTIAL TREATMENT REQUESTED]% shall be paid to SFX. Settlement and
payment of all amounts owed to SFX under this Section 5 shall be made on a
weekly basis.
[XXX CONFIDENTIAL TREATMENT REQUESTED]
7. Signing
Bonus; Annual Advances. In consideration for SFX entering
into and performing this Agreement, Ticketmaster shall, on the fifth Business
Day after the date of the execution of this Agreement, pay to SFX a
non-refundable signing bonus in the amount of [XXX CONFIDENTIAL TREATMENT
REQUESTED]. Additionally, on the fifth Business Day of January, 1999, and on
the fifth Business Day of January of each of the years 2000, 2001, 2002
and 2003, Ticketmaster shall advance to SFX the sum of [XXX CONFIDENTIAL
TREATMENT REQUESTED]. The advances made to SFX on the fifth Business Day of January of
each of the first five years of the term of the Agreement shall be fully
recoupable without interest by Ticketmaster throughout the course of the year
and shall be offset against any and all amounts otherwise due to SFX under
Sections 4, 5 and 6 hereof until all amounts are recouped in full; provided, however,
that all amounts from advances which have not been recouped by Ticketmaster in
the event of a termination of the Agreement prior to the expiration of its term
shall be paid by SFX to Ticketmaster in full promptly following the effective
date of such termination.
8. Internet
Marketing. SFX shall have the right to place links to
Ticketmasters Ticketmaster.com web site from SFX owned or operated facilities
for the purpose of selling Tickets to Attractions, and Ticketmaster shall place
links from its Ticketmaster.com web site to SFX owned and operated web sites to
enable purchasers of Tickets to Attractions to gain access to SFXs transaction
page. Ticketmaster shall provide SFX with a box on the Ticketmaster web site at
which Tickets for SFXs Attractions are sold for SFXs use in connection with
its sponsorship sales, and shall also provide prominent space for SFX to
include ticket header sponsorship information on the web page outside the
box for SFXs use in connection with the sale of Tickets to SFXs Attractions.
9. Credit
Card Charges. With respect to all Tickets which are
purchased through the use of American Express, Master Card, Visa, or Discover
Card, SFX shall instruct Ticketmaster to increase the Customer Convenience
Charge by an amount equal to [XXX CONFIDENTIAL TREATMENT REQUESTED], provided
that Ticketmaster may increase such amount by the amount of any increase in
inter-bank fees.
10. Additional
Business Opportunities. Ticketmaster and SFX agree to use
their reasonable best efforts to develop future merchandising and promotional
opportunities, including but not limited to joint ventures for licensing,
merchandising and affinity and similar programs to be sold through Ticketmaster
Direct and other sources (including various existing and to-be-formed Internet
sites), and to use reasonable efforts to cause additional promotional
programming and other opportunities through Home Shopping Network, USA Network
and other assets of USAI on commercially reasonable terms.
11. Access
to Data Bases. At SFXs request, Ticketmaster shall
deliver to SFX without cost the data bases for all Attractions in accessible
electronic form and in a reasonably expeditious manner for SFXs use, subject
to Ticketmaster obtaining any requisite consents prior to such delivery.
Alternatively,
4
SFX
may from time to time request that Ticketmaster provide SFX with certain
reasonable services utilizing the SFX data bases and the Ticketmaster data
bases, and upon such request Ticketmaster shall provide such services and shall
be compensated for providing such services at its direct cost (excluding
corporate overhead allocations) plus [XXX CONFIDENTIAL TREATMENT REQUESTED]%.
Additionally, from time to time, Ticketmaster and SFX shall cooperate to
develop affinity merchandising and similar programs to be shared jointly
between the parties utilizing both SFXs and Ticketmasters data bases, and the
profits from any sales generated by such particular programs shall be shared
equally between the parties after deducting the direct costs thereof (excluding
corporate overhead allocations).
12. Affinity
Programs. At SFXs request, Ticketmaster shall mail
information about current or future affinity programs (i.e., programs which
provide additional benefits to the purchaser of a Ticket) which SFX provides to
Ticketmaster to any consumer who purchases a Ticket through Telephone Sales to
an Attraction at an SFX Facility or a Non-SFX Facility (provided SFX first
receives the written consent to so solicit from the third party having a
ticketing agreement with Ticketmaster for such Attraction at the Non-SFX
Facility), at Ticketmasters direct cost (excluding corporate overhead
allocations) plus [XXX CONFIDENTIAL TREATMENT REQUESTED]%. Ticketmaster and SFX
shall cooperate in expanding such services utilizing Ticketmasters phone
operators and other Ticketmaster assets and personnel (such as Ticketmasters
monthly Guide) on economic terms and conditions to be mutually agreed to by the
parties.
13. Storage
Fee; Additional Ticketmaster Income; Promotion Efforts. Ticketmaster
agrees to eliminate the account storage fee or any similar fee which is being
charged to SFX or any SFX Affiliate as of the Effective Date. SFX agrees that
it will provide an amount of business opportunities to Ticketmasters various
businesses (other than the ticketing business, i.e., Ticketmaster Direct) which
will result, on an annual basis, in additional operating income to Ticketmaster
of at least [XXX CONFIDENTIAL TREATMENT REQUESTED], based on Ticketmasters
representation that its business operates at no less than a [XXX CONFIDENTIAL
TREATMENT REQUESTED]% margin. Such additional operating income shall come from
services which Ticketmaster provides to SFX for licensing, merchandising and
affinity and similar programs and/or other revenue sources described herein.
SFX shall use its reasonable best efforts to promote the use of IVR and
Internet sales of Tickets at all SFX Facilities and for all SFX Attractions.
14. Representations
and Warranties of SFX. SFX represents and warrants to
Ticketmaster that:
(a) SFX and each
of the SFX Affiliates is a corporation duly organized and in good standing in
its state of incorporation and has adequate power to enter into and perform
this Agreement;
(b) This
Agreement has been duly authorized, executed and delivered on behalf of SFX and
constitutes the legal, valid and binding agreement of SFX, enforceable in
accordance with its terms;
(c) The entering
into and performance of this Agreement will not violate any judgment, order,
law or regulation applicable to SFX or any provision of SFXs charter or
bylaws, or result in any breach of, constitute a default under, or result in
the creation of any line, charge, security interest or other encumbrance upon
any assets of SFX pursuant to any instrument to which SFX is a party or by
which it or its assets may be bound;
(d) SFX has the
right to sell, or Controls the Right to sell, Tickets to each SFX Facility
which is subject to the terms of this Agreement at which any of its Attractions
are held, and is duly authorized to execute, perform and deliver this
Agreement; and
(e) SFX has the
right, authority and power to enter into this Agreement on behalf of and bind
itself and each of the SFX Affiliates.
5
15. Representations
and Warranties of Ticketmaster. Ticketmaster represents
and warrants to SFX that:
(a) Ticketmaster
is a corporation duly organized and in good standing in its state of
incorporation and has adequate power to enter into and perform this Agreement;
(b) This
Agreement has been duly authorized, executed and delivered on behalf of
Ticketmaster and constitutes the legal, valid and binding agreement of
Ticketmaster, enforceable in accordance with its terms;
(c) The entering
into and performance of this Agreement will not violate any judgment, order,
law or regulation applicable to Ticketmaster or any provision of Ticketmasters
charter or bylaws, or result in any breach of, constitute a default under, or
result in the creation of any line, charge, security interest or other
encumbrance upon any assets of Ticketmaster pursuant to any instrument to which
Ticketmaster is a party or by which it or its assets may be bound;
(d) Ticketmaster
is duly authorized to execute, perform and deliver this Agreement; and
(e) Ticketmaster
has the right, authority and power to enter into this Agreement on behalf of
and bind each of the TM Affiliates.
16. Miscellaneous.
(a) Notices. Any notice
required or permitted to be given by the provisions of this Agreement shall be
conclusively deemed to have been received by a party hereto on the day it is
delivered by hand or fax to such party at the addresses or fax numbers
indicated below (or at such other address or fax number such party shall
specify to the other party in writing including by fax), or, if sent by
registered or certified mail, on the third Business Day after the day on which
mailed, addressed to such party at such address:
If to SFX, at:
|
|
SFX
Entertainment, Inc.
|
|
|
650 Madison Avenue
|
|
|
16th Floor
|
|
|
New York, New York 10022
|
|
|
Attn: Michael G. Ferrel,
President &
|
|
|
CEO
|
|
|
Fax
No. (212) 486-4869
|
|
|
|
with a copy to:
|
|
SFX
Entertainment, Inc.
|
|
|
650 Madison Avenue
|
|
|
16th Floor
|
|
|
New York, New York 10022
|
|
|
Attn: Richard A.
Liese, Esq.
|
|
|
Fax
No. (212) 486-4830
|
|
|
|
If to Ticketmaster, at:
|
|
Ticketmaster Corporation
|
|
|
3701 Wilshire Boulevard
|
|
|
Seventh Floor
|
|
|
Los Angeles, California
90010
|
|
|
Attn: Terry Barnes,
President & CEO
|
|
|
Fax
No. (213) 480-4884
|
6
with a copy to:
|
|
Ticketmaster Corporation
|
|
|
8800 Sunset Boulevard
|
|
|
West Hollywood, California
90069
|
|
|
Attn: Eugene Cobuzzi, COO
|
|
|
Fax
No. (310) 360-6509
|
|
|
|
with a copy to:
|
|
Ticketmaster Corporation
|
|
|
555 West 57th
Street
|
|
|
New York, New York 10019
|
|
|
Attn: Daniel R.
Goodman, Esq.
|
|
|
Fax
No. (212) 399-1395
|
|
|
|
and with a copy to:
|
|
Ticketmaster Corporation
|
|
|
8800 West Sunset Boulevard
|
|
|
West Hollywood, California
90069
|
|
|
Attn: Stuart DePina, CFO
|
|
|
Fax
No. (310) 360-0625
|
(b) Applicable Law. This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of New York. Any action that is or may be commenced by any party
pertaining to this Agreement and the subject matter hereof shall be commenced
in a Federal or state court located in New York County, New York. The parties
hereto hereby consent to the jurisdiction of such court.
(c) Counterparts. This
Agreement may be executed in one or more counterparts, all of which shall be
deemed to be one and the same Agreement.
(d) Amendments. This
Agreement shall not be changed, modified, altered or amended in any respect
without the mutual consent of the parties hereto, which consent shall be
evidenced by a written amendment to this Agreement executed by the parties.
(e) Entire Agreement. This
written Agreement and the Exhibit hereto constitute the sole and only
agreement of the parties relating to the matters covered hereby. Any prior or
contemporaneous agreements, promises, negotiations or representations not
expressly set forth in this Agreement are of no force or effect.
(f) Joint and Several Obligations. Notwithstanding
anything to the contrary contained in this Agreement, all agreements,
covenants, duties and obligations of SFX hereunder shall be the joint and
several agreements, covenants, duties and obligations of SFX and each of the
SFX Affiliates.
(g) Existing Agreements. Upon
the execution of this Agreement, and except as otherwise provided herein,
including the extension of the existing Agreement on the terms set forth
herein, all existing ticketing servicing agreements between Ticketmaster and
any of SFX or the SFX Affiliates shall automatically terminate as of the Effective
Date hereof with respect to activities following such date, and shall be of no
further force or effect with respect to activities following such date.
(h) Confidentiality. It is
the intent of the parties hereto that the terms, conditions and provisions of
this Agreement shall remain confidential and shall not be disclosed to any
other person without the prior consent of the non-disclosing party. However,
the parties acknowledge that (i) in operating under this Agreement and the
Master Agreement, multiple employees of each of them will be privy to some or
all of the provisions hereof and (ii) certain regulatory processes
(including, but not limited to, those related to the Securities and Exchange
Commission) may require disclosure of some or all of the provisions hereof, and
that any disclosure pursuant thereto, or any inadvertent disclosure by a
recipient thereof of any non-material terms, shall not constitute
7
a breach of this Agreement.
In the event either party is requested or required (by oral questions,
interrogatories, requests for information or documents in legal proceedings,
subpoena, civil investigative demand or other similar process) to disclose all
or any portions of this Agreement, the party from whom the disclosure is sought
shall provide the other party with immediate oral, followed by prompt written,
notice of any such request or requirements so that such party may seek a
protective order or other appropriate remedy and/or waive compliance with the
provisions of this Agreement. If, in the absence of a protective order or other
remedy, the party from whom disclosure is sought is, nonetheless, legally
compelled to disclose all or any portions of this Agreement, such party may,
without liability hereunder, disclose the Agreement or only that portion of the
Agreement which it is legally required to disclose.
(i) Severability. In the
event any one or more of the provisions contained in this Agreement shall for
any reason be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement, but this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein. Further, in
the event that any provision of this Agreement shall be held to be
unenforceable by virtue of its scope, but may be made enforceable by a
limitation thereof, such provision shall be deemed to be amended to the minimum
extent necessary to render it enforceable under the laws of the jurisdiction in
which enforcement is sought.
17. Indemnity.
(a) SFX shall protect, indemnify, save
and hold Ticketmaster and the TM Affiliates, including all of their respective
officers, directors, shareholders, employees and/or agents, harmless from and
against any and all claims, actions, damages, expenses (including court costs
and reasonable attorneys fees), obligations, losses, liabilities and liens
imposed or incurred by, or asserted against, Ticketmaster, the TM Affiliates or
their successors or assigns, by any person or entity, caused by or occurring as
a result of SFXs use of the TM System at a Facility, except to the extent that
such claim shall relate to Ticketmasters gross negligence or wilful misconduct
with respect thereto, the performance of this Agreement or the breach of any
covenant, representation or warranty contained in this Agreement by SFX, its
agents, employees or any other person (other than Ticketmaster or a TM Affiliate)
acting under the direction and on behalf of SFX.
(b) Ticketmaster shall protect,
indemnify, save and hold SFX and the SFX Affiliates, including all of their
respective officers, directors, shareholders, employees and/or agents, harmless
from and against any and all claims, actions, damages, expenses (including
court costs and reasonable attorneys fees), obligations, losses, liabilities
and liens imposed or incurred by, or asserted against, SFX, the SFX Affiliates
or their successors or assigns, by any person or entity, caused by or arising
out of any alleged patent, trademark, or copyright infringement, asserted
against SFX with respect to SFXs use of the TM System, except to the extent
that any such claim shall relate to SFXs negligence or wilful misconduct with
respect thereto, the performance of this Agreement or the breach of any
covenant, representation or warranty contained in this Agreement by
Ticketmaster, its agents, employees or any other person (other than SFX or an
SFX Affiliate) acting under the direction and on behalf of Ticketmaster.
18. Press
Releases. It is the intention of the parties to issue a
press release regarding the general nature of the terms and conditions of this
Agreement after the execution by both parties of this Agreement.
Notwithstanding the foregoing, neither party shall make or issue any public
statements, disclosure or press release with respect to the matters
contemplated herein without the prior consent of the other, which consent shall
not be unreasonably withheld, provided that (i) press releases in
conformity with the disclosure requirements of the Securities and Exchange
Commission, in a form which shall be previously approved by Ticketmaster and
SFX, may be issued by SFX and/or Ticketmaster if deemed necessary, (ii) that
the parties hereto shall continue such communications with
8
directors,
employees, customers, suppliers, franchisees, lenders, lessors, shareholders,
partners and other particular groups as may be legally required or necessary or
appropriate and not inconsistent with the best interests of the other parties
for the proper consummation of the transactions contemplated herein, and (iii) as
required by law.
19. Expenses. Each
of SFX and Ticketmaster shall be solely responsible for and bear all of their
respective expenses, including, without limitations, expenses of legal counsel,
accountants and other advisors, incurred at any time in connection with all
negotiations and documentation relating to the parties entering into this
Agreement and the Master Agreement.
In order to confirm your agreement to the terms and
conditions set forth herein, kindly execute and return the signed copy hereof
to the undersigned.
|
Very truly yours,
|
|
|
|
|
|
|
|
SFX ENTERTAINMENT, INC.
|
|
|
|
|
|
|
|
By:
|
/s/ MICHAEL G. FERREL
|
|
|
|
|
|
|
Michael G. Ferrel
|
|
|
Its:
|
President and Chief
Executive Officer
|
|
|
|
|
|
AGREED TO AND ACCEPTED
THIS
|
|
|
|
13th DAY OF
NOVEMBER, 1998:
|
|
|
|
|
|
|
|
TICKETMASTER CORPORATION
|
|
|
|
|
|
By:
|
/s/ TERRY BARNES
|
|
|
|
|
|
|
|
Terry Barnes
|
|
|
Its:
|
President and Chief
Executive Officer
|
|
|
|
|
|
|
|
|
9
EX-10.18
11
a2186551zex-10_18.htm
EXHIBIT 10.18
Exhibit
10.18
![](g133354kq01i001.jpg)
|
Paul dEustachio
President
|
|
|
|
EXECUTIVE OFFICES
|
July 28, 1997
|
1 Harry S. Truman Drive
|
|
Landover Maryland 20785
|
|
(301) 808-4300
|
|
Fax (301) 808-4325
|
Ned
S. Goldstein
Senior Vice President
and General Counsel
Ticketmaster
Corporation
8800 Sunset Blvd.
West Hollywood, CA 90069
Re: License Agreement
Dear
Mr. Goldstein:
Ticketmaster
has raised a question of whether Additional Payments are due under the
License Agreement in connection with certain tickets sold by the USAir Arena,
Baltimore Arena and Patriot Center box offices. In response, we have carefully
reviewed the issue of box office sales, sought to compile relevant information
and reached the following conclusions.
First,
while there is some ambiguity in the terms of the License Agreement, and in
their application to this matter, TGLP will make an Additional Payment to
Ticketmaster in connection with certain tickets sold by the USAir Arena box
office. Second, TGLP does not believe that Additional Payments are due in connection
with sales by the Baltimore Arena and Patriot Center box offices. Both
conclusions are discussed further below.
Turning
first to the USAir Arena, it imposes a $1.00 service charge upon certain
advance sale tickets sold through the box office. There is no service charge
upon season tickets or date-of-event sales. Nor are service charges imposed on
advance sales to certain events, such as Ringling Brothers and Disney on Ice.
The
USAir Arena also sells a limited number of tickets on what it refers to as a
consignment basis. This typically involves the advance sale to a third-party of
a block of tickets for a particular event. Service charges for consignments
generally range from $2 to $5 per ticket.
USAir
Arena box office employees generate a daily spreadsheet which includes a line
item showing service charges collected that day. Using these spread sheets, the
USAir Arena Accounting Department then prepares monthly spreadsheets compiling
total service charges collected. This line item includes both the $1.00 service
charge applied to certain advance sales and the consignment charges.
Total
service charge income for the USAir Arena box office during the previous three
fiscal years (July 1, 1994 through June 30, 1997) was as follows:
1995
|
|
$
|
69,079
|
|
1996
|
|
$
|
77,240
|
|
1997
|
|
$
|
87,945
|
|
CONCERTS ·
SPORTS ·
PERFORMING ARTS · CULTURAL ATTRACTIONS · FAMILY &
SPECIAL EVENTS · CLUBS
To ensure that
Ticketmaster receives all payments to which it may be entitled under the
License Agreement, we have assumed that each dollar of revenue collected reflects
one ticket sold. In fact, the number of tickets to which a service charge
applied was substantially less, because the service charges applied to
consignments exceeded $1.00 per ticket.
Using that assumption, we
then made the following calculations:
|
|
|
|
Per Ticket Amount
|
|
|
|
|
|
|
|
Under License
|
|
|
|
Fiscal Year
|
|
Number of Tickets
|
|
Agreement
|
|
Total
|
|
|
|
|
|
|
|
|
|
1995
|
|
69,079
|
|
.07
|
|
$
|
4,836
|
|
1996
|
|
77,240
|
|
.08
|
|
$
|
6,179
|
|
1997
|
|
87,945
|
|
.08
|
|
$
|
7.036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
18,051
|
|
The USAir Arena
Accounting Department no longer has records which isolate service charge income
from all other sources of revenue for fiscal years 1992, 1993 and 1994. We
have, however, compiled information enabling us to make a relatively accurate
computation of the number of tickets to which a service charge was applied, and
made assumptions in Ticketmasters favor designed to ensure that it receives
all Additional Payments to which it may be entitled.
Again assuming that every
dollar of service charge revenue reflects one ticket sold, during each of
fiscal years 1995, 1996 and 1997 approximately 8% of all tickets sold by the
USAir Arena box office carried a service charge. (The total number of box
office sales during fiscal years 1995, 1996 and 1997 were 920,229, 934,982 and
1,120,045, respectively.) Although, for the reasons set forth above, that
assumption substantially overstates the actual number of tickets subject to a
service charge, we have applied the same 8% figure to the total number of
tickets sold by the USAir Arena box office for fiscal years 1992, 1993 and 1994.
Total box office ticket sales those years were 833,925, 828,476 and 8X8,225,
respectively. Applying the 8% figure, this translates to 66,714, 66,278 and
71,058 tickets bearing a service charge during those years.
We then made the
following calculations:
|
|
|
|
Per Ticket Amount
|
|
|
|
|
|
|
|
Under License
|
|
|
|
Fiscal Year
|
|
Number of Tickets
|
|
Agreement
|
|
Total
|
|
|
|
|
|
|
|
|
|
1992
|
|
66,714
|
|
.06
|
|
$
|
4,003
|
|
1993
|
|
66,278
|
|
.06
|
|
3,977
|
|
1994
|
|
71,058
|
|
.07
|
|
4,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
12,954
|
|
2
Enclosed
is a check for $ 31,005, reflecting Additional Payments for the period July 1,
1991 through June 30, 1997, for box office sales at the USAir Arena, 1 believe
that this payment exceeds the maximum amount potentially due under the License
Agreement. In addition, it is our intention to work with the USAir Arena to
establish a system for reporting such sales, and remitting payments to
Ticketmaster, each year going forward.
The
USAir Arena also charges season ticket holders a handling fee in connection
with certain transactions, such as the exchange of tickets to one game for
those of another. It is a flat fee (generally $5.00) and does not vary
according to the number of tickets involved. We do not believe that an
Additional Payment is due under the License Agreement in connection with these
handling fees, but provide this information to ensure that the factual record
is complete.
Turning
to the Baltimore Arena, I am informed that it imposes a $1.00 service charge on
all tickets purchased at the box office with a credit card. The purpose of the
charge is to offset the credit card commission the City of Baltimore must pay
to the credit card company with respect to such sales. The box office also
sells a small number of consignment tickets to various events, for which the
service charge is $3.00. Both service charges are paid to the City.
It
is my understanding that under the current Management Agreement between
Baltimore and Centre Group, Centre Groups compensation for managing the
Baltimore Arena is based upon the degree of improvement in the net operating
loss of the Arena below $650,000. Net operating loss is defined as gross
revenue less operating expenses. The first $100,000 of improvement goes to the
City; the next $100,000 goes to Centre Group; reductions of net operating loss
of more than $200,000, but less than $800,000, are split 50%-50% between the
City and Centre Group; and reductions of more than $800,000 are shared 65% by
the City and 35% by Centre Group.
In
our view, no Additional Payment is due in connection with tickets sold by the
Baltimore Arena box office. The service charges are imposed by the City, are
paid to the City, and principally offset associated credit card expenses. As an
aside, it is my understanding that the total number of ticket sales by the
Baltimore Arena box office to which a service charge is applied is quite small.
Indeed, I am informed that the Citys total service charge income has been less
than $20,000 per year, the bulk of which consists of credit Card charges.
Accordingly, should Ticketmaster disagree with our position, the amount at
issue is less than $2,000 per year, and less than $10,000 for the entire term
of the License Agreement.
Next,
I understand that George Mason University imposes a $1.00 service charge on
certain advance ticket sales at the Patriot Center box office. Sales to
University events (such as basketball games) and childrens events (such as
Disney and the Barney Show) are excluded. The service charges are paid to the
University, and are included in the gross revenue of the Patriot Center.
It
is my understanding that pursuant to the Management Agreement for the Patriot
Center between the University and Centre Group, Centre Group receives a fixed
fee of $250,000 per year, and a variable fee based on building gross revenue.
The variable fee is two percent of building revenue if building expenses are
more than 70 percent of revenue; 2.5 percent of building revenue if building
expenses are between 60
3
percent
and 70 percent of revenue; and three percent of building revenue if building
expenses are less than 60 percent of revenue. The total fee is capped by the
requirement that the fixed fee must be at least 51 percent of the total fee
paid to Centre Group.
In
our view, no Additional Payment is due in connection with sales by the Patriot
Center box office. The service charge is paid to the University, and there is
no direct tie between that charge and Centre Groups compensation. We do not
believe that it was the intent of the License Agreement to require an
Additional Payment in these circumstances. This is illustrated by the fact that
if an Additional Payment was due upon the sale of such tickets, it would
substantially exceed the highest potential increase in Centre Groups variable
fee by reason of the imposition of the service charge. Specifically, while the
maximum amount of the variable fee can be 2 - 3% of additional revenue
generated (i. e., two
or three cents), the Additional Payment would be eight cents per ticket.
Plainly, neither TGLP nor an affiliate would choose to implement a program
under which, in the best case, it was net out-of-pocket five cents per ticket
sold by reason of the imposition of a service charge.
I
am informed by Centre Group that the Patriot Center box office applied the
$1.00 service charge to less than 40,000 tickets annually from 1991 through
today. Accordingly, should Ticketmaster disagree with our position, the amount
at issue is less than $4,000 per year, and less than $20,000 for the entire
term of the License Agreement.
This
letter is written for the purpose of resolving disputes between TGLP and
Ticketmaster with respect to the issue of box office sales. While we do not
agree with all of the positions that Ticketmaster has taken with respect to the
relevant terms of the License Agreement (such as the definition of an affiliate
and other relevant terms), the sums involved with respect to the issue of box
office sales are quite small, and in our view should not be a source of ongoing
disagreements. TGLPs goal is to fully satisfy any obligations owing to
Ticketmaster, and to avoid the recurrence of these issues in the future. To
that end, I am willing to provide Ticketmaster with additional information
concerning these issues, independently of the outstanding litigation. We will
also consider any countervailing points you wish to raise, or proposed
solutions, and address them promptly.
In
closing, I must emphasize that much of the information set forth above was
compiled by me (or at my direction), and first came to my attention, as a
result of the questions recently raised. To my knowledge, neither Ticketmaster
nor TGLP previously focused upon these questions. There has never been any intention
to withhold funds owing to Ticketmaster.
Sincerely,
|
|
|
|
|
|
/s/ Paul dEustachio
|
|
Paul
dEustachio
|
|
Enclosure
cc:
|
Abe
Pollin
|
|
David
Osnos
|
4
EX-10.19
12
a2186551zex-10_19.htm
EXHIBIT 10.19
Exhibit
10.19
TICKETMASTER
CONSENT AND AGREEMENT
This CONSENT AND AGREEMENT (this Consent), dated as of January 5,
1996, made by Ticketmaster Group Limited Partnership, a Maryland partnership
(with its successors and assigns, TGLP) and Ticketmaster Corporation,
an Illinois corporation (with its successors and assigns, the Consenting Party),
to NationsBank, N.A., as collateral agent (the Collateral Agent) for (i) certain
banks (the BANKS) party to the Credit Agreement dated as of December 19,
1995 among TGLP and its affiliates, the Banks and NationsBank, N.A., acting in
its capacity as agent for the Banks (as amended, modified of supplemented from
time to time, the Senior Credit Agreement) and (ii) MCI
Telecommunications Corporation (with its successors and assigns, MCI),
as lender under the Credit Agreement dated as of December 19, 1995 (as
amended, modified or supplemented from time to time, the Subordinated
Credit Agreement and together with the Senior Credit Agreement, the Credit
Agreements).
WHEREAS, TGLPand the Consenting Party have entered into a License
Agreement dated as of May 23, 1991 (as amended, supplemented or otherwise
modified from time to time, the Assigned Agreement); and
WHEREAS, TGLP has assigned to the Collateral Agent for security
purposes, all of TGLPs right, title and interest in the Assigned Agreement as
collateral for TGLPs obligations under the Credit Agreements and the security
documents (as amended, modified or supplemented from time to time, the Security
Documents) executed in connection therewith.
NOW, THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
Section 1. Consents. The Consenting Party:
(a) Consents
to the assignment by TGLP to the Collateral Agent of all of TGLPs right, title
and interest in the Assigned Agreement as collateral for the obligations of
TGLP under the Credit Agreements and the Security Documents.
(b) Acknowledges
(and TGLP confirms) the Collateral Agents right to enforce all obligations to
and exercise all rights and remedies of TGLP under the Assigned Agreement.
(c) Agrees
that the Consenting Party shall not materially modify the Assigned Agreement
without the prior written consent of the Collateral Agent.
(d) Agrees
that, in the event of any default by TGLP under the Assigned Agreement, the
Consenting Party will not terminate the Assigned Agreement until it first gives
written notice to the Collateral Agent and affords the Collateral Agent a
reasonable opportunity (not less than 30 days) to cure such default.
(e) Agrees
that the Collateral Agent shall not be subject to any duty or obligation under
the Assigned Agreement unless and until the Collateral Agent exercises its
rights to substitute itself or its designee for TGLP under the Assigned
Agreement.
(f) Agrees
that if the Collateral Agent shall sell, assign or transfer its rights, title
or interest in the Assigned Agreement pursuant to the exercise of its remedies
under the Security Documents, the purchaser, assignee or transferee shall be
substituted for TGLP and the Consenting Party will continue to perform its
obligations under the Assigned Agreement.
Section 2. Representations
and Warranties.
The Consenting Party represents and warrants
that: (a) each of this Consent and
the Assigned Agreement is in full force and effect and constitutes the legal,
valid and binding obligation of the Consenting Party, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, or other similar laws
affecting creditors rights or by equitable principles; and (b) neither of
the Consenting Party nor, to the best of the Consenting Partys knowledge, TGLP
is in default of any obligation under the Assigned Agreement and neither has
any existing counterclaims, offsets or defenses against the other.
Section 3. Miscellaneous.
(a) Subject
to Section 4 herein, the Consenting Party shall pay all monies due to TGLP
under the Assigned Agreement directly to the Collateral Agent at an address to
be furnished by the Collateral Agent.
(b) All
notices hereunder shall be in writing and shall be delivered to the applicable
address specified herein on the signature page (unless otherwise directed
by a party). In addition, notices to MCI shall be sent to: 1133 19th Street, N.W., Washington, DC. 20036; Attention: Assistant General Counsel Network &
Facilities; Telecopy: (202) 736-6666.
(c) This
Consent shall be binding upon the parties and their respective successors and
assigns, provided, however, that the Consenting Party shall not
transfer or assign its obligations under this Consent or the Assigned Agreement
without the prior written consent of the Collateral Agent, which consent shall
not be unreasonably withheld.
(d) No
failure or delay by the Collateral Agent in exercising any right hereunder
shall operate as a waiver thereof. The
rights and remedies herein are cumulative and not exclusive of any rights or remedies
the Collateral Agent may otherwise have.
2
(e) This
Consent may be executed in counterparts, each of which shall be an original,
but all of which shall together constitute one and the same instrument.
(f) In
case any provision of this Consent shall be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
In the event of a conflict between this Consent and the Assigned
Agreement, the terms of this Consent shall control.
(g) This
Consent shall be construed under and be governed by the laws of District of
Columbia (without giving effect to conflicts of law principles thereof).
Section 4. Rights of MCI.
(a) Notwithstanding
anything contained herein to the contrary, MCIs rights under this Consent
shall be subordinate to those of the Banks under the Senior Credit
Agreement. Upon the Consenting Partys
receipt of notice from the Collateral Agent that the obligations of TGLP and
its affiliates under the Senior Credit Agreement have been performed or paid in
full, MCI shall automatically succeed to
the rights of the Collateral Agent hereunder, without further action.
(b) Notwithstanding
anything contained herein to the contrary, all notices sent to the Collateral
Agent pursuant to this Consent shall also be sent to MCI in the manner and at
the address specified in Section 3 herein.
3
IN WITNESS WHEREOF, the
parties hereto have caused their duly authorized officers to execute and
deliver this Consent and Agreement as of the date first above written.
NATIONSBANK,
N.A., as
Collateral Agent
|
TICKETMASTER
CORPORATION
|
By:
|
|
|
By:
|
|
Name:
|
|
|
Name:
|
|
Title:
|
|
|
Title:
|
|
|
|
|
|
|
|
|
|
|
Attention:
|
Peter
Knickerbocker
|
Attention:
|
|
|
Address:
|
6610
Rockledge Drive
|
Address:
|
|
Bethesda,
MD 20817
|
|
|
|
|
Telephone:
|
(301)
493-7053
|
Telephone:
|
Telecopy:
|
(301)
493-7262
|
Telecopy:
|
AGREED AND ACCEPTED:
TICKETMASTER
GROUP LIMITED
PARTNERSHIP
|
MCI
TELECOMMUNICATIONS
CORPORATION
|
By: AP Tickets, Inc.,
as General Partner
By:
|
|
|
By:
|
|
Name:
|
|
|
Name:
|
|
Title:
|
|
|
Title:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EX-10.20
13
a2186551zex-10_20.htm
EXHIBIT 10.20
Exhibit 10.20
LICENSE AGREEMENT
THIS AGREEMENT is made and entered into as of the 23rd day of May,
1991, by and between Ticketmaster corporation, an Illinois corporation (Ticketmaster),
and Ticketmaster Group Limited Partnership, a Maryland limited partnership (User).
W I T
N E S S E T H :
WHEREAS, Ticketmaster is the owner of certain software systems,
accounting procedures and know-how which, in the aggregate, comprise a
computerized event ticketing system (the System); and
WHEREAS, Ticketmaster is the owner of and/or claims ownership rights to
the name, mark and logo Ticketmaster (the Mark), which Mark is used in
conjunction and identified with the System; and
WHEREAS, the System and the Mark are known within the
computerized ticketing industry and by the public as connoting a high
level of quality and service; and
WHEREAS, User desires to be granted a license by Ticketmaster to use
the System and the Mark in connection with Users computerized event ticketing
business in the territory described in Exhibit I attached hereto (the Market
Area);
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. License. Ticketmaster
hereby grants to User an exclusive right and license to use the System and
(solely in connection with the System and the provision of computerized
ticketing services) the Mark within the Market Area; subject to the rights
retained by Ticketmaster in accordance with Section 5 hereof.
User hereby acknowledges that the System and
the name Ticketmaster are highly regarded in the computerized ticketing industry
and by the public, and that Ticketmaster deems it important that all persons
using the System or such name operate in a manner consistent with good business
practice. Accordingly, User agrees to operate its business in a manner that
will not negatively affect the reputation of the System or the Ticketmaster
name, including, without limitation thereby, the prompt settlement of accounts
and the honoring of all bona fide obligations.
Ticketmaster further assigns all of its
right, title and interest in and to those certain agreements described on
Exhibit II attached hereto to User, it being agreed and understood that
(i) such agreements are assigned by Ticketmaster to User as is, and without
any representations and warranties whatsoever, and (ii)
User
shall indemnify and hold. Ticketmaster and its officers, directors, employees,
agents, representatives, affiliates, shareholders, successors and assigns
harmless from and against any and all losses, claims, damages, liabilities,
costs and expenses (including, without limitation, reasonable attorneys fees)
arising from or related to such agreements and to the performance thereof by
User at any time from and after the date hereof.
2. Term. The initial
term of this Agreement and the license granted hereby shall commence on the
date hereof, and shall remain in force, unless terminated earlier in accordance
with the provisions hereof, until the tenth (10th) anniversary of the Operational
Date. This Agreement may be renewed by
User for two additional five year terms by written notice of renewal delivered by
User to Ticketmaster no less than 90 but no more than 150 days prior to
the expiration of the then current term of this Agreement so long as User is
not in default under this Agreement either at the time such notice is delivered
or at the time the renewal period is scheduled to commence.
As used in this Agreement, (A) the term Operational
Date shall mean the date upon which the System becomes operational in the
Market Area or any part thereof, and (B) the term Operational Year shall
mean the twelve-month period commencing on the Operational Date and ending on
the first anniversary of such date and each twelve month period thereafter.
3. Base Payments. User shall
pay to Ticketmaster during each year of the term hereof a minimum annual royalty
in the amount of $125,000 for the right to use the System and the Mark in the Market
Area (the Base Payment). The Base Payment shall be payable in advance in
equal quarterly installments commencing on the Operational Date.
All Base Payments shall be made by User directly to
Ticketmaster in United States Dollars in the manner designated by Ticketmaster from
time to time during the term of this Agreement, which may include wire transfer
into a Ticketmaster bank account.
4. Additional Payments. In addition
to the Base Payments, User shall pay to Ticketmaster with respect to each
Operational Year an additional royalty (the Additional Payment) equal to (i) the
Number of Tickets Sold multiplied by the Per Ticket Amount minus (ii) the
aggregate Base Payments actually paid by User to Ticketmaster during that
Operational year. To the extent that in any Operational Year part (i) of
the foregoing calculation does not exceed part (ii) thereof, no Additional
Payment shall be made by User to Ticketmaster for that Operational Year and
Ticketmaster shall not be obligated to return any portion of the Base Payments
paid during such Operational Year or to credit any amount against Additional
Payments payable in any succeeding Operational Year. As used herein Number of
Tickets Sold shall mean for any
2
Operational
Year the number of tickets sold or distributed by User, whether or not by or
through the System or using the Mark, in the Market Area and to which a customer
convenience charge or service charge is or normally is attached, whether at
remote ticket outlets, by telephone, by mail order, at facility box offices, at
User locations or elsewhere (exclusive of complimentary and season tickets and
tickets sold at a facility box office by a party not affiliated with User where
that party assesses a service charge no part of which accrues to the benefit or
is otherwise payable to User or Users affiliates). Further, as used herein,
the Per Ticket Amount shall be the amount set forth below during each of the
indicated Operational Years (including permissible renewal periods):
|
|
The Per Ticket
|
During Operational years
|
|
Amount Shall Be
|
|
|
|
1 through 2
|
|
$
|
0.06
|
3 through 4
|
|
$
|
0.07
|
5 through 6
|
|
$
|
0.08
|
7 through 8
|
|
$
|
0.09
|
9 through 10
|
|
$
|
0.10
|
11 through 12
|
|
$
|
0.11
|
13 through 14
|
|
$
|
0.12
|
15 through 16
|
|
$
|
0.13
|
17 through 18
|
|
$
|
0.14
|
19 through 20
|
|
$
|
0.15
|
In
the event that this Agreement is terminated for any reason prior to its
expiration, the period commencing on the day following the end of the prior Operational
Year and ending on the date of termination shall be deemed to be an Operational
Year for purposes of this Agreement.
Additional Payments for each Operational Year shall
be calculated and paid by User to Ticketmaster in United States Dollars on a
quarterly basis, within ten (10) days following any quarter during an
Operational Year in which the aggregate per ticket royalty for such year
exceeds the Base Payment for such year and in each quarter thereafter during
any such year. All Additional Payments shall be made by User directly to
Ticketmaster in the manner designated by Ticketmaster from time to time during
the term of this Agreement, which may include wire transfer into a Ticketmaster
bank account.
Within ten (10) days after the end of each
quarter of the term hereof, User shall deliver to Ticketmaster a report of all
tickets sold, printed, produced and distributed by User in the Market Area
during such quarter, which report shall contain such information as may be
necessary for Ticketmaster to calculate Additional Payments and such other
information as Ticketmaster may reasonably request. Ticketmaster shall be
entitled upon reasonable notice to
3
User to access to the books
and records of User during Users normal business hours and at Users premises
for purposes of confirming and computing the amounts of Additional Payments
payable hereunder; provided, however, that access to such books and records by
Ticketmaster shall not unduly disrupt normal business operations of User.
5. Ticketmaster Rights.
Notwithstanding anything to the contrary herein, Ticketmaster is hereby
retaining the right for itself and for its affiliates to sell, by telephone
and/or at outlets, tickets or other evidences of admission or entitlement to
attend or receive transmission of the following events within the Market Area
and User shall have no right, license or interest in or to use the System or
the Mark with respect to said events:
(a) Any pay per
view events for cable systems, whether by use of an 800 number or otherwise;
and
(b) Special events,
which do not involve any traditional venues or tickets on sale to the general
public;
;
provided, however, that User will have the right and license, on a nonexclusive
basis, to use the System and the Mark with respect to pay per view events for
cable systems serving only the Market Area and no other areas outside of the
Market Area.
6. Title.
(a) Title,
beneficial interest and all ownership rights to the System, the Mark and all
related materials furnished by Ticketmaster and licensed under this Agreement
shall remain in Ticketmaster. User hereby acknowledges that the System, the
Mark and all related materials furnished by Ticketmaster hereunder are claimed
by Ticketmaster to be Ticketmasters proprietary information and trade secrets,
whether or not any portion thereof is, or may be, validly copyrighted,
patented, trademarked or otherwise protected.
(b) Users rights
in and to the System and the Mark furnished by Ticketmaster as a result of this
Agreement may not be assigned, licensed or otherwise transferred voluntarily, by
operation of law or otherwise, without the prior written consent of Ticketmaster.
(c) Ticketmaster
and/or User may add to, delete from or modify the System and all related
materials furnished by Ticketmaster hereunder in any manner, but no such
changes, however extensive, shall reduce Ticketmasters title to the System.
Any improvements made by User shall be and remain the confidential, proprietary
property and information of User except that Ticketmaster shall retain
4
all proprietary rights in the underlying System as so improved and User
shall not have any right to use the System as so improved without the prior
written consent of Ticketmaster (except pursuant to this Agreement).
(d) User
acknowledges and agrees that Ticketmaster has acquired all right, title and
interest in and to all equipment formerly used in connection with the Ticketron
System including, but not limited to, any such equipment or personal computers
used at any facility box offices or outlets in the Market Area, but excluding,
as to the Market Area, (i) the personal computers, printers and CRTs
currently installed and being used in the facility box office at the Capital
Centre in Landover, Maryland, (ii) the printers and CRTs currently
installed and being operated in the facility box offices at Baltimore Arena in
Baltimore, Maryland, and Patriot Center in Fairfax County, Virginia, and (iii) all
dumb CRTs formerly being used by Ticketron in the Market Area and attached
cabling (but not including any new CRTs).
7. Use of the System
and Mark.
(a) The System
(including any changes thereto made by or on behalf of Ticketmaster or User)
and all related materials may be used for, by or on behalf of User only in
connection with any computer equipment which User uses solely for, or solely in
connection with, computerized ticketing at the facility locations and remote
terminal locations within the Market Area. The System may not be utilized in
connection with any additional physical computer facilities (or other
computers), for any other reason or by or for any other person, firm,
corporation or other organization, without the prior written consent of
Ticketmaster.
(b) User agrees
that the Mark shall be the sole mark and name utilized by it in connection with
the System and the operation of its ticketing business, and shall not be used
with any other marks or names.
(c) The Mark shall
be used by User in accordance with such quality control standards as Ticketmaster
may from time to time prescribe for use by its non-affiliated licensees with
respect to products and services in connection with which the Mark is utilized.
Further, User shall only use the Mark together with such notations as
Ticketmaster may from time to time prescribe for purposes of advising the
public of service mark, trademark and similar protection. User shall cease all
use of the Mark ten (10) days after notice from Ticketmaster that User has
failed to comply with any such standard unless, within such ten (10)-day
5
period, User corrects such failure to the satisfaction of Ticketmaster.
(d) Neither User
nor any of its employees, agents or representatives
shall reproduce, duplicate or otherwise
copy the System or any related materials
furnished by Ticketmaster hereunder or any portion thereof, except for internal use
directly with the System. All such
materials and any copies thereof shall
be returned by User to Ticketmaster immediately following termination or
expiration of this Agreement.
8. Warranties. Ticketmaster
warrants to User that it is the owner
of the System end the Mark (or claims ownership rights to the Mark) and has the right to grant this license to User. Ticketmaster further
warrants that the System to be installed
in the Market Area will be substantially the same as, and will be capable of performing (if
used with the same equipment and
subject to limitations based on size and capacity) as, the basic system currently being
operated by Ticketmaster and its licensees
in San Francisco and Philadelphia. The System does not include certain custom enhancements such as direct line credit card authorization, disaster recovery,
off-line archiving of accounts, nitrun,
remote VAXNET software and the TM fraud program, all of which may be purchased separately. IN THE EVENT OF ANY
BREACH OF THE WARRANTY CONTAINED IN THE PREVIOUS SENTENCE, TICKETMASTERS SOLE RESPONSIBILITY SHALL
BE TO USE ITS BEST EFFORTS TO CORRECT
THE SYSTEM SO THAT IT PERFORMS IN ALL MATERIAL RESPECTS IN THE MANNER DESCRIBED ABOVE. THE
WARRANTIES CONTAINED IN THIS PARAGRAPH
8 ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
User hereby warrants to
Ticketmaster that (i) it is a duly
organized and validly existing limited partnership under the laws of the State of Maryland;
(ii) it has all necessary power
and authority to execute and perform this Agreement in accordance with its terms; (iii) the
execution and performance of this
Agreement by it will not breach, constitute a default under or violate any of Users governing
instruments or any agreement to which
it is a party or by which its assets may be bound; (iv) this Agreement is enforceable against
User in accordance with its terms; and (v) no
approvals or consents of any third party (including any government agency) is necessary in
order for User to execute and deliver
this Agreement and to perform hereunder.
9. Breach of Warranty.
(a) Ticketmaster
shall, at its expense, defend any
action brought against User to the extent such action is based on a claim that the use of the System or the Mark directly infringes any service
mark, trademark, copyright or
patent (Infringement Action) and Ticketmaster
shall
6
pay any and all costs, expenses, damages, recoveries, deficiencies and attorneys fees awarded against User in any Infringement
Action; provided that (i) Ticketmasters
obligations under this Paragraph 9(a) are conditioned on Users promptly notifying Ticketmaster of any Infringement Action (and all
claims relating thereto); and (ii) Ticketmaster
shall have sole control of the defense
and all negotiations for compromise of
any Infringement Action. Ticketmaster assumes no liability for the modification of the System, or any part thereof, unless such modification
is made by Ticketmaster. THE FOREGOING STATES THE SOLE AND
EXCLUSIVE LIABILITY OF TICKETMASTER
AND THE EXCLUSIVE REMEDY OF USER FOR
SERVICE MARK, TRADEMARK, COPYRIGHT OR PATENT INFRINGEMENT.
(b) Users remedy
for any breach of warranty shall be
limited solely to the remedies provided in this Agreement. All other liability, either in
contract or tort, is expressly disclaimed,
waived and negated. In no event shall Ticketmaster
be liable to User for any consequential
or exemplary damages resulting from a breach of any warranty contained in this Agreement or any implied warranty or any requirement existing
and applicable under the law, which
contrary to the intention of the parties hereto, the law status cannot be or is not disclaimed, waived or negated.
10. Restrictive Covenants.
(a) User recognizes
and acknowledges that the System and all
related materials furnished to User by Ticketmaster hereunder represent highly confidential, proprietary information of Ticketmaster
and constitutes a valuable, special
and unique asset of and to the business
of Ticketmaster. User covenants and agrees that, during and after the term hereof, no information, source
materials, design specifications, programs, flow charts, listings, magnetic tapes, disks,
punched cards, documentation or other supporting or related materials and information of any nature or
description whatsoever relating to the design
and operation of the System, or any
portion thereof, are made available or disclosed by User, its general partner or any of their principals, officers, directors, employees, agents
or representatives, directly or
indirectly, to any other person, firm or corporation, for any reason or purpose whatsoever or, directly or indirectly, used by User,
its general partner, or any of
their principals, employees, agents or representatives;
provided, however, that user may disclose pertinent portions of the System to those of its employees, agents
or representatives who have a need to have access to such portions of the System in order to enable User to use the
7
System within the Market Area, and further provided that the foregoing
restrictions shall not apply to information within the public domain. Ticketmaster shall have the right to bring
legal action to prevent a breach or threatened breach of this confidentiality
agreement and to pursue any other legal or equitable remedies for any such
breach or threatened breach, and User
shall reimburse Ticketmaster for all costs and expenses, including but not
limited to attorneys fees, incurred by Ticketmaster with respect thereto. User
shall notify Ticketmaster of any such breach immediately upon discovery of such
breach. Additionally, User shall use the
System only in accordance with the terms and conditions hereof; and after the
expiration of the term hereof, or earlier termination of this Agreement, User
shall: (i) cease all use of the System, the Mark and all related materials
furnished hereunder by Ticketmaster, (ii) return to Ticketmaster all
information, source materials, design specifications, programs, flow charts,
listings, magnetic tapes, disks, punched cards, documentation and other
supporting or related materials relating to the System (and copies thereof) , (iii) warrant that all such documentation
and materials (and copies thereof) have been returned to Ticketmaster or have
been destroyed, and (iv) warrant that any and all use of the Mark has ceased.
(b) During the term of
this Agreement, neither User, its general partner, nor any of their principals
subsidiaries, affiliates, successors or assigns shall, directly or indirectly, as principal, agent, shareholder, partner,
joint venturer, investor or in any other capacity or by any other means whatsoever, (i) compete
with Ticketmaster or its affiliates within the Market Area in the computerized
ticketing business or (ii) solicit the employment by User, its general
partner, or any of their principals, subsidiaries, affiliates, successors or assigns of any employee of
Ticketmaster or its affiliates.
(c) User acknowledges
that the remedy at law for any breach or threatened breach of the agreements
and covenants set forth in this Paragraph 10 will be inadequate, and Ticketmaster
shall be entitled to preliminary and permanent injunctive relief in any court of competent
jurisdiction, without the requirement of posting bond or any other condition
precedent thereto, for any breach or threatened breach of the agreements and
covenants contained in this Paragraph 10. Such remedy shall be in addition to, and
not in limitation of, any other remedy available to Ticketmaster at law, in
equity or otherwise, and may be obtained by Ticketmaster notwithstanding any
8
assertion by User that Ticketmasters claims to proprietary rights in
its confidential information is invalid or unenforceable.
(d) Termination or
expiration of this Agreement shall not terminate the continuing confidentiality
obligations imposed upon User, its employees, servants and agents by the terms
of this Paragraph 10.
(e) At Ticketmasters
request, User shall require each person permitted access to any of the
confidential information to execute a confidentiality agreement in such form and containing such terms as
Ticketmaster shall determine.
11. Termination.
(a) This Agreement
may be immediately terminated by Ticketmaster if:
(i) User shall dissolve
or commence winding up its activities to
effect dissolution, liquidation or termination, or shall make an
assignment for the benefit of creditors, or shall admit, in writing, its
inability to pay its debts as they become due, or shall file a voluntary
petition in bankruptcy, or shall be adjudicated a bankrupt or insolvent or
shall file any petition or answer seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, or shall file any answer
admitting or not contesting the material allegations of a petition filed against
it in any such proceedings, or shall seek, consent to or acquiesce in the
appointment of any trustee, receiver or liquidator of User or of all or any substantial
part of the properties of User;
(ii) User, its general
partner (or any of their principals, officers, directors, employees, agents or
representatives) shall breach, or threaten to breach, any of the
confidentiality obligations of User or any of them set forth in Paragraph 10
hereof; or
(iii) User shall fail
to pay when due any amounts owing Ticketmaster under, or to observe or perform
any terms or conditions of, this Agreement (other than Paragraph 10); provided,
that any such failure shall continue for a
9
period of seven (7) days after Ticketmaster has given written
notice thereof to User.
(b) This Agreement
may be immediately terminated by User if Ticketmaster shall dissolve or
commence winding up its activities to effect dissolution, liquidation or termination,
or shall make an assignment for the benefit of creditors, or shall admit, in
writing, its inability to pay its debts as they become due, or shall file a voluntary
petition in bankruptcy, or shall be adjudicated a bankrupt or insolvent or shall
file any petition or answer seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, or shall file any answer admitting or not contesting
the material allegations of a petition filed against it in any such
proceedings, or shall seek, consent to acquiesce in the appointment of any trustee,
receiver or liquidator of Ticketmaster or of all or any substantial part of the
properties of Ticketmaster.
(c) Upon any such
termination, (i) any past due or currently due payments (including Additional
Payments for the period from the beginning of the then current License Year
through the date of termination) shall become due and payable (or, if
applicable, prepaid Base Payments for the remainder of the current License Year
quarter shall be reimbursed), and (ii) this Agreement and the license
granted hereby shall forthwith be revoked and of no further force or effect
except as stated otherwise herein. Ticketmasters and Users right to terminate this Agreement shall be
in addition to and without prejudice to any other remedies such party may have,
except as otherwise specifically provided herein.
(d) Immediately
upon any such termination User shall surrender
to Ticketmaster, and Ticketmaster shall have the right peacefully to take,
possession of the System, and User shall further cease to use the Mark. Ticketmaster
shall thereafter own and hold the System and the Mark free of any claim or
interest of User. Without limiting the generality of the foregoing, User shall immediately
after any such termination legally change its name so that its name shall no longer
include the word Ticketmaster or any derivation thereof. User shall indemnify and hold Ticketmaster
harmless from and against any claim, loss, expense (including reasonable attorneys
fees) or liability whatsoever resulting from, due to or arising by reason of
any misuse of the System or Mark by User in any manner.
10
12. Enhancements
and support; Source Code.
(a) In the event
that the System shall, at any time during the term of this Agreement, fail to
perform in the manner warranted by Ticketmaster in Paragraph 8 hereof,
Ticketmaster shall, at no charge to User, correct the System in the manner
provided in said Paragraph 8.
(b) In the event
that Ticketmaster shall, at any time during the term of this Agreement, develop
and complete testing of enhancements to the version of software comprising a
part of the System then being used by User, and Ticketmaster shall make such
enhancement available to its non-affiliated licensees on a general basis,
Ticketmaster shall also make such enhancement available to User in
consideration of the payment by User of any and all out-of-pocket expenses
incurred by Ticketmaster (including, without limitation thereby, costs of
materials and personnel) in connection with making such enhancement available
to User, as well as the costs of all necessary new equipment.
(c) In the event
that Ticketmaster shall, at any time during the term of this Agreement, offer
to User, and User shall elect to receive, an upgrade to or improved version of
the software used in the System, the implementation of which would require a
conversion of Users database, User shall pay to Ticketmaster the sum of
$30,000 U.S. therefor, and Ticketmaster shall effect such conversion for and on
behalf of User.
(d) In the event
that User shall, at any time during the term of this Agreement, request that
Ticketmaster develop custom enhancements to the System to meet certain specific
performance criteria reasonably requested by User, Ticketmaster shall use its
reasonable efforts to cause such custom enhancements to be developed by its
programmers in consideration of the payment by User to Ticketmaster of the
prevailing rate then being charged by Ticketmaster to its other non-affiliated
licensees.
(e) In addition to
any other fees payable by it to Ticketmaster pursuant to this Paragraph 12,
User shall be responsible, and shall immediately reimburse Ticketmaster upon
invoice, for any and all expenses (including travel) incurred by Ticketmasters
employees, agents and representatives pursuant to or in connection with
Ticketmasters performance under Paragraph 12(b), (c) and (d) above.
(f) During the term
of this Agreement Ticketmaster shall furnish User with the access code to the
System at least
11
30 days prior to the date
upon which that access code is to take effect.
13. Documentation. Ticketmaster
will supply User with documentation which will enable User, after the initial
training of its personnel, to operate the System.
14. Equipment. During the
term of this Agreement, User shall have the right to purchase all equipment it
may require from time to time to be used entirely or in material part with the
System from or through Ticketmaster. The cost of any such equipment which is
manufactured by a party other than by Ticketmaster shall be at Ticketmasters
cost plus ten percent (10%). The cost of any such equipment manufactured in
whole or in part for or by Ticketmaster shall be at Ticketmasters then current
market rate to its non-affiliated licensees for such equipment. The cost of
delivering and installing such equipment shall be borne solely by User.
15. Indemnification. User shall
indemnify and hold Ticketmaster, and its
subsidiaries, affiliates, successors, assigns, officers, directors, employees,
representatives and agents, harmless from and against any and all losses, liabilities,
damages, claims, actions, causes of action and expenses (including reasonable
attorneys fees) that said indemnified parties may incur or be responsible for
as a result or by virtue of the operation of User, including, without
limitation thereby, Users use of the System, but excluding those costs,
expenses, damages, recoveries, deficiencies and attorneys fees awarded in any
Infringement Action pursuant to
Paragraph 10(a) above.
16. Right of First Refusal. User and, by
their execution of this Agreement in the space provided below, the holders of
all of the general and limited partnership interests of User (the Partners),
agree that in the event (i) User receives an offer from a third party to
purchase for cash or other property any or all of the assets of User (including
this Agreement) or (ii) the Partners, or any of them, receive an offer
from a third party to purchase for cash or other property any or all of the general
or limited partnership interests of User, which either User or the Partners
wish to accept, User or the Partners, as applicable, will cause such offer to
be reduced to writing and shall deliver written notice of such offer to
Ticketmaster. Ticketmaster may designate one or more persons to accept the
right of first refusal contained in this Section 16. The notice from User
or the Partners shall also contain an irrevocable offer by them to sell the covered assets or partnership interests to Ticketmaster or its
designees at a price equal to the price, and upon substantially the same terms
and conditions as the terms and conditions contained in, the offer transmitted
with the notice; provided, however, that if the price is not payable solely in
cash, then User or the Partners, as applicable, shall advise Ticketmaster of
the reasonable value Ticketmaster of such non-cash consideration (which
reasonable value Ticketmaster
12
may
contest) and Ticketmaster shall be permitted to deliver cash in the amount
thereof in substitution for such non-cash consideration. Ticketmaster or its
designees shall have the right and option, exercisable within 15 days after
delivery of the notice from User or the Partners, to accept such offer as to
all, but not less than all, of the assets or partnership interests affected by
the offer. The closing of the purchase of the assets or partnership interests
covered by the offer by Ticketmaster or its designees shall take place at the
principal office of Ticketmaster (or such other place as may be agreed upon by the
parties) on the fifth business day after the expiration of the 15-day period
following the giving of the notice. At such closing, Ticketmaster or its
designees shall make payment of the purchase price against delivery of the
assets or partnership interests covered by the offer, together with appropriate
instruments of assignment and transfer. If at the end of the 15-day period
following the giving of notice by User or the Partners, neither Ticketmaster nor
its designees have accepted the offer as to all of the assets and partnership
interests covered by the offer, then User and the Partners shall have 20 days
in which to sell the assets or the partnership interests covered by the offer
at a price equal to that contained in the notice and upon terms and conditions
not more favorable to the offeror than were contained in the notice. If, at the
end of such 20-day period, User or the Partners have not completed the sale of
the assets or the partnership interests covered by the offer, then they shall
no longer be permitted to sell such assets or partnership interests pursuant to
this Section 16 without again fully complying with the provisions of this
Section 16. During the term of this Agreement, User shall keep this Agreement
free and clear of any liens, pledges, security interests and encumbrances of
any kind of nature whatsoever, and the Partners shall neither sell, assign,
transfer, give, donate or otherwise dispose of their partnership interests
(except in accordance with the terms of this section 16).
17. Assignment. User may not
assign its rights, duties, and/or obligations hereunder, nor may the System, the
Mark or any materials furnished by Ticketmaster
hereunder be transferred, assigned, sublicensed or otherwise disposed of by
User, without the prior written consent of Ticketmaster; provided, however,
that User may assign this Agreement to an entity controlled by, controlling or
under common control with User solely as part of an internal reorganization of
User and its affiliates so long as such entity becomes a party to and agrees to
be bound by the terms and conditions of this Agreement.
18. Binding Effect. This
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective, successors and assigns.
19. Entire Agreement; Amendment. This
Agreement constitutes the entire agreement between the parties hereto relative
to the
13
subject matter hereof, and supersedes any and all prior agreements,
written or oral, between the parties relating to such subject matter. No
modifications or amendments of any of the terms hereof shall be valid or
binding unless made in writing and signed by Ticketmaster and User.
20. Waiver. No waiver of
any breach of any provision of this Agreement shall constitute a waiver of any
prior, concurrent or subsequent breach of the same or any other provision
hereof, and no waiver shall be effective unless made in writing.
21. Attorneys Fees. In case of
any action or proceeding to compel compliance with, or for a breach of, the
provisions of this Agreement, the prevailing party shall be entitled to recover from the other
party all costs of such action or proceeding including, but not limited to,
reasonable attorneys fees.
22. Notices. All notices which
are required or permitted hereunder shall be
sufficient if given in writing and delivered personally, by telecopy or by
registered or certified mail, postage prepaid, addressed to the party receiving
such notice at the following address or at such other address as may be
requested in writing by either party pursuant to this Paragraph 22:
If to Ticketmaster, to:
|
|
Ticketmaster Corporation
|
|
|
3701 Wilshire Boulevard
|
|
|
7th Floor
|
|
|
Los Angeles, California 90010
|
|
|
Attn:
|
Fredric D. Rosen
|
|
|
|
Ned S. Goldstein
|
|
|
|
With
a copy to:
|
|
Neal Gerber & Eisenberg
|
|
|
Two North LaSalle Street
|
|
|
Suite 2200
|
|
|
Chicago, Illinois 60602
|
|
|
Attn:
|
Norman J. Gantz, Esq.
|
|
|
|
If to User, to:
|
|
Ticketmaster Group Limited Partnership
|
|
|
c/o Abe Pollin Tickets, Inc.
|
|
|
One Harry S. Truman Drive
|
|
|
Landover, Maryland 20785
|
|
|
Attn:
|
Abe Pollin
|
|
|
|
With a copy to:
|
|
Arent Fox Kintner Plotkin & Kahn
|
|
|
1050 Connecticut Avenue, N.W.
|
|
|
Washington, D.C. 20036
|
|
|
Attn:
|
David M. Osnos and
|
|
|
|
Daniel F. Van Horn
|
23. Severability. If any provision
of this Agreement shall be held invalid or unenforceable by any court of
competent
14
jurisdiction, the
remaining provisions of this Agreement shall remain in full force and effect. Further, should any provision of this Agreement
be deemed unenforceable by virtue of its scope, such provision shall be deemed
limited to the extent necessary to render the same enforceable.
24. Law to Govern. The validity construction and
enforceability of this Agreement shall be governed in all respects by the laws
of the State of Illinois, without regard to its conflict of laws rules. Any
legal proceeding or other action taken or to be taken by any of the parties hereto
relative to this Agreement or the transactions contemplated hereby, or to
enforce or interpret the terms and conditions of this Agreement, shall be
instituted in a state or Federal court located in Cook County, Illinois. The parties hereto hereby irrevocably consent to the jurisdiction of any such court
and irrevocably waive, to the fullest extent that they may effectively do so,
the defense of an inconvenient forum to the maintenance of such proceeding or
action. The parties hereto agree that a
final judgment, from which no further appeal may be taken or from which no
further petition for review may be filed, in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the judgement
or in any other manner provided by law.
25. Headings. The headings of paragraphs in this Agreement have
been inserted for the convenience of reference only and shall in no way
restrict or otherwise modify the terms of this Agreement.
26. Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original, but each
of which together shall constitute one and the same document.
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day
and year first above written.
|
TICKETMASTER CORPORATION
|
|
|
|
|
|
By:
|
/s/ [ILLEGIBLE]
|
|
Title:
|
[ILLEGIBLE]
|
|
|
|
TICKETMASTER GROUP LIMITED
PARTNERSHIP
|
|
|
|
By: AP
TICKETS, INC.,
its General Partner
|
|
|
|
By:
|
/s/ [ILLEGIBLE]
|
|
Title:
|
[ILLEGIBLE]
|
|
|
|
|
15
AGREED TO AS OF THE DATE
HEREOF FOR PURPOSES OF
SECTION 16
GENERAL PARTNER:
AP TICKETS, INC.,
a Maryland corporation
By:
|
/s/ [ILLEGIBLE]
|
|
Title:
|
[ILLEGIBLE]
|
|
|
|
|
|
LIMITED PARTNER:
|
|
|
|
CENTER GROUP LIMITED PARTNERSHIP,
a Maryland limited partnership
|
|
|
|
|
|
By:
|
Abe Pollin Sports, Inc.,
its general partner
|
|
|
|
|
|
|
|
By:
|
/s/ [ILLEGIBLE]
|
|
Title:
|
[ILLEGIBLE]
|
|
16
EXHIBIT I
MARKET AREA
(a) The State of
Maryland.
(b) Washington, D.C.,
and
(c) The independent
cities of Alexandria, Fairfax, Falls Church, Manassas and Manassas Park, and the Counties of Arlington, Loudoun, Fairfax and Prince
William, in the Commonwealth of Virginia.
EXHIBIT II
ASSIGNED AGREEMENTS
Centre
Group Limited
Partnership (Capital Centre)
Stage
Right Production
Baltimore
Museum of Art
Fast
Lane Presents
The
Washington Savoyards
The
Washington Performing Arts Society
L Afrique, Inc. (The
Kilimanjaro Club)
InterArt Project
Centre
Group Limited Partnership (Baltimore Arena)
DAR
Constitution Hall
Washington
Ballet, Inc.
D.C.
Armory Board (R.F.K.
Stadium and D.C. Armory)
Morgan
State University Fine Arts
The
National Aquarium in Baltimore, Inc.
G
Street Express
Centre
Group Limited Partnership (Patriot Center)
Col
Arts Associates, Inc. (Merriweather Post Pavilion)
George
Washington University (Lisner Auditorium, Smith Center)
Lyric
Opera House
Towson
State University
The
American University (Khashoggi Center)
The
Kemper Open Golf Tournament
The
Baltimore Zoo
Blues
Alley
Birchmere Inc.
Cellar
Door Productions
Alden
Theatre (no contract)
The
Bayou (no contract)
Fords
Theatre
Hammerjacks
The
Kennedy Center
The
Olney Theatre
Pier
6
TicketPlace
(no contract)
University
of Maryland
Washington
Performing Arts Society
Wild
World
John
Yates Productions (no contract)
Wolf
Trap Barns (no contract)
Wolf Trap Filene Center (no contract)
BACI
Productions
Dimensions
Unlimited
IMP/9:30
Club (no contract)
Meyerhoff
Symphony Hall (no contract)
EX-10.22
14
a2186551zex-10_22.htm
EXHIBIT 10.22
Exhibit 10.22
EMPLOYMENT
AGREEMENT
THIS EMPLOYMENT
AGREEMENT (Agreement) is entered into by and between Brian Regan (Employee)
and Ticketmaster L.L.C., a Virginia limited liability company (the Company),
as of May , 2008 and shall be effective as of June ,
2008 (the Effective Date).
WHEREAS, the
Company desires to establish its right to the services of Employee, in the
capacity described below, on the terms and conditions hereinafter set forth,
and Employee is willing to accept such employment on such terms and conditions.
NOW, THEREFORE, in
consideration of the mutual agreements hereinafter set forth, Employee and the
Company have agreed and do hereby agree as follows:
1A. EMPLOYMENT. The Company agrees to employ Employee as EVP,
Chief Financial Officer and Employee accepts and agrees to such
employment. During Employees employment
with the Company, Employee shall do and perform all services and acts necessary
or advisable to fulfill the duties and responsibilities as are commensurate and
consistent with Employees position and shall render such services on the terms
set forth herein. Employee shall render
such other services for the Company and corporations controlled by, under
common control with or controlling, directly or indirectly, the Company, and to
successor entities and assignees of the Company (each, a Company Affiliate)
as the Company may from time to time reasonably request and as shall be
consistent with the duties Employee is to perform form the Company and with
Employees experience. During Employees
employment with the Company, Employee shall report directly to the President
and CEO, currently Sean Moriarty, or such other person as from time to time may
be designated by the Company (hereinafter referred to as the Reporting Officer)
and shall maintain current or a comparable title at the discretion of the
Company. Employee shall have such powers
and duties with respect to the Company as may reasonably be assigned to
Employee by the Reporting Officer, to the extent consistent with Employees
position and status. Employee agrees to
devote all of Employees working time, attention and efforts to the Company and
to perform the duties of Employees position in accordance with the Companys
policies as in effect from time to time.
2A. TERM OF AGREEMENT. The term (Term) of this Agreement shall
commence on the Effective Date and shall continue until for a period of three (3) years,
unless sooner terminated in accordance with the provisions of Section 1 of
the Standard Terms and Conditions attached hereto. For the avoidance of doubt,
the parties post-termination obligations including but not limited to the
confidentiality, covenant not to compete, consulting, non-solicitation of
employees, and non-solicitation of clients provisions in the Agreement shall
survive the Term of Employees employment hereunder.
3A. COMPENSATION.
(a) BASE SALARY. During the Term, the Company shall pay
Employee an annual base salary of $375,000 (the Base Salary), payable in
equal biweekly installments or in accordance with the Companys payroll
practice as in effect from time to time.
For all purposes under this Agreement, the term Base Salary shall
refer to Base Salary as in effect from time to time.
(b) SIGNING BONUS. The Company shall pay Employee a signing
bonus in the amount of $175,000, payable the first pay-period following
Employees start date. Such signing
bonus is subject to forfeiture in the event Employee resigns without Good
Reason or is terminated for cause prior to the first anniversary of Employees
start date.
(c) DISCRETIONARY BONUS. During the Term, Employee shall be eligible
to receive discretionary annual bonuses.
Employee shall receive a minimum annual bonus in 2009 of $175,000,
provided Employee is employed at such time that bonuses for similarly situated
employees are paid.
1
(d) RESTRICTED STOCK
UNITS. Employee will receive under IACs Stock & Annual Incentive
Plan an award of restricted stock units (the Restricted Stock Units)
representing shares of common stock of IAC/InterActiveCorp in the amount of
20,000 units, subject to the approval of the Compensation/Benefits Committee of
the Board of Directors of IAC/InterActiveCorp. The award will be governed by a
Restricted Stock Unit agreement.
(e) STOCK OPTIONS. Employee
will receive under IACs Stock & Annual Incentive Plan an award of
stock options (the Stock Options) representing shares of common stock of
IAC/InterActiveCorp in the amount of 150,000 options, subject to the approval
of the Compensation/Benefits Committee of the Board of Directors of
IAC/InterActiveCorp. The award will be governed by a Stock Options agreement.
(f) BENEFITS. From the Effective Date through the date of
termination of Employees employment with the Company for any reason, Employee
shall be entitled to participate in any welfare, health and life insurance and
pension benefit and incentive programs as may be adopted from time to time by
the Company. Without limiting the
generality of the foregoing, Employee shall be entitled to the following
benefits:
(i) Reimbursement for
Business Expenses. During the Term,
the Company shall reimburse Employee for all reasonable and necessary expenses
incurred by Employee in performing Employees duties for the Company, on the
same basis as similarly situated employees and in accordance with the Companys
policies as in effect from time to time.
(ii) Vacation. During the Term, Employee shall be entitled
to paid vacation in accordance with the plans, policies, programs and practices
of the Company applicable to similarly situated employees of the Company
generally.
(iii) Relocation Expenses. Except as otherwise prohibited by applicable
law or regulations, the Company shall provide relocation assistance to Employee
per the IAC / Ticketmaster Relocation Policy.
4A. NOTICES. All notices and other communications under
this Agreement shall be in writing and shall be given by first-class mail,
certified or registered with return receipt requested or hand delivery
acknowledged in writing by the recipient personally, and shall be deemed to
have been duly given three days after mailing or immediately upon duly
acknowledged hand delivery to the respective persons named below:
If to the Company: Ticketmaster L.L.C.
8800
Sunset Boulevard
West Hollywood, CA 90069
Attention: General Counsel
With a copy to: InterActiveCorp.
555 West 18th Street
New York, New York 10011
Attention: General Counsel
If to Employee:
Either party may change
such partys address for notices by notice duly given pursuant hereto.
2
5A. GOVERNING LAW;
JURISDICTION. This Agreement and the
legal relations thus created between the parties hereto shall be governed by
and construed under and in accordance with the internal laws of the State of
California without reference to the principles of conflicts of laws. Any and all disputes between the parties
which may arise pursuant to this Agreement will be heard and determined before
an appropriate federal court in California, or, if not maintainable therein,
then in an appropriate California state court.
The parties acknowledge that such courts have jurisdiction to interpret
and enforce the provisions of this Agreement, and the parties consent to, and
waive any and all objections that they may have as to, personal jurisdiction
and/or venue in such courts.
6A. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument. Employee expressly understands and
acknowledges that the Standard Terms and Conditions attached hereto are
incorporated herein by reference, deemed a part of this Agreement and are
binding and enforceable provisions of this Agreement. References to this Agreement or the use of
the term hereof shall refer to this Agreement and the Standard Terms and
Conditions attached hereto, taken as a whole.
IN WITNESS
WHEREOF, the Company has caused this Agreement to be executed and delivered by
its duly authorized officer and Employee has executed and delivered this Agreement
as of
, 2008
TICKETMASTER
L.L.C.
8800 Sunset
Boulevard
West Hollywood,
CA 90069
3
STANDARD TERMS AND
CONDITIONS
1. TERMINATION OF
EMPLOYEES EMPLOYMENT.
(a) DEATH. In the event Employees employment hereunder
is terminated by reason of Employees death, the Company shall pay Employees
designated beneficiary or beneficiaries, within 30 days of Employees death in
a lump sum in cash, Employees Base Salary through the end of the month in
which death occurs and any Accrued Obligations (as defined in paragraph 1(f) below).
(b) DISABILITY. If, as a result of Employees incapacity due
to physical or mental illness (Disability), Employee shall have been absent
from the full-time performance of Employees duties with the Company for a
period of four consecutive months and, within 30 days after written notice is
provided to Employee by the Company (in accordance with Section 4A above),
Employee shall not have returned to the full-time performance of Employees
duties, Employees employment under this Agreement may be terminated by the
Company for Disability. During any
period prior to such termination during which Employee is absent from the
full-time performance of Employees duties with the Company due to Disability,
the Company shall continue to pay Employees Base Salary at the rate in effect
at the commencement of such period of Disability, offset by any amounts payable
to Employee under any disability insurance plan or policy provided by the
Company. Upon termination of Employees
employment due to Disability, the Company shall pay Employee within 30 days of
such termination (i) Employees Base Salary through the end of the month
in which termination occurs in a lump sum in cash, offset by any amounts
payable to Employee under any disability insurance plan or policy provided by
the Company; and (ii) any Accrued Obligations (as defined in paragraph 1(f) below).
(c) TERMINATION FOR
CAUSE. The Company may terminate
Employees employment under this Agreement for Cause at any time prior to the
expiration of the Term. As used herein,
Cause shall mean: (i) the plea
of guilty or nolo contendere to, or conviction for, the commission of a felony
offense by Employee; provided, however, that after indictment,
the Company may suspend Employee from the rendition of services, but without
limiting or modifying in any other way the Companys obligations under this
Agreement; (ii) a material breach by Employee of a fiduciary duty owed to
the Company; (iii) a material breach by Employee of any of the covenants
made by Employee in Section 2 hereof; (iv) the willful or gross
neglect by Employee of the material duties required by this Agreement; (v) unsatisfactory
performance of Employees duties or responsibilities as determined by the
Companys Board of Directors; provided that
the Company has given Employee written notice specifying the unsatisfactory
performance of his duties and responsibilities, which remains uncorrected by
the Employee after the lapse of 30 days following the receipt of the written
notice (vi) a material breach by the Employee of his duty not to engage in
any transaction that represents, directly or indirectly, self-dealing with the
Company or any Company Affiliates which has not been approved by a majority of
the disinterested directors of the Companys Board of Directors, if such
material breach remains uncured after the lapse of 30 days following the date
that the Company has given the Employee written notice thereof; (vii) any
act of misappropriation, embezzlement, intentional fraud or similar contact involving
the Company or any Company Affiliates; (viii) intentional infliction of
any damage of a material nature to any property of the Company or any Company
Affiliates; (ix) a violation of any Company policy pertaining to ethics,
wrongdoing or conflicts of interest; and (x) the repeated non-prescription
abuse of any controlled substance which, in any case described in this clause,
the Companys Board of Directors reasonably determines renders the Employee
unfit to serve in his capacity as an officer or employee of the Company or any
Company Affiliates. In the event of
Employees termination for Cause, this Agreement shall terminate without
further obligation by the Company, except for the payment of any Accrued
Obligations (as defined in paragraph 1(f) below).
(d) TERMINATION BY THE
EMPLOYEE FOR GOOD REASON. The
Employee may terminate this Agreement at any time prior to the expiration of
the Term for Good Reason, which
4
is defined as any
of the following: (i) failure of the Company to comply with a material
item in the agreement; (ii) a substantial or unusual increase in the
Employees duties and responsibilities without an offer of additional
reasonable compensation as determined by the Company; (iii) a substantial
or unusual decrease in the Employees duties, responsibilities and/or
compensation. Prior to the Employees
termination of this Agreement for Good Reason, the Employee must provide the
Company with thirty (30) days advance written notice in which the Company may
attempt to resolve the issue.
(e) TERMINATION BY THE
COMPANY OTHER THAN FOR DEATH, DISABILITY OR CAUSE. If Employees employment is terminated by the
Company for any reason other than Employees death or Disability or for Cause,
then (i) the Company shall pay Employee the Base Salary through the end of
the Term over the course of the then remaining Term; and (ii) the Company
shall pay Employee within 30 days of the date of such termination in a lump sum
in cash any Accrued Obligations (as defined in paragraph 1(f) below). The payment to Employee of the severance
benefits described in this Section 1(d) shall be subject to Employees
execution and non-revocation of a general release of the Company and its
affiliates in a form substantially similar to that used for similarly situated
executives of the Company and its affiliates.
(f) MITIGATION; OFFSET. In the event of termination of Employees
employment prior to the end of the Term, Employee shall use reasonable best
efforts to seek other employment and to take other reasonable actions to
mitigate the amounts payable under Section 1 hereof. If Employee obtains other employment during
the Term, the amount of any payment or benefit provided for under Section 1
hereof which has been paid to Employee shall be refunded to the Company by
Employee in an amount equal to any compensation earned by Employee as a result
of employment with or services provided to another employer after the date of
Employees termination of employment and prior to the otherwise applicable
expiration of the Term, and all future amounts payable by the Company to
Employee during the remainder of the Term shall be offset by the amount earned
by Employee from another employer. Any non-cash
compensation (including unvested equity) received from a subsequent employer
will not be considered as compensation to be offset against amounts paid or to
be paid to Employee in the event of termination without cause. For purposes of this Section 1(e),
Employee shall have an obligation to inform the Company regarding Employees
employment status following termination and during the period encompassing the
Term.
(g) ACCRUED OBLIGATIONS. As used in this Agreement, Accrued
Obligations shall mean the sum of (i) any portion of Employees Base
Salary through the date of death or termination of employment for any reason,
as the case may be, which has not yet been paid; and (ii) any compensation
previously earned but deferred by Employee (together with any interest or
earnings thereon) that has not yet been paid.
2. CONFIDENTIAL
INFORMATION; NON-SOLICITATION; AND PROPRIETARY RIGHTS.
(a) CONFIDENTIALITY. Employee acknowledges that while employed by
the Company Employee will occupy a position of trust and confidence. Employee shall not, except as may be required
to perform Employees duties hereunder or as required by applicable law,
without limitation in time or until such information shall have become public
other than by Employees unauthorized disclosure, disclose to others or use,
whether directly or indirectly, any Confidential Information regarding the
Company or any of its subsidiaries or affiliates. Confidential Information shall mean
information about the Company or any of its subsidiaries or affiliates, and
their clients and customers that is not disclosed by the Company or any of its
subsidiaries or affiliates for financial reporting purposes and that was
learned by Employee in the course of employment by the Company or any of its
subsidiaries or affiliates, including (without limitation) any proprietary
knowledge, trade secrets, data, formulae, information and client and customer
5
lists and all
papers, resumes, and records (including computer records) of the documents
containing such Confidential Information.
Employee acknowledges that such Confidential Information is specialized,
unique in nature and of great value to the Company and its subsidiaries or
affiliates, and that such information gives the Company and its subsidiaries or
affiliates a competitive advantage.
Employee agrees to deliver or return to the Company, at the Companys
request at any time or upon termination or expiration of Employees employment
or as soon thereafter as possible, all documents, computer tapes and disks,
records, lists, data, drawings, prints, notes and written information (and all
copies thereof) furnished by the Company and its subsidiaries or affiliates or
prepared by Employee in the course of Employees employment by the Company and
its subsidiaries or affiliates. As used
in this Agreement, subsidiaries and affiliates
shall mean any company controlled by, controlling or under common control with
the Company.
(b) POST-SEPARATION COOPERATION. During the one year period commencing immediately
upon the termination of Employees employment for any reason (other than
termination resulting from Employees death), Employee shall be available for
consultation with the Company and its subsidiaries and affiliates concerning
their general operations and the industries in which they engage in business,
as may be reasonably required without jeopardizing Employees then full-time,
non-Ticketmaster Business employment opportunities; provided, however, that
Employee shall not be obligated to devote more than 24 hours during such one
year period to the performance of such duties.
The Company agrees to reimburse Employee for all reasonable and
necessary business expenses incurred by Employee in the performance of such
consultation in accordance with the Companys reimbursement policy, including,
without limitation, the submission of supporting evidence as reasonably
required by the Company.
(c) NON-SOLICITATION OF
EMPLOYEES. Employee recognizes that
he will possess confidential information about other employees of the Company
and its subsidiaries or affiliates relating to their education, experience,
skills, abilities, compensation and benefits, and inter-personal relationships
with suppliers to and customers of the Company and its subsidiaries or affiliates. Employee recognizes that the information he
will possess about these other employees is not generally known, is of
substantial value to the Company and its subsidiaries or affiliates in
developing their respective businesses and in securing and retaining customers,
and will be acquired by Employee because of Employees business position with
the Company. Employee agrees that,
during Employees employment and during the period commencing immediately upon
the termination of Employees employment for any reason and ending on the later
of (i) the end of the Term and (ii) the second anniversary of the
date of termination of Employees employment (the Non-Solicit Period),
Employee will not, directly or indirectly, solicit or recruit any employee of
the Company or any of its subsidiaries or affiliates for the purpose of being
employed by Employee or by any business, individual, partnership, firm,
corporation or other entity on whose behalf Employee is acting as an agent,
representative or employee and that Employee will not convey any such
confidential information or trade secrets about other employees of the Company
or any of its subsidiaries or affiliates to any other person except within the
scope of Employees duties hereunder. The mere fact that Employee is an
employee of a company, business, partnership, firm, corporation or other entity
soliciting employees of the Company, without the Employees involvement in the
solicitation, will not cause Employee to violate this provision.
(d) NON-COMPETITION. During Employees employment and during the
Non-Solicit Period, Employee shall not, without the prior written consent of
the Company, directly or indirectly engage in or assist any activity which is
the same as, similar to or competitive with the Ticketmaster Businesses (other
than on behalf of the Company or any of its subsidiaries or affiliates)
including, without limitation, whether such engagement or assistance is an
officer, director, proprietor, employee, partner, investor (other than as a
holder of less than 5% of the outstanding capital stock of a publicly traded
corporation), guarantor, consultant, advisor, agent, sales representative or
other participant, anywhere in the world that the Company or any of its
subsidiaries or affiliates has been engaged, including, without limitation, the
United States, Canada, Mexico, England,
6
Ireland, Scotland,
Europe, Australia and China. Nothing
herein shall limit Employees ability to own interests in or manage entities
which sell tickets as an incidental part of their primary business (e.g. cable
networks, on-line computer services, sports teams, arenas, hotels, cruise
lines, theatrical and movie productions and the like) and which do not hold
themselves out generally as competitors of the Company or any of its
subsidiaries or affiliates. The Ticketmaster
Businesses are defined as (A) the principal businesses of the Company as
of the date hereof, namely (i) the computerized sale and/or resale of
tickets for sporting, theatrical, live theatrical, live events, musical or any
other events on behalf of various venues and promoters through distribution
channels currently being utilized by the Company or any of its subsidiaries or
affiliates, (ii) the provision of fan club and marketing services to
artists, and (iii) the promotion of live events, and (B) the
principal businesses of the Company at the time that the Employee ceases to be
a Company employee. The determination of
the principal businesses of the Company at the time the Employee ceases to be a
Company employee will be made with reference to the definition of the principal
businesses as of the date hereof in terms of the relative importance of the
businesses to the Company at that time compared to its other activities.
(e) NON-SOLICITATION OF
CUSTOMERS. During Employees
employment and during the Non-Solicit Period, Employee shall not solicit any
Customers of the Company or any of its subsidiaries or affiliates or encourage
(regardless of who initiates the contact) any such Customers to use the
facilities or services of any competitor of the Company or any of its
subsidiaries or affiliates. Customer
shall mean any person who engages the Company or any of its subsidiaries or
affiliates to sell, on its behalf as agent, tickets to the public.
(f) PROPRIETARY RIGHTS;
ASSIGNMENT. All Employee
Developments shall be made for hire by the Employee for the Company or any of
its subsidiaries or affiliates. Employee
Developments means any idea, discovery, invention, design, method, technique,
improvement, enhancement, development, computer program, machine, algorithm or
other work or authorship that (i) relates to the business or operations of
the Company or any of its subsidiaries or affiliates, or (ii) results from
or is suggested by any undertaking assigned to the Employee or work performed
by the Employee for or on behalf of the Company or any of its subsidiaries or
affiliates, whether created alone or with others, during or after working
hours. All Confidential Information and
all Employee Developments shall remain the sole property of the Company or any
of its subsidiaries or affiliates. The
Employee shall acquire no proprietary interest in any Confidential Information
or Employee Developments developed or acquired during the Term. To the extent the Employee may, by operation
of law or otherwise, acquire any right, title or interest in or to any
Confidential Information or Employee Development, the Employee hereby assigns
to the Company all such proprietary rights.
The Employee shall, both during and after the Term, upon the Companys
request, promptly execute and deliver to the Company all such assignments,
certificates and instruments, and shall promptly perform such other acts, as
the Company may from time to time in its discretion deem necessary or desirable
to evidence, establish, maintain, perfect, enforce or defend the Companys
rights in Confidential Information and Employee Developments.
(g) COMPLIANCE WITH
POLICIES AND PROCEDURES. During the
Term, Employee shall adhere to the policies and standards of professionalism
set forth in the Companys Policies and Procedures as they may exist from time
to time.
(h) REMEDIES FOR BREACH. Employee expressly agrees and understands
that Employee will notify the Company in writing of any alleged breach of this
Agreement by the Company, and the Company will have 30 days from receipt of
Employees notice to cure any such breach.
Employee expressly agrees and understands that the remedy at law for any
breach by Employee of this Section 2 will be inadequate and that damages
flowing from such breach are not usually susceptible to being measured in
monetary terms. Accordingly, it is
acknowledged that upon Employees violation of any provision of this Section 2
the Company shall be entitled to obtain from any court of competent
jurisdiction immediate injunctive relief and obtain a temporary order
7
restraining any
threatened or further breach as well as an equitable accounting of all profits
or benefits arising out of such violation.
Nothing in this Section 2 shall be deemed to limit the Companys
remedies at law or in equity for any breach by Employee of any of the
provisions of this Section 2, which may be pursued by or available to the
Company.
(i) SURVIVAL OF
PROVISIONS. The obligations
contained in this Section 2 shall, to the extent provided in this Section 2,
survive the termination or expiration of Employees employment with the Company
and, as applicable, shall be fully enforceable thereafter in accordance with
the terms of this Agreement. If it is
determined by a court of competent jurisdiction in any state that any
restriction in this Section 2 is excessive in duration or scope or is
unreasonable or unenforceable under the laws of that state, it is the intention
of the parties that such restriction may be modified or amended by the court to
render it enforceable to the maximum extent permitted by the law of that state.
3. TERMINATION OF
PRIOR AGREEMENTS. This Agreement
constitutes the entire agreement between the parties and terminates and
supersedes any and all prior agreements and understandings (whether written or
oral) between the parties with respect to the subject matter of this
Agreement. Employee acknowledges and
agrees that neither the Company nor anyone acting on its behalf has made, and
is not making, and in executing this Agreement, the Employee has not relied
upon, any representations, promises or inducements except to the extent the
same is expressly set forth in this Agreement.
Employee hereby represents and warrants that by entering into this
Agreement, Employee will not rescind or otherwise breach an employment
agreement with Employees current employer prior to the natural expiration date
of such agreement.
4. ASSIGNMENT;
SUCCESSORS. This Agreement is
personal in its nature and none of the parties hereto shall, without the
consent of the others, assign or transfer this Agreement or any rights or
obligations hereunder, provided that, in the event of the merger,
consolidation, transfer, or sale of all or substantially all of the assets of
the Company with or to any other individual or entity, this Agreement shall,
subject to the provisions hereof, be binding upon and inure to the benefit of
such successor and such successor shall discharge and perform all the promises,
covenants, duties, and obligations of the Company hereunder, and all references
herein to the Company shall refer to such successor.
5. WITHHOLDING. The Company shall make such deductions and
withhold such amounts from each payment and benefit made or provided to
Employee hereunder, as may be required from time to time by applicable law,
governmental regulation or order.
6. HEADING REFERENCES. Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
References to this Agreement or the use of the term hereof shall
refer to these Standard Terms and Conditions and the Employment Agreement
attached hereto, taken as a whole.
7. WAIVER;
MODIFICATION. Failure to insist upon
strict compliance with any of the terms, covenants, or conditions hereof shall
not be deemed a waiver of such term, covenant, or condition, nor shall any
waiver or relinquishment of, or failure to insist upon strict compliance with,
any right or power hereunder at any one or more times be deemed a waiver or
relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any
respect except by a writing executed by each party hereto. Notwithstanding anything to the contrary
herein, neither the assignment of Employee to a different Reporting Officer due
to a reorganization or an internal restructuring of the Company or its
affiliated companies nor a change in the title of the Reporting Officer shall
constitute a modification or a breach of this Agreement.
8. SEVERABILITY. In the event that a court of competent
jurisdiction determines that any portion of this Agreement is in violation of
any law or public policy, only the portions of this Agreement that violate such
law or public policy shall be stricken.
All portions of this Agreement that do not violate any statute or public
policy shall continue in full force and effect.
Further, any court order striking any portion of this
8
Agreement shall modify
the stricken terms as narrowly as possible to give as much effect as possible
to the intentions of the parties under this Agreement.
9. INDEMNIFICATION. The Company shall indemnify and hold Employee
harmless for acts and omissions in Employees capacity as an officer, director
or employee of the Company to the maximum extent permitted under applicable
law; provided, however, that neither the Company, nor any of its
subsidiaries or affiliates shall indemnify Employee for any losses incurred by
Employee as a result of acts described in Section 1(c) of this Agreement.
9
ACKNOWLEDGED AND AGREED:
TICKETMASTER
L.L.C.
8800 Sunset
Boulevard
West Hollywood,
CA 90069
10
EX-99.1
15
a2186551zex-99_1.htm
EXHIBIT 99.1
QuickLinks
-- Click here to rapidly navigate through this document
Exhibit 99.1
[ ],
2008
Dear
IAC/InterActiveCorp Stockholder:
I
am pleased to inform you that on [ ], 2008, the Board of Directors of IAC/InterActiveCorp approved the spin-offs of
HSN, Inc., Interval Leisure Group, Inc., Ticketmaster and Tree.com, Inc. (each, a "Spinco" and collectively, the "Spincos") via the distribution of all of the outstanding shares
of common stock of each Spinco to IAC's stockholders. As a result of the spin-offs, IAC will be separated into five separate, publicly traded companies.
At
the time of the spin-offs, the Spincos will collectively hold all of the assets and liabilities associated with IAC's Retailing, Interval, Ticketmaster, Lending and Real
Estate segments. We believe that the separation of these businesses will over time enhance their operating performance, provide each of them with a liquid equity currency linked directly to its
businesses, open up strategic alternatives that may otherwise not have been readily available to them and facilitate investor understanding and better target investor demand. We expect the
spin-offs of each of the Spincos to occur simultaneously, unless otherwise determined by IAC's board of directors. Immediately after each spin-off, IAC stockholders will own
100% of the common stock of the company being distributed.
The spin-offs of each of the Spincos will occur on [ ], 2008 by way of a pro rata dividend to IAC
stockholders, unless otherwise determined by IAC's board of directors. Each IAC stockholder will be entitled to receive one-fifth of a share of common stock of HSN, Inc., one-fifth of a share
of common stock of Interval Leisure Group, Inc., one-fifth of a share of common stock of Ticketmaster and one-thirtieth of a share of common stock of Tree.com, Inc. for every share of
IAC common stock and/or Class B common stock held by such stockholder at the close of business on [ ], 2008, the record date for
the spin-offs. IAC will not distribute any fractional shares of common stock of the Spincos to its stockholders, as more fully described in the accompanying information statement.
Stockholder approval of the spin-offs is not required, nor are you required to take any action to receive your shares of common stock of the Spincos.
The
enclosed information statement, which is being mailed to all IAC stockholders, describes the spin-offs of the common stock of each of the Spincos in detail and contains important
information about each of the Spincos. We urge you to read this information statement carefully.
I
want to thank you for your continued support of IAC, and each of the Spincos looks forward to your support in the future.
|
Sincerely, |
|
Barry Diller Chairman of the Board and Chief Executive Officer |
Preliminary Information Statement
(Subject to Completion, Dated [ ], 2008)
Information Statement
Distribution of
HSN, Inc. Common Stock (Par Value $0.01 Per Share)
Interval Leisure Group, Inc. Common Stock (Par Value $0.01 Per Share)
Ticketmaster Common Stock (Par Value $0.01 Per Share)
Tree.com, Inc. Common Stock (Par Value $0.01 Per Share)
by
IAC/InterActiveCorp
to IAC/InterActiveCorp Stockholders
This information statement is being furnished to you as a stockholder of IAC in connection with the spin-off by IAC/InterActiveCorp to
its stockholders of HSN, Inc. ("HSNi"), Interval Leisure Group, Inc. ("ILG"), Ticketmaster and Tree.com, Inc. ("Tree.com") (each, a "Spinco" and collectively, the "Spincos"), each a
wholly-owned subsidiary of IAC that at the time of its spin-off will hold directly or indirectly the assets and liabilities associated with the following businesses:
-
- HSNi:
HSN TV, HSN.com, and the Cornerstone Brands, Inc. portfolio of catalogs, websites and retail locations;
-
- ILG:
the businesses currently comprising IAC's Interval segment;
-
- Ticketmaster:
Ticketmaster's primary domestic and international operations, as well as certain investments in unconsolidated affiliates;
-
- Tree.com:
the businesses currently comprising IAC's Lending and Real Estate segments.
To implement the spin-offs, IAC and the Spincos will effect a series of restructuring transactions following which IAC will distribute all of the outstanding shares of common
stock of the Spincos on a pro rata basis to the holders of IAC common stock and/or Class B common stock. Each of you, as a holder of IAC common stock and/or Class B common stock, will
receive one-fifth of a share of common stock of HSNi, one-fifth of a share of common stock of ILG, one-fifth of a share of common stock of Ticketmaster and one-thirtieth of a share of common stock of
Tree.com for every share of IAC common stock and/or Class B common stock that you held at the close of business on [ ], 2008, the
record date for the spin-offs. The spin-offs will be effective as of [ ], 2008, unless otherwise determined by
IAC's board of directors. Immediately after the spin-offs are completed, each of the Spincos will be a separate public company. All of the outstanding shares of the common stock of each of
the Spincos are currently owned by IAC. Accordingly, there currently is no public trading market for the common stock of any of the Spincos. Each of the Spincos has applied to list its common stock
under the ticker symbol "HSNI," "IILG," "TKTM" and "TREE," respectively, on the NASDAQ Stock Market.
No vote of IAC stockholders is required in connection with the spin-offs. Neither IAC nor the Spincos are asking you for a
proxy, and you are not requested to send us a proxy. IAC stockholders will not be required to pay any consideration for the shares of common stock of the Spincos they receive in the
spin-offs, and they will not be required to surrender or exchange shares of their IAC common stock and/or Class B common stock or take any other action in connection with the
spin-offs.
In
reviewing this information statement, you should carefully consider the matters described under the caption "Risk Factors" beginning on page
[ ] of this information statement.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of any of the securities of any of the Spincos or determined whether this
information statement is truthful or complete. Any representation to the contrary is a criminal offense.
This
information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.
The
date of this information statement is [ ], 2008.
This
information statement was first mailed to IAC stockholders on or about [ ], 2008.
TABLE OF CONTENTS
|
|
Page
|
Spinco Company Information |
|
1 |
Forward-Looking Statements |
|
2 |
Summary |
|
4 |
|
Business of HSNi |
|
4 |
|
Business of ILG |
|
4 |
|
Business of Ticketmaster |
|
4 |
|
Business of Tree.com |
|
5 |
|
Overview of the Separation |
|
5 |
Questions and Answers about the Spincos and the Spin-Offs |
|
6 |
Risk Factors |
|
11 |
The Separation |
|
18 |
|
General |
|
18 |
|
The Number of Shares You Will Receive |
|
18 |
|
When and How You Will Receive the Dividend |
|
18 |
|
Results of the Separation |
|
19 |
|
Material U.S. Federal Income Tax Consequences of the Spin-Offs |
|
19 |
|
Market for Common Stock of the Spincos |
|
23 |
|
Trading Before the Distribution Date |
|
23 |
|
Conditions to the Spin-Offs |
|
23 |
|
Reasons for the Separation |
|
24 |
|
Litigation with Liberty Media Corporation |
|
25 |
|
Financial Advisor |
|
26 |
Treatment of Outstanding IAC Compensatory Equity-Based Awards |
|
26 |
Dividend Policy |
|
28 |
Transfers to IAC and Financing |
|
28 |
Certain Information With Respect To HSNi |
|
29 |
|
Business of HSNi |
|
29 |
|
Risk Factors Relating to the Business of HSNi Following the Spin-Offs |
|
36 |
|
Capitalization |
|
42 |
|
Selected Historical Financial Data |
|
43 |
|
Unaudited Pro Forma Condensed Combined Financial Statements |
|
44 |
|
Management's Discussion and Analysis of Financial Condition and Results of
Operations of HSNi |
|
51 |
|
Quantitative and Qualitative Disclosures about Market Risk |
|
79 |
|
Management of HSNi |
|
80 |
|
HSNi Executive Compensation |
|
84 |
|
HSNi Security Ownership of Certain Beneficial Owners and Management |
|
96 |
Certain Information With Respect to ILG |
|
98 |
|
Business of ILG |
|
98 |
|
Risk Factors Relating to the Business of ILG Following the Spin-Offs |
|
107 |
|
Capitalization |
|
112 |
|
Selected Historical Financial Data |
|
113 |
|
Unaudited Pro Forma Condensed Consolidated Financial Statements |
|
114 |
|
Management's Discussion and Analysis of Financial Condition and Results of
Operations of ILG |
|
121 |
|
Quantitative and Qualitative Disclosures about Market Risk |
|
139 |
|
Management of ILG |
|
140 |
|
ILG Executive Compensation |
|
143 |
i
|
ILG Security Ownership Of Certain Beneficial Owners and Management |
|
154 |
Certain Information With Respect to Ticketmaster |
|
156 |
|
Business of Ticketmaster |
|
156 |
|
Risk Factors Relating to the Business of Ticketmaster Following the Spin-Offs |
|
164 |
|
Capitalization |
|
170 |
|
Selected Historical Financial Data |
|
171 |
|
Unaudited Pro Forma Condensed Combined Financial Statements |
|
172 |
|
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Ticketmaster |
|
180 |
|
Quantitative and Qualitative Disclosures about Market Risk |
|
200 |
|
Management of Ticketmaster |
|
201 |
|
Ticketmaster Executive Compensation |
|
204 |
|
Ticketmaster Security Ownership of Certain Beneficial Owners and Management |
|
216 |
Certain Information with Respect to Tree.com |
|
218 |
|
Business of Tree.com |
|
218 |
|
Risk Factors Relating to the Business of Tree.com Following the Spin-Offs |
|
232 |
|
Capitalization |
|
238 |
|
Selected Historical Financial Data |
|
239 |
|
Unaudited Pro Forma Condensed Consolidated Financial Statements |
|
240 |
|
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Tree.com |
|
247 |
|
Quantitative and Qualitative Disclosures about Market Risk |
|
272 |
|
Management of Tree.com |
|
273 |
|
Tree.com Executive Compensation |
|
276 |
|
Tree.com Security Ownership Of Certain Beneficial Owners and Management |
|
288 |
Description of Capital Stock of the Spincos |
|
290 |
Certain Relationships and Related Party Transactions |
|
294 |
Spinco Stock and Annual Incentive Plans |
|
304 |
Where You Can Find More Information |
|
307 |
Annex AHSNi Combined Financial Statements |
|
A-1 |
Annex BILG Consolidated Financial Statements |
|
B-1 |
Annex CTicketmaster Combined Financial Statements |
|
C-1 |
Annex DTree.com Consolidated Financial Statements |
|
D-1 |
ii
This information statement describes the businesses of the Spincos as though they were the businesses of the Spincos for all historical periods described. However, HSNi, ILG and Tree.com
are newly formed entities that have not conducted any operations prior to the spin-offs and instead had such businesses transferred to them prior to the spin-offs. References in this
information statement to the historical assets, liabilities, products, businesses or activities of the businesses of the Spincos are intended to refer to the historical assets, liabilities, products,
businesses or activities of the relevant businesses as those businesses were conducted as part of IAC prior to the spin-offs. Following the spin-offs, each of the Spincos will
be a separate, publicly traded company, and IAC will have no continuing stock ownership in the Spincos. The historical combined financial information of the Spincos as part of IAC contained in this
information statement are not necessarily indicative of their future financial position, future results of operations or future cash flows, nor does it reflect what the financial position, results of
operations or cash flows of the Spincos would have been had they been operated as stand-alone companies during the periods presented.
This information statement is being furnished solely to provide information to IAC stockholders who will receive shares of common stock of the Spincos in connection with the
spin-offs. It is not provided as an inducement or encouragement to buy or sell any securities. You should not assume that the information contained in this information statement is
accurate as of any date other than the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and neither IAC nor any Spinco
undertakes any obligation to update the information unless required to do so by law. All information contained in this information statement concerning a Spinco has been
provided by such Spinco and neither any of the other Spincos nor IAC takes any responsibility for the accuracy of any such information to the extent it does not relate to such
entity.
SPINCO COMPANY INFORMATION
HSNi was incorporated in Delaware in May 2008. Its principal offices are located at 1 HSN Drive, St. Petersburg, FL 33729. Its main telephone number
is 727-872-1000.
ILG
was incorporated in Delaware in May 2008. Its principal offices are located at 6262 Sunset Drive, Miami, Fl 33143. Its main telephone number is 305-666-1861.
Ticketmaster
was incorporated in Delaware in September 1995. Its principal offices are located at 8800 West Sunset Blvd., West Hollywood, CA 90069. Its main telephone number is
310-360-3300.
Tree.com
was incorporated in Delaware in April 2008. Its principal offices are located at 11115 Rushmore Drive, Charlotte, NC 28277. Its main telephone number is
704-541-5351.
1
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this information statement, the public filings or other public statements of each of the Spincos are subject to known and unknown
risks, uncertainties and other factors that may cause actual results, performance or achievements of the Spincos to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements or other public statements. Forward-looking statements include the information regarding future financial performance, business prospects and
strategy, including the completion of the spin-offs and the realization of related anticipated benefits, anticipated financial position, liquidity and capital needs and other similar
matters, in each case, relating to the Spincos.
Statements
preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "projects," "estimates," "plans," "may increase," "may
fluctuate," and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could" are generally forward looking in nature and not historical facts. You should
understand that the following important factors could affect future results and could cause actual results to differ materially from those expressed in such forward-looking statements:
-
- adverse
changes in economic conditions generally or in any of the markets or industries in which the businesses of a Spinco operate;
-
- changes
in senior management at a Spinco;
-
- adverse
changes to, or interruptions in, relationships with third parties;
-
- changes
affecting the ability of a Spinco to efficiently maintain and grow the market share of its various brands, as well as to extend the reach of these brands through a
variety of distribution channels and to attract new (and retain existing) customers;
-
- consumer
acceptance of new products and services offered by a Spinco;
-
- the
rates of growth of the internet and the e-commerce industry;
-
- changes
adversely affecting the ability of a Spinco to adequately expand the reach of its businesses into various international markets, as well as to successfully manage
risks specific to international operations and acquisitions, including the successful integration of acquired businesses;
-
- future
regulatory and legislative actions and conditions affecting a Spinco, including:
-
- the
promulgation of new, and/or the amendment of existing laws, rules and regulations applicable to a Spinco and its respective businesses; and
-
- changes
in the application or interpretation of existing laws, rules and regulations in the case of the businesses of a Spinco. In each case, laws, rules and regulations
include, among others, those relating to sales, use, value-added and other taxes, software programs, consumer protection and privacy, intellectual property, the internet and e-commerce;
-
- competition
from other companies;
-
- changes
adversely affecting the ability of a Spinco and its businesses to adequately protect intellectual property rights, as well as to obtain licenses or other rights with
respect to intellectual property in the future, which may or may not be available on favorable terms (if at all);
-
- third-party
claims alleging infringement of intellectual property rights by a Spinco or its businesses, which could result in the expenditure of significant financial and
managerial resources, injunctions or the imposition of damages, as well as the need to enter into formal
2
Certain
of these factors and other factors, risks and uncertainties are discussed in the "Risk Factors" section of this information statement. Other unknown or unpredictable factors may
also cause actual results to differ materially from those projected by the forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond the control of IAC and
the Spincos.
You
should consider the areas of risk described above, as well as those set forth under the heading "Risk Factors," in connection with considering any forward-looking statements that may
be made by the Spincos generally. Except for the ongoing obligations of the Spincos to disclose material information under the federal securities laws, the Spincos do not undertake any obligation to
release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required to do so by law.
3
SUMMARY
This summary highlights selected information from this information statement and may not contain all the information that may be important to you. Accordingly,
you are encouraged to read carefully the entire information statement, its annexes and the documents filed as exhibits to each Spinco's registration statement on Form 10, of which this
information statement is a part.
Except
as otherwise indicated or unless the context otherwise requires, (i) "Spinco" refers to any of HSNi, ILG, Ticketmaster and Tree.com and their respective subsidiaries, (ii)
"Spincos" refers to all of the foregoing collectively, (iii) "IAC/InterActiveCorp" and "IAC" refer to IAC/InterActiveCorp and its consolidated subsidiaries other than, for all periods following
the spin-offs, the Spincos, (iv) "HSNi" refers to HSN, Inc., (v) "ILG" refers to Interval Leisure Group, Inc., (vi) "Tree.com" refers to Tree.com, Inc. and
(vii) the "separation," "Spin-Off," "spin-off" and "distributions" or "distribution" refers to the distribution by IAC of the common stock of the Spincos, as more fully
described in this information statement.
Business of HSNi
HSNi owns and operates HSN, a retailer and interactive lifestyle network offering a broad assortment of products through television home shopping programming on
the HSN television network and HSN.com. HSN strives to transform the shopping experience by incorporating experts, entertainment, inspiration, solutions, tips and ideas in connection with the sale of
products through the HSN television network and HSN.com. HSNi also owns and operates the Cornerstone Brands portfolio of catalogs and related websites, including Frontgate,
Ballard Designs, Garnet Hill, Smith+Noble, The Territory Ahead, TravelSmith and Improvements, as well as a limited number of
retail stores.
Business of ILG
ILG is a leading provider of membership services to the vacation ownership industry, which is a segment of the broader hospitality industry. Vacation ownership is
a term used to describe the shared ownership of vacation real estate and includes those businesses which develop, manage, operate and sell vacation interests (i.e. the ownership or use of
accommodations at a given property or properties, together with associated amenities and facilities for a specified period of time). ILG's principal business, Interval, makes available vacation
ownership membership services to individual members of its exchange networks, which allows such members to exchange the use and occupancy of their vacation interest for comparable, alternative
accommodations at the same or another resort participating in an Interval exchange network and provides such members with certain value-added products and services depending on the program and country
of residence. Interval also makes available related services to developers of the resorts participating in its exchange networks worldwide. As of December 31, 2007, more than 2,400 resorts
located in more than 75 countries participated in Interval's primary exchange network, the Interval Network, and nearly two million owners of vacation interests were enrolled as members of the
Interval Network. ILG's other principal business, ResortQuest Hawaii, was acquired in May 2007 and is a provider of vacation rental and property management services to vacationers and vacation
property owners across Hawaii. As of December 31, 2007, RQH provided property management services to 26 resorts and hotels, as well as other more limited management services to an additional 23
properties.
Business of Ticketmaster
As the world's leading live entertainment ticketing and marketing company, Ticketmaster connects the world to live entertainment. Ticketmaster currently operates
in 20 countries worldwide, providing ticket sales, ticket resale services, marketing and distribution through www.ticketmaster.com, one of the largest
e-commerce sites on the internet, and related proprietary internet and mobile channels,
4
approximately
6,700 independent sales outlets and 19 call centers worldwide. Established in 1976, Ticketmaster served more than 10,000 clients in 2007 worldwide across multiple live event categories,
providing exclusive ticketing services for leading arenas, stadiums, amphitheaters, music clubs, concert promoters, professional sports franchises and leagues, college sports teams, performing arts
venues, museums and theaters. In 2007, Ticketmaster brands and businesses sold approximately 141 million tickets valued at over $8.3 billion.
Business of Tree.com
Through its various subsidiaries, Tree.com currently operates a lending business (the "Lending Business") and a real estate business (the "Real Estate Business").
The Lending Business consists of online networks, principally LendingTree.com® and GetSmart.com®, as well as call centers, which match consumers with lenders and loan brokers.
In addition, the Lending Business originates, processes, approves and funds various types of residential real estate loans under two brand names, LendingTree Loans® and
HomeLoanCenter.com®, and offers residential mortgage loan settlement services under the name LendingTree Settlement Services. The Real Estate Business consists primarily of an
internet-enabled national residential real estate brokerage that currently operates offices in 14 markets under the brand name "RealEstate.com, REALTORS®." The Real Estate Business also
consists of a brokerage that matches residential home buyers interested in newly constructed homes with builders and currently operates under the brand name "iNest."
Overview of the Separation
On [ ], 2008, the Board of Directors of IAC approved a plan to separate IAC into five separate,
publicly traded companies via the distribution of all of the outstanding shares of common stock of the Spincos, each a wholly-owned subsidiary of IAC. At the time of the spin-offs, the
Spincos will hold directly or indirectly the assets and liabilities associated with the following businesses:
-
- HSNi:
HSN TV, HSN.com, and the Cornerstone Brands, Inc. portfolio of catalogs, websites and retail locations;
-
- ILG:
the businesses currently comprising IAC's Interval segment;
-
- Ticketmaster:
Ticketmaster's primary domestic and international operations, as well as certain investments in unconsolidated affiliates; and
-
- Tree.com:
the businesses currently comprising IAC's Lending and Real Estate segments.
Unless
otherwise indicated or the context otherwise requires, references in this information statement to the businesses of HSNi, ILG, Ticketmaster and Tree.com respectively refer to the
businesses described above.
Following the spin-offs, IAC will consist of the remaining businesses of IAC and its subsidiaries and will include all assets and liabilities primarily related to the
business and operations of (i) IAC's Media & Advertising, Match, ServiceMagic and Entertainment segments, (ii) IAC's Shoebuy business, (iii) IAC's ReserveAmerica business,
(iv) the businesses currently comprising the IAC's Emerging Businesses group and (v) certain investments in unconsolidated affiliates.
Prior
to the spin-offs, the Spincos will enter into a Separation and Distribution Agreement and several other agreements with IAC and the other Spincos to effect the
separation of the Spincos and provide a framework for the relationships of the Spincos with IAC and each other. Immediately following the spin-offs, IAC stockholders will own 100% of the
outstanding common stock of each of the Spincos.
5
QUESTIONS AND ANSWERS ABOUT THE SPINCOS AND THE SPIN-OFFS
Why are the spin-offs structured as dividends? |
|
IAC believes that a tax-free distribution of shares of the Spincos to IAC stockholders is a tax-efficient way to separate HSNi, ILG, Ticketmaster, and Tree.com from the rest of IAC in a manner that will
create long-term value for IAC stockholders. |
How will the spin-offs occur? |
|
IAC will distribute to its stockholders via dividend all of the outstanding shares of common stock of HSNi, ILG, Ticketmaster and Tree.com owned by IAC, which will be 100% of the common stock of the Spincos outstanding immediately prior to the
spin-offs. |
How many shares of the Spincos will I receive? |
|
Unless otherwise determined by the IAC Board of Directors prior to the distribution date, for every share of IAC common stock or Class B common stock held by you as of the record date, you will receive one-fifth of a share of common stock of
HSNi, one-fifth of a share of common stock of ILG, one-fifth of a share of common stock of Ticketmaster and one-thirtieth of a share of common stock of Tree.com. IAC will not distribute any fractional shares of any Spinco common stock to its
stockholders. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds of the sales pro rata to each holder
who otherwise would have been entitled to receive a fractional share in the spin-offs. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares. The number of
shares that IAC will distribute to its stockholders will be reduced to the extent that cash payments are to be made in lieu of the issuance of fractional shares of Spinco common stock. |
Can IAC decide not to complete the spin-offs? |
|
Yes. The IAC Board of Directors has reserved the right, in its sole discretion, to amend, modify or abandon the spin-offs and related transactions at any time prior to the distribution date. This means that IAC has the right not to complete the
spin-off of any or all of the Spincos if, at any time, the IAC Board of Directors determines, in its sole discretion, that the spin-off is not in the best interests of IAC or its stockholders. In addition, the spin-offs are subject to the
satisfaction or waiver of a number of conditions. See "The SeparationConditions to the Spin-offs." |
What is the record date for the spin-offs? |
|
The record date for determining stockholders entitled to receive the shares of the Spincos in the spin-offs is the close of business on [ ], 2008. |
6
What is the distribution date? |
|
The distribution date of the shares of common stock of the Spincos under the spin-offs is [ ], 2008. |
What other transactions are occurring with the spin-offs? |
|
IAC currently expects that in connection with the spin-offs, HSNi will transfer to IAC approximately $390 million in cash; an entity that will become a subsidiary of ILG prior to the spin-offs will distribute to IAC approximately
$390 million in cash and Ticketmaster will distribute to IAC approximately $730 million in cash. These Spincos expect to finance the amount distributed to IAC through borrowings by the applicable Spinco or its subsidiaries. Additionally,
each of these companies may distribute some amount of cash on hand, but these amounts are not presently knowable and are unlikely to be material. IAC currently expects that the borrowing arrangements will consist of a combination of secured credit
facilities and privately-issued debt securities for each of HSNi, ILG and Ticketmaster, the breakdown of which has yet to be determined. HSNi, ILG and Ticketmaster are each also expected to dividend to IAC prior to the spin-offs all net receivables
owed them by IAC and its affiliates. IAC does not expect Tree.com to incur material indebtedness prior to, or in connection with, the spin-offs and instead expects to contribute approximately $[ ] to
Tree.com prior to its spin-off. |
|
|
In addition, IAC expects to effect a reverse stock split following the spin-offs, as described under "The SeparationResults of the Separation." |
7
What are the U.S. federal income tax consequences of the spin-offs to IAC stockholders? |
|
IAC has requested and expects to receive, prior to effecting any of the spin-offs, a private letter ruling from the Internal Revenue Service (the "IRS") and/or an opinion of counsel satisfactory to the IAC board of directors regarding the
qualification of the spin-offs, together with certain related transactions, as transactions that are generally tax free for U.S. federal income tax purposes under Sections 355 and/or 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the private letter ruling is received prior to the spin-offs, IAC expects to receive an opinion of counsel regarding certain aspects of the transaction that are not covered by the private letter ruling. If the private letter ruling
is not received prior to the spin-offs, IAC expects to receive an opinion of counsel regarding the qualification of the spin-offs, together with certain related transactions, as transactions that are generally tax free for U.S. federal income tax
purposes under Sections 355 and/or 368(a)(1)(D) of the Code. Assuming the spin-offs qualify as transactions that are generally tax free for U.S. federal income tax purposes under Sections 355 and/or 368(a)(1)(D) of the Code, for U.S.
federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income, upon the receipt of shares of Spinco common stock pursuant to the spin-offs, except with respect to any cash received in lieu of a
fractional share of Spinco common stock. For more information, see "The SeparationMaterial U.S. Federal Income Tax Consequences of the Spin-Offs," included elsewhere in this information statement. |
What will the relationships among IAC and each of the Spincos be following the spin-offs? |
|
Prior to the spin-offs, each of the Spincos will enter into a Separation and Distribution Agreement and several other agreements with IAC and the other Spincos to effect the spin-offs and provide a framework for the relationships of each of the
Spincos with IAC and the other Spincos. These agreements will govern the relationships between IAC and the Spincos subsequent to the completion of the spin-offs. See "Certain Relationships and Related Party TransactionsRelationships Among IAC
and the Spincos." |
8
Will I receive physical certificates representing shares of common stock of the Spincos following the separation? |
|
No. Following the separation, neither IAC nor any of the Spincos will be issuing physical certificates representing shares of the common stock of the Spincos. Instead, IAC, with the assistance of The Bank of New York, the distribution agent, will
electronically issue shares of common stock of the Spincos to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. The Bank of New York will mail you a book-entry account statement that reflects your
shares of common stock of the Spincos, or your bank or brokerage firm will credit your account for the shares. |
What if I want to sell my IAC common stock or my common stock in any of the Spincos? |
|
You should consult with your financial advisors, such as your stockbroker or bank. Neither IAC nor any of the Spincos makes any recommendations on the purchase, retention or sale of shares of IAC common stock or the Spinco common stock to be
distributed. |
|
|
If you decide to sell any shares before the spin-offs, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your IAC shares or Spinco shares you will receive in the spin-offs or both. |
Where will I be able to trade shares of the common stock of the Spincos? |
|
There is not currently a public market for the common stock of any of the Spincos. HSNi, ILG, Ticketmaster and Tree.com have applied to list their common stock on the NASDAQ Stock Market, or "NASDAQ," under the symbols "HSNI," "IILG," "TKTM," and
"TREE," respectively. Each of the Spincos anticipates that trading in shares of their common stock will begin on a "when-issued" basis prior to the distribution date and will continue up to and including through the distribution date and that
"regular-way" trading in shares of common stock of the Spincos will begin on the first trading day following the distribution date. If trading begins on a "when-issued" basis, you may purchase or sell your common stock of any of the Spincos up to and
including through the distribution date, but your transaction will not settle until after the distribution date. You will not be required to make any payment, surrender or exchange your shares of IAC common stock and/or Class B common stock or
take any other action to receive your shares of common stock of the Spincos. |
Will the number of IAC shares I own change as a result of the spin-offs? |
|
No. The number of shares of IAC common stock you own will not change as a result of the spin-offs. However, in connection with the spin-offs, and as described under "The SeparationResults of the Separation," IAC expects to effect a reverse
stock split following the spin-offs. |
9
What will happen to the listing of IAC common stock? |
|
Nothing. IAC common stock will continue to be traded on NASDAQ under the symbol "IACI." |
Which businesses will be retained by IAC following the spin-offs? |
|
Immediately following the spin-offs, IAC primarily will be engaged in the business and operations relating to (i) Ask.com, Citysearch, IAC Advertising Solutions, Evite, and Zwinky and its related Funweb Products; (ii) Match.com,
ServiceMagic and Shoebuy.com; (iii) its emerging businesses, including Black Web Enterprises, BustedTees, CollegeHumor, GarageGames, Gifts.com, Green.com, InstantAction, Primal Ventures, Pronto, Very Short List, Vimeo and 23/6; and
(iv) certain investments in unconsolidated entities. |
Are there risks to owning common stock in any of the Spincos? |
|
Yes. The business of each of the Spincos is subject to both general and specific risks relating to its business, leverage, relationship with IAC and being a separate publicly traded company. The businesses of the Spincos are also subject to risks
relating to the separation. These risks are described in the "Risk Factors" section of this information statement beginning on page [ ] and under "Certain Information With Respect to
HSNiRisk Factors Relating to the Business of HSNi Following the Spin-Offs," "Certain Information With Respect to ILGRisk Factors Relating to the Business of ILG Following the Spin-Offs," "Certain Information With Respect to
TicketmasterRisk Factors Relating to the Business of Ticketmaster Following the Spin-Offs" and "Certain Information With Respect to Tree.comRisk Factors Relating to the Business of Tree.com Following the Spin-Offs." You are encouraged to
read those sections carefully. |
Where can IAC stockholders get more information? |
|
Before the spin-offs, if you have any questions relating to the spin-offs, you should contact: |
|
|
IAC
Investor Relations
555 West 18th Street
New York, NY 10011
Tel: (212) 314-7400
Fax: (212) 314-7379 ir@iac.com |
Is Liberty Media Corporation challenging the spin-offs? |
|
No. Liberty Media Corporation and IAC have agreed to a single-tiered voting structure for each of the Spincos and the Spinco governance provisions as set forth under "Certain Relationships and Related Party TransactionsAgreements with Liberty
Media Corporation." |
10
RISK FACTORS
The following risk factors relate to all of the Spincos. For the particular risk factors relating to businesses of the individual Spincos, see "Certain
Information With Respect to HSNiRisk Factors Relating to the Business of HSNi Following the Spin-Offs," "Certain Information With Respect to ILGRisk Factors
Relating to the Business of ILG Following the Spin-Offs," "Certain Information With Respect to TicketmasterRisk Factors Relating to the Business of Ticketmaster Following the
Spin-Offs" and "Certain Information With Respect to Tree.comRisk Factors Relating to the Business of Tree.com Following the Spin-Offs."
After the spin-offs, any or all of the Spincos may be unable to make the changes necessary to operate effectively as separate public
entities.
Following the spin-offs, IAC will have no obligation to provide financial, operational or organizational assistance to the Spincos, other than limited
services pursuant to a transition services agreement that IAC and each of the Spincos will enter into in connection with the spin-offs. As a separate public entity, each of the Spincos
will be subject to, and responsible for, regulatory compliance, including periodic public filings with the SEC and compliance with NASDAQ's continued listing requirements, as well as generally
applicable tax and accounting rules. The Spincos may be unable to implement successfully the changes necessary to operate as independent public entities.
Each of the Spincos expects to incur increased costs relating to operating as an independent company that could cause its cash flow and results of
operations to decline.
Each of the Spincos expects that the obligations of being a public company, including substantial public reporting and investor relations obligations, will
require new expenditures, place new demands on its management and will require the hiring of additional personnel. The Spincos may need to implement additional systems that require new expenditures in
order to adequately function as public companies.
Such expenditures could adversely affect the business, financial condition and results of operations of any Spinco(s).
In
addition, IAC's businesses, by virtue of being under the same corporate structure, currently share economies of scope and scale in costs, human capital, vendor relationships and
customer relationships with the businesses that the Spincos will own following the spin-offs. The increased costs resulting from the loss of these benefits could have an adverse effect on
the Spincos.
If one or more spin-offs, together with certain related transactions, were to fail to qualify as a transaction that is generally tax free
for U.S. federal income tax purposes under Sections 355 and/or 368(a)(1)(D) of the Code, IAC, the Spincos and IAC stockholders may be subject to significant tax liabilities.
IAC
expects to receive a private letter ruling from the IRS and/or an opinion of counsel satisfactory to the IAC Board of Directors regarding the qualification of the
spin-offs, together with certain related transactions, as transactions that are generally tax free for U.S. federal income tax purposes under Sections 355 and/or 368(a)(1)(D) of the
Code. The IRS private letter ruling and the opinion of counsel will be based on, among other things, certain assumptions as well as the accuracy of certain representations and statements that IAC and
the Spincos make to the IRS and to counsel. If any of these representations or statements are, or become, inaccurate or incomplete, or if IAC or the Spincos breach any of their respective covenants,
the IRS private letter ruling and/or the opinion of counsel may be invalid.
Moreover,
the IRS private letter ruling would not address all the issues that are relevant to determining whether the spin-offs qualify as transactions that are generally tax
free for U.S. federal income tax purposes. Notwithstanding the IRS private letter ruling and/or opinion of counsel, the IRS
11
could
determine that one or more of the spin-offs should be treated as a taxable distribution if it determines that any of the representations, assumptions or undertakings that were
included in the request for the IRS private letter ruling is false or has been violated or if it disagrees with the conclusions in the tax opinion that are not covered by the IRS ruling.
If one or more spin-offs were to fail to qualify as a transaction that is generally tax free for U.S. federal income tax purposes under Sections 355 and/or
368(a)(1)(D) of the Code, then IAC generally would recognize gain in an amount equal to the excess of (i) the fair market value of the Spinco common stock distributed to the IAC stockholders in
such taxable spin-off over
(ii) IAC's tax basis in the common stock of such Spinco. In addition, each IAC stockholder who received Spinco common stock in such taxable spin-off generally would be treated as
having received a taxable distribution in an amount equal to the fair market value of the Spinco common stock received (including any fractional share sold on behalf of the stockholder) in such
spin-off, which would be taxable as a dividend to the extent of the stockholder's ratable share of IAC's current and accumulated earnings and profits (as increased to reflect any current
income, including any gain, recognized by IAC on the taxable spin-off). The balance, if any, of the distribution would be treated as a nontaxable return of capital to the extent of the IAC
stockholder's tax basis in its IAC stock, with any remaining amount being taxed as capital gain. For more information, see "The SeparationMaterial U.S. Federal Income Tax Consequences of
the Spin-Offs," included elsewhere in this information statement.
Under
the Tax Sharing Agreement among IAC and the Spincos, each Spinco generally would be required to indemnify IAC and the other Spincos for any taxes resulting from the
spin-off of such Spinco (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related stockholder litigation or controversies) to the
extent such amounts resulted from (i) any act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement, (ii) any acquisition of equity securities or
assets of such Spinco or a member of its group, or (iii) any breach by such Spinco or any member of its group of any representation or covenant contained in the separation documents or in the
documents relating to the IRS private letter ruling and/or tax opinion. The ability of IAC or the other Spincos to collect under these indemnity provisions will depend on the financial position of the
indemnifying party. See "Certain Relationships and Related Party TransactionsTax Sharing Agreement."
Certain transactions in IAC or Spinco equity securities could cause one or more of the spin-offs to be taxable to IAC and may give rise to
indemnification obligations of the Spincos under the Tax Sharing Agreement.
Current
U.S. federal income tax law creates a presumption that the spin-off of a Spinco would be taxable to IAC, but not to its stockholders, if such spin-off is
part of a "plan or series of related transactions" pursuant to which one or more persons acquire directly or indirectly stock representing a 50% or greater interest (by vote or value) in IAC or such
Spinco. Acquisitions that occur during the four-year period that begins two years before the date of a spin-off are presumed to occur pursuant to a plan or series of related
transactions, unless it is established that the acquisition is not pursuant to a plan or series of transactions that includes the spin-off. U.S. Treasury regulations currently in effect
generally provide that whether an acquisition and a spin-off are part of a plan is determined based on all of the facts and circumstances, including, but not limited to, specific factors
described in the Treasury regulations. In addition, the Treasury regulations provide several "safe harbors" for acquisitions that are not considered to be part of a plan.
These
rules will limit the ability of IAC and each of the Spincos (other than Tree.com) during the two-year period following the spin-offs to enter into certain
transactions that might be advantageous to them and their respective stockholders, particularly issuing equity securities to satisfy financing needs, repurchasing equity securities, and, under certain
limited circumstances, acquiring businesses or assets with equity securities or agreeing to be acquired.
12
Under the Tax Sharing Agreement, there are restrictions on the ability of each Spinco (other than Tree.com) to take such actions for a period of 25 months from the day after the
spin-off of such Spinco. Because IAC has an unrealized loss, for federal income tax purposes, in the stock of Tree.com, it is not necessary to subject Tree.com to the same restrictions as
the other Spincos with respect to acquisitions of Spinco equity securities. Tree.com will be subject to certain other restrictions that apply to all of the Spincos during the 25 month period
following the spin-off, which restrictions are designed to preserve the tax-free nature of the spin-offs to IAC shareholders.
In addition, the Tax Sharing Agreement generally provides that each Spinco will have to indemnify IAC and the other Spincos for any taxes resulting from the spin-off of such
Spinco (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related stockholder litigation or controversies) to the extent such amounts result
from (i) any act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement, (ii) any acquisition of equity securities or assets of such Spinco or a member
of its group, and (iii) any breach by such Spinco or any member of its group of any representation or covenant contained in the separation documents or in the documents relating to the IRS
private letter ruling and/or tax opinion. See "The SeparationMaterial U.S. Federal Income Tax Consequences of the Spin-Offs" and "Certain Relationships and Related Party
TransactionsTax Sharing Agreement."
In addition to actions of IAC and the Spincos, certain transactions that are outside their control and therefore not subject to the restrictive covenants contained in the Tax Sharing
Agreement, such as a sale or disposition of the stock of IAC or the stock of a Spinco by certain persons that own five percent or more of any class of stock of IAC or such Spinco, respectively, could
have a similar effect on the tax-free status of the spin-offs as transactions to which IAC or a Spinco is a party. As of April 30, 2008, Liberty Media Corporation and
certain of its affiliates, in the aggregate, owned IAC stock representing approximately 61.6% by vote and 29.9% by value and, assuming no acquisitions or dispositions of IAC stock by Liberty Media
Corporation or its affiliates between such date and the date of the spin-offs, are expected to own stock of each Spinco representing approximately 29.9% by vote and value. Accordingly, in
evaluating the ability of IAC and the Spincos to engage in certain transactions involving equity securities of IAC or the Spincos, IAC and the Spincos will need to take into account the activities of
Liberty Media Corporation and its affiliates.
As a result of these rules, even if a spin-off otherwise qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes, transactions
involving equity securities of IAC or the Spincos (including transactions by certain significant stockholders) could cause IAC to recognize taxable gain with respect to the stock of one or more of the
Spincos as described above. Although the restrictive covenants and indemnification provisions contained in the Tax Sharing Agreement are intended to minimize the likelihood that such an event will
occur, one or more of the spin-offs may become taxable to IAC as a result of transactions in IAC or Spinco equity securities.
The market price and trading volume of Spinco securities may be volatile and may face negative pressure.
There is currently no trading market for any of the Spinco securities. Investors may decide to dispose of some or all of the Spinco securities that they receive
in the spin-offs. The Spinco securities issued in the spin-offs will be trading publicly for the first time. Until, and possibly even after, orderly trading markets develop for
these securities, there may be significant fluctuations in price. It is not possible to accurately predict how investors in a Spinco's securities will behave after the spin-offs. The
market price for a Spinco's securities following the spin-offs may be more volatile than the market price of IAC securities before the spin-offs. The market price of a Spinco's
securities could fluctuate significantly for many reasons, including the risks identified in this information statement or reasons unrelated to each company's performance. These factors may result in
short- or long-term negative pressure on the value of the Spincos' securities.
13
After the spin-offs, the securities of the Spincos may not qualify for placement in investment indices. In addition, Spinco securities may
fail to meet the investment guidelines of institutional investors. In either case, these factors may negatively impact the price of Spinco securities and may impair the ability of a Spinco to raise
capital through the sale of securities.
Some of the holders of IAC securities are index funds tied to NASDAQ or other stock or investment indices, or are institutional investors bound by various
investment guidelines. Companies are generally selected for investment indices, and in some cases selected by institutional investors, based on factors such as market capitalization, industry, trading
liquidity and financial condition. As independent companies, each of the Spincos will initially have a lower market capitalization than IAC has today. As a result, Spinco securities may not qualify
for those investment indices. In addition, Spinco securities that are received in the spin-offs may not meet the investment guidelines of some institutional investors. Consequently, these
index funds and institutional investors may have to sell some or all of the securities they receive in the spin-offs, and the prices of Spinco securities
may fall as a result. Any such decline could impair the ability of a Spinco to raise capital through future sales of securities.
FinancingThe Spincos may have future capital needs and may not be able to obtain additional financing on acceptable terms.
In connection with the spin-offs, each of HSNi, ILG and Ticketmaster is expected to incur indebtedness of $450 million, $450 million and
$750 million, respectively. In each case most or all of the proceeds from this indebtedness will be distributed to IAC. See "Transfer to IAC and Financing."
These
arrangements may limit the ability of HSNi, ILG and Ticketmaster to secure significant, additional financing in the future on favorable terms. Additionally, the current
uncertainties surrounding the industries in which Tree.com operates, as well as other factors, may constrain its financing abilities. The ability of each of the Spincos to secure additional financing
and satisfy its financial obligations under indebtedness outstanding from time to time will depend upon its future operating performance, which is subject to then prevailing general economic and
credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are beyond its control. The prolonged
continuation or worsening of current credit market conditions would have a material adverse affect on the ability of any Spinco to secure financing on favorable terms, if at all.
Any Spinco may be unable to secure additional financing or financing on favorable terms or its operating cash flow may be insufficient to satisfy its financial obligations under
indebtedness outstanding from time to time (if any). Furthermore, if financing is not available when needed, or is available on unfavorable terms, the affected Spinco may be unable to develop new or
enhance its existing services, complete acquisitions or otherwise take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on its
business, financial condition and results of operations. If additional funds are raised through the issuance of equity securities, Spinco stockholders may experience significant dilution. Also, the
ability of any Spinco (other than Tree.com) to engage in significant equity issuances will be limited or restricted after the spin-offs in order to preserve the tax-free nature
of the distribution.
Maintenance of Systems and InfrastructureThe success of each Spinco depends, in part, on the integrity of its systems and infrastructures.
System interruption and the lack of integration and redundancy in these systems and infrastructures may have an adverse impact on the business, financial conditions and results of operations of the
Spincos.
The success of each Spinco depends, in part, on its ability to maintain the integrity of its systems and infrastructures, including websites, information and
related systems, call centers and distribution and fulfillment facilities. System interruption and the lack of integration and redundancy in the
14
information
systems and infrastructures of a Spinco may adversely affect the ability of such Spinco from operating websites, processing and fulfilling transactions, responding to customer inquiries
and generally maintaining cost-efficient operations. Any Spinco may experience occasional system interruptions that make some or all systems or data unavailable or prevent Spinco
businesses from efficiently providing services or fulfilling orders. Each Spinco also relies on affiliate and third party computer systems, broadband and other communications systems and service
providers in connection with the provision of services generally, as well as to facilitate, process and fulfill transactions. Any interruptions, outages or delays in the systems and infrastructures of
a Spinco, its businesses, its affiliates and/or third parties, or deterioration in the performance of these systems and infrastructures, could impair the ability of the businesses of the affected
Spinco to provide services, fulfill orders and/or process transactions. Fire, flood, power loss, telecommunications failure, hurricanes, tornadoes, earthquakes, acts of war or terrorism, acts of God
and similar events or disruptions may damage or interrupt computer, broadband or other communications systems and infrastructures at any time. Any of these events could cause system interruption,
delays and loss of critical data, and could prevent Spinco businesses from providing services, fulfilling orders and/or processing transactions. While each of the Spinco businesses has backup systems
for certain aspects of their respective operations, these systems are not fully redundant (with the exception of the Ticketmaster System) and disaster recovery planning is not sufficient for all
eventualities. In addition, the Spincos may not have adequate insurance coverage to compensate for losses from a major interruption. If any of these adverse events were to occur, it could adversely
affect the business, financial conditions and results of operations of the affected Spinco.
In addition, any penetration of network security or other misappropriation or misuse of personal consumer information, particularly in the case of Tree.com, could cause interruptions in
the operations of Spinco businesses and subject the affected Spinco to increased costs, litigation and other liabilities. Claims could also be made against the Spincos for other misuse of personal
information, such as for unauthorized purposes or identity theft, which could result in litigation and financial liabilities, as well as administrative action from governmental authorities. Security
breaches could also significantly damage the reputation of the Spincos with consumers and third parties with whom they do business. It is possible that advances in computer capabilities, new
discoveries, undetected fraud, inadvertent violations of company policies or procedures or other developments could result in a compromise of information or a breach of the technology and security
processes that are used to protect consumer transaction data. As a result, current security measures may not prevent any or all security breaches. Any Spinco may be required to expend significant
capital and other resources to protect against and remedy any potential or existing security breaches and their consequences. Each Spinco also faces risks associated with security breaches affecting
third parties with which they are affiliated or otherwise conduct business online. Consumers are generally concerned with security and privacy of the internet,
and any publicized security problems affecting the businesses of a Spinco and/or third parties may discourage consumers from doing business with the affected Spinco, which could have an adverse effect
on the business, financial condition and results of operations of the affected Spinco.
PrivacyThe processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation,
conflicting legal requirements or differing views of personal privacy rights.
In the processing of consumer transactions, the businesses of each of the Spincos receive, transmit and store a large volume of personally identifiable
information and other user data, particularly in the case of Tree.com. The sharing, use, disclosure and protection of this information are governed by the respective privacy and data security policies
maintained by each Spinco and its businesses. Moreover, there are federal, state and international laws regarding privacy and the storing, sharing, use, disclosure and protection of personally
identifiable information and user data. Specifically, personally identifiable information is increasingly subject to legislation and regulations in numerous jurisdictions around the world, the intent
of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. Any Spinco, particularly Tree.com, could be
15
adversely
affected if legislation or regulations are expanded to require changes in business practices or privacy policies, or if governing jurisdictions interpret or implement their legislation or
regulations in ways that negatively affect the business, financial condition and results of operations of such Spinco.
Spinco
businesses may also become exposed to potential liabilities as a result of differing views on the privacy of consumer and other user data collected by these businesses. The
failure of any Spinco, and/or the various third party vendors and service providers with which it does business, to comply with applicable privacy policies or federal, state or similar international
laws and regulations or any compromise of security that results in the unauthorized release of personally identifiable information or other user data could damage the reputation of these businesses,
discourage potential users from trying the products and services of the affected Spinco and/or result in fines and/or proceedings by governmental agencies and/or consumers, one or all of which could
adversely affect the business, financial condition and results of operations of the affected Spinco.
Intellectual PropertyEach Spinco may fail to adequately protect their intellectual property rights or may be accused of infringing
intellectual property rights of third parties.
Each Spinco may fail to adequately protect its intellectual property rights or may be accused of infringing intellectual property rights of third parties. Each
Spinco regards its intellectual property rights, including patents, service marks, trademarks and domain names, copyrights, trade secrets and similar intellectual property (as applicable), as critical
to its success. Spinco businesses also rely heavily
upon software codes, informational databases and other components that make up their products and services.
Each Spinco relies on a combination of laws and contractual restrictions with employees, customers, suppliers, affiliates and others to establish and protect these proprietary rights.
Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use trade secret or copyrighted intellectual property without authorization which, if discovered, might
require legal action to correct. In addition, third parties may independently and lawfully develop substantially similar intellectual properties.
The
Spincos have generally registered and continue to apply to register, or secure by contract when appropriate, their respective trademarks and service marks as they are developed and
used, and reserve and register domain names as they deem appropriate. The Spincos generally consider the protection of their respective trademarks to be important for purposes of brand maintenance and
reputation. While each Spinco vigorously protects its trademarks, service marks and domain names, effective trademark protection may not be available or may not be sought in every country in which
products and services are made available, and contractual disputes may affect the use of marks governed by private contract. Similarly, not every variation of a domain name may be available or be
registered, even if available. The failure of a Spinco to protect its intellectual property rights in a meaningful manner or challenges to related contractual rights could result in erosion of brand
names and limit the ability of the affected Spinco to control marketing on or through the internet using its various domain names or otherwise, which could adversely affect the business, financial
condition and results of operations of the affected Spinco.
Some Spinco businesses have been granted patents and/or have patent applications pending with the United States Patent and Trademark Office and/or various foreign patent authorities for
various proprietary technologies and other inventions. The Spincos consider applying for patents or for other appropriate statutory protection when they develop valuable new or improved proprietary
technologies or inventions are identified, and will continue to consider the appropriateness of filing for patents to protect future proprietary technologies and inventions as circumstances may
warrant. The status of any patent involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, any patent application filed may not result in a patent
being issued or existing or future
16
patents may not be adjudicated valid by a court or be afforded adequate protection against competitors with similar technology. In addition, third parties may create new products or methods that
achieve similar results without infringing upon patents owned by a Spinco. Likewise, the issuance of a patent to a Spinco does not mean that the processes or inventions of the Spinco will not be found
to infringe upon patents or other rights previously issued to third parties.
From
time to time, certain of the Spincos are subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of the trademarks,
copyrights, patents and other intellectual property rights of third parties. In addition, litigation may be necessary in the future to enforce the intellectual property rights of the affected Spinco,
protect trade secrets or to determine
the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and
technical resources, any of which could adversely affect the business, financial condition and results of operations of the affected Spinco. Patent litigation tends to be particularly protracted and
expensive.
The spin-off agreements were not the result of arm's length negotiations.
The agreements that the Spincos will enter into with IAC and the other Spincos in connection with the spin-offs, including the separation and
distribution agreement, tax sharing agreement, employee matters agreement and transition services agreement were established by IAC, in consultation with the Spincos, with the intention of maximizing
the value to current IAC's shareholders. Accordingly, the terms for any particular Spinco may not be as favorable as would have resulted from negotiations among unrelated third parties.
17
THE SEPARATION
General
On [ ], 2008, the IAC Board of Directors approved the separation of IAC into five separate,
publicly traded companies: (1) IAC, (2) HSNi, (3) ILG, (4) Ticketmaster and (5) Tree.com. The separation will be accomplished through the distribution by IAC of all
of the shares of the common stock of the Spincos held by IAC to holders of IAC common stock on the record date. Immediately following the distributions, IAC stockholders will own 100% of the
outstanding common stock of IAC and the Spincos. You will not be required to make any payment, surrender or exchange your shares of IAC common stock and/or Class B common stock or take any
other action to receive your shares of common stock of the Spincos.
The board of directors of IAC has reserved the right to modify, delay or abandon the spin-off of any or all of the Spincos. In addition, the spin-offs are subject to the
satisfaction or waiver of a number of conditions described under "Conditions to the Spin-Offs."
The Number of Shares You Will Receive
For every share of IAC common stock and/or Class B common stock that you owned at the close of business on
[ ], 2008, the record date, you will receive one-fifth, one-fifth, one-fifth and one-thirtieth of a share of common stock of HSNi, ILG,
Ticketmaster and Tree.com, respectively, on the distribution date. As described below under "When and How You Will Receive the Dividend," IAC will not distribute any fractional shares of
common stock of any of the Spincos to its stockholders.
When and How You Will Receive the Dividend
IAC will distribute the shares of common stock of each of the Spincos on [ ], 2008, the
distribution date. The Bank of New York, which currently serves as the transfer agent and registrar for IAC's common stock, will serve as transfer agent and registrar for the common stock of the
Spincos and as distribution agent in connection with the spin-offs.
If
you own IAC common stock and/or Class B common stock as of the close of business on the record date, the shares of Spinco common stock that you are entitled to receive in the
spin-offs will be issued electronically, as of the distribution date, to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form.
Registration in book-entry form refers to a method of recording stock ownership when no physical share certificates are issued to stockholders, as is the case in the spin-offs.
Commencing
on or shortly after the distribution date, if you hold physical stock certificates that represent your shares of IAC common stock and/or Class B common stock and you
are the registered holder of the IAC shares represented by those certificates, the distribution agent will mail to you an account statement that indicates the number of shares of Spinco common stock
that have been registered in book-entry form in your name. If you have any questions concerning the mechanics of having shares of common stock of the Spinco registered in
book-entry form, you are encouraged to contact The Bank of New York at the address set forth on page [ ] of this information
statement.
Most
IAC stockholders hold their shares of IAC common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in "street name"
and ownership
would be recorded on the bank or brokerage firm's books. If you hold your IAC common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of
common stock of the Spincos that you are entitled to receive in the spin-offs. If you have any questions concerning the mechanics of having shares of Spincos common stock held in "street name," you
are encouraged to contact your bank or brokerage firm.
18
The
Bank of New York, as distribution agent, will not deliver any fractional shares of common stock of a Spinco in connection with the spin-offs. Instead, for each Spinco, The Bank of
New York will aggregate all fractional shares and sell them on behalf of the holders who otherwise would be entitled to receive fractional shares. If you physically hold IAC common stock certificates
and are the registered holder, you will receive a check from the distribution agent in an amount equal to your pro rata share of the aggregate net cash proceeds of the sales. The Spincos estimate that
it will take approximately [two weeks] from the distribution date for the distribution agent to complete the distributions of the aggregate net cash proceeds. If you hold your
IAC stock through a bank or brokerage firm, your bank or brokerage firm will receive on your behalf your pro rata share of the aggregate net cash proceeds of the sales and should electronically credit
your account for your share of such proceeds.
Results of the Separation
After the spin-offs, each of the Spincos will be a separate publicly traded company. Immediately following the spin-offs, based on the number of registered
stockholders of IAC common stock and Class B common stock on [ ], and without giving effect to "when-issued" trading, each of the
Spincos expects to have [ ] stockholders of record.
The
actual number of shares to be distributed will be determined on the record date and will reflect the issuance of IAC common stock in connection with any exercise of IAC options,
vesting of restricted share units or conversion of other convertible IAC securities between the date the IAC Board of Directors declares the dividend for the distribution and the record date for the
spin-offs.
The spin-offs will not affect the number of outstanding shares of IAC common stock and/or Class B common stock or any rights of IAC stockholders. However, in
connection with the spin-offs, as more fully described in IAC's preliminary proxy statement under Schedule 14A under the Securities Exchange Act of 1934, as amended, filed on
June 9, 2008, IAC has sought approval from its stockholders of a proposal to amend its Restated Certificate of Incorporation to effect a 1-for-2 reverse stock split of
its common stock and Class B
common stock, which may be implemented by IAC's Board of Directors in its sole discretion immediately following the completion of the spin-offs or, if not all of the spin-offs
are effected substantially simultaneously, immediately following the first spin-off. If the reverse stock split is approved by IAC's stockholders and implemented by IAC's Board of
Directors, each two shares of IAC common stock or Class B common stock will be combined into one share of IAC common stock or Class B common stock, respectively. The purpose of
implementing the reverse stock split would be to seek to increase the per share trading price of IAC's common stock following the spin-offs relative to what the per share trading price
would be if the reverse stock split were not implemented. An increased trading price could increase interest from institutional investors, investment funds and brokerage firms in IAC common stock;
lower the transaction costs involved in purchasing IAC common stock and improve the trading liquidity of IAC common stock.
Material U.S. Federal Income Tax Consequences of the Spin-Offs
The following section describes the material U.S. federal income tax consequences of the spin-offs to "U.S. holders" (as defined below) of IAC common
stock. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary or proposed U.S. Treasury regulations promulgated thereunder,
judicial opinions, published positions of the IRS and all other applicable authorities, all as in effect as of the date of this document and all of which are subject to change, possibly with
retroactive effect. Any such change could affect the accuracy of the statements and conclusions set forth in this document.
For
purposes of this discussion, the term "U.S. holder" means a beneficial owner of IAC common stock that is, for U.S. federal income tax purposes:
-
- An
individual who is a citizen or resident of the United States;
19
-
- a
corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States, any state thereof, or
the District of Columbia;
-
- an
estate, the income of which is subject to U.S. federal income tax regardless of its source; or
-
- a
trust if (1) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust or (2) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
If an entity or arrangement that is treated as a partnership for U.S. federal income tax purposes holds IAC common stock, the tax treatment of a partner in such entity generally will
depend on the status of the partners and the activities of the partnership. If you are a partner in a partnership holding IAC common stock, please consult your tax advisor.
This
discussion only addresses holders of IAC common stock that are U.S. holders and hold such stock as a capital asset within the meaning of Section 1221 of the Code. Further,
this summary does not address all aspects of U.S. federal income taxation that may be relevant to a holder in light of the holder's particular circumstances or that may be applicable to holders
subject to special treatment under U.S. federal income tax law (including, for example, persons that are not U.S. holders, financial institutions, dealers in securities, traders in securities that
elect mark-to-market treatment, insurance companies, mutual funds, tax-exempt organizations, partnerships or other flow-through entities and their
partners or members, U.S. expatriates, holders liable for the alternative minimum tax, holders whose functional currency is not the U.S. dollar, and holders who hold their IAC common stock as part of
a hedge, straddle, constructive sale or conversion transaction, or holders who acquired IAC common stock pursuant to the exercise of employee stock options or otherwise as compensation). This
discussion does not address the tax consequences to any person who actually or constructively owns more than 5% of IAC common stock. In addition, no information is provided herein with respect to the
tax consequences of the spin-offs under applicable state, local or non-U.S. laws or federal laws other than those pertaining to the federal income tax.
IAC STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE SPIN-OFFS TO THEM, INCLUDING THE EFFECTS OF U.S. FEDERAL,
STATE AND LOCAL, FOREIGN AND OTHER TAX LAWS.
IAC has requested and expects to receive, prior to effecting any of the spin-offs, a private letter ruling from the IRS and/or an opinion of counsel
satisfactory to the IAC board of directors regarding the qualification of the spin-offs, together with certain related transactions, as transactions that are generally tax free for U.S.
federal income tax purposes under Sections 355 and/or 368(a)(1)(D) of the Code. If the private letter ruling is received prior to the spin-offs, IAC expects to receive an opinion of
counsel regarding certain aspects of the transaction that are not covered by the private letter ruling. If the private letter ruling is not received prior to the spin-offs, IAC expects to
receive an opinion of counsel regarding the
qualification of the spin-offs, together with certain related transactions, as transactions that are generally tax free for U.S. federal income tax purposes under Sections 355
and/or 368(a)(1)(D) of the Code.
Certain U.S. Federal Income Tax Consequences if each of the spin-offs Qualifies as a Transaction that is generally tax free under
Sections 355 and/or 368(a)(1)(D) of the Code
Assuming that each of the spin-offs qualifies as a transaction that is generally tax free for U.S. federal income tax purposes under
Sections 355 and/or 368(a)(1)(D) of the Code:
-
- no
gain or loss will be recognized by, and no amount will be includible in the income of IAC as a result of the spin-offs, other than gain or income arising in
connection with certain internal
20
If
an IAC stockholder holds different blocks of IAC common stock (generally, shares of IAC common stock acquired on different dates or at different prices), such holder should consult
its tax advisor regarding the determination of the basis and holding period of shares of Spinco common stock received in the spin-offs in respect of particular blocks of IAC common stock.
U.S.
Treasury regulations require IAC stockholders who receive Spinco common stock in the spin-offs to attach to their U.S. federal income tax returns for the year in which
the Spinco stock is received a detailed statement setting forth such data as may be appropriate to demonstrate the applicability of Section 355 of the Code to the spin-offs.
Certain U.S. Federal Income Tax Consequences if One or More of the Spin-Offs Were Taxable
The IRS private letter ruling and/or the opinion of counsel will be based on, among other things, certain assumptions as well as on the accuracy of certain
representations and statements that IAC and the Spincos make to the IRS and to counsel. If any of these representations or statements are, or become, inaccurate or incomplete, or if IAC or the Spincos
breach any of their respective covenants, the IRS private letter ruling and/or the opinion of counsel may be invalid.
Moreover,
the IRS private letter ruling would not address all the issues that are relevant to determining whether the spin-offs qualify as transactions that are generally tax
free for U.S. federal income tax purposes. Notwithstanding the IRS private letter ruling and/or opinion, the IRS could determine that one or more of the spin-offs should be treated as a
taxable distribution if it determines that any of the representations, assumptions or undertakings that were included in the request for the private letter ruling is false or has been violated or if
it disagrees with the conclusions in the tax opinion that are not covered by the IRS ruling.
If
the IRS were to assert successfully that one or more of the spin-offs were taxable, the above consequences would not apply with respect to such spin-off and
both IAC and holders of IAC common stock who received shares of Spinco common stock in such spin-off could be subject to tax, as
21
described
below. In addition, certain events that may or may not be within the control of IAC or a Spinco, including extraordinary purchases of IAC common stock or Spinco common stock, could cause one
or more of the spin-offs not to qualify as tax free to IAC and/or holders of IAC common stock. Depending on the circumstances, a Spinco may be required to indemnify IAC and the other
Spincos for some or all of the taxes and certain related losses resulting from the spin-off of such Spinco not qualifying as tax free under Sections 355 and/or 368(a)(1)(D) of the
Code. See "Certain Relationships and Related Party TransactionsTax Sharing Agreement." If a spin-off were taxable, then:
-
- IAC
would recognize gain in an amount equal to the excess of the fair market value of Spinco common stock on the date of the spin-off distributed to IAC
stockholders over IAC's adjusted tax basis in the stock of such Spinco, and IAC may also recognize income or gain with respect to certain restructuring transactions undertaken in connection with such
spin-off;
-
- each
IAC stockholder who received Spinco common stock in the taxable spin-off would be treated as having received a taxable distribution in an amount equal to
the fair market value of such Spinco stock (including any fractional shares sold on behalf of the stockholder) on the spin-off date. That distribution would be taxable to the stockholder
as a dividend to the extent of IAC's current and accumulated earnings and profits (as increased to reflect any current income, including any gain, recognized by IAC on the taxable spin-off). Any
amount that exceeded IAC's earnings and profits would be treated first as a non-taxable return of capital to the extent of the IAC stockholder's tax basis in its IAC common stock with any
remaining amounts being taxed as capital gain;
-
- certain
stockholders could be subject to additional special rules, such as rules relating to the dividends received deduction and extraordinary dividends; and
-
- a
stockholder's tax basis in Spinco common stock received generally would equal the fair market value of Spinco common stock on the spin-off date, and the
holding period for that stock would begin the day after the spin-off date.
Even if one or more spin-offs otherwise qualify as transactions that are generally tax free for U.S. federal income tax purposes under Sections 355 and/or 368(a)(1)(D)
of the Code, they could be taxable to IAC under Section 355(e) of the Code if one or more persons were to acquire directly or indirectly stock representing a 50% or greater interest, by vote or
value, in IAC or one of the Spincos during the four-year period beginning on the date which is two years before the date of the spin-off, as part of a plan or series of related
transactions that includes the spin-off. If such an acquisition of IAC stock or Spinco stock were to trigger the application of Section 355(e), IAC would recognize taxable gain as
described above, but the spin-offs would be tax free to IAC stockholders.
In connection with the spin-offs, IAC and the Spincos will enter into a Tax Sharing Agreement. Under the Tax Sharing Agreement, each Spinco will have to indemnify IAC and the
other Spincos for any taxes resulting from the spin-off of such Spinco (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related
stockholder litigation or controversies) to the extent such amounts result from (i) any act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement,
(ii) any acquisition of equity securities or assets of such Spinco or a member of its group, or (iii) any breach by such Spinco or any member of its group of any representation or
covenant contained in the separation documents or in the documents relating to the IRS private letter ruling and/or tax opinion. The ability of IAC or any of the Spincos to collect under these
indemnity provisions will depend on the financial position of the indemnifying party. See "Certain Relationships and Related Party TransactionsTax Sharing Agreement."
THE FOREGOING IS A SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFFS UNDER CURRENT LAW AND IS FOR GENERAL INFORMATION ONLY. THE
FOREGOING DOES NOT PURPORT TO ADDRESS ALL U.S.
22
FEDERAL INCOME TAX CONSEQUENCES OR TAX CONSEQUENCES THAT MAY ARISE UNDER THE TAX LAWS OF OTHER JURISDICTIONS OR THAT MAY APPLY TO PARTICULAR CATEGORIES OF STOCKHOLDERS. EACH IAC STOCKHOLDER SHOULD
CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE SPIN-OFFS TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE
EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.
Market for Common Stock of the Spincos
There is currently no public market for the common stock of any of the Spincos. HSNi has applied to list its common stock on NASDAQ under the symbol "HSNI." ILG
has applied to list its common stock on NASDAQ under the symbol "IILG." Ticketmaster has applied to list its common stock on NASDAQ under the symbol "TKTM." Tree.com has applied to list its common
stock on NASDAQ
under the symbol "TREE." Each of HSNi, ILG, Ticketmaster and Tree.com has been approved for inclusion in [ ],
[ ],
[ ] and [ ] market tier of the Nasdaq Stock Market, respectively.
Trading Before the Distribution Date
Beginning on or shortly before the record date and continuing through the distribution date, it is expected that there will be two markets in IAC common stock: a
"regular-way" market and an "ex-distribution" market. Shares of IAC common stock that trade on the regular way market will trade with an entitlement to shares of the common
stock of the Spincos distributed pursuant to the spin-offs. Shares that trade on the ex-distribution market will trade without an entitlement to shares of the common stock of the Spincos
distributed pursuant to the spin-offs. Therefore, if you sell shares of IAC common stock in the "regular-way" market up to and including through the distribution date, you will be selling
your right to receive shares of the common stock of the Spincos in the spin-offs. If you own shares of IAC common stock at the close of business on the record date and sell those shares on the
"ex-distribution" market, up to and including through the distribution date, you will still receive the shares of the common stock of the Spincos that you would be entitled to receive
pursuant to your ownership of the shares of IAC common stock.
Furthermore,
beginning shortly before the distribution date and continuing up to and including through the distribution date, it is expected that there will be a
"when-issued" market in the common stock of each of the Spincos. "When-issued" trading refers to a sale or purchase made conditionally because the security has been authorized
but not yet issued. The "when-issued" trading market will be a market for shares of Spinco common stock that will be distributed to IAC stockholders on the distribution date. If you owned
shares of IAC common stock at the close of business on the record date, you would be entitled to shares of Spincos' common stock distributed pursuant to the spin-offs. You may trade this entitlement
to shares of common stock of all or any of the Spincos, without the shares of IAC common stock you own, on the "when-issued" market. On the first trading day following the distribution
date, "when-issued" trading with respect to Spinco common stock will end and "regular-way" trading will begin.
Conditions to the Spin-Offs
The IAC Board of Directors has reserved the right, in its sole discretion, to amend, modify or abandon the spin-offs and the related transactions at
any time prior to the distribution date. This means IAC may cancel or delay the planned distribution of common stock of all or any of the Spincos if at any time the Board of Directors of IAC
determines that the distribution of such common stock is not in the best interests of IAC and its stockholders. If IAC's Board of Directors determines to cancel
23
the
spin-off of a Spinco, stockholders of IAC will not receive any dividend of common stock of such Spinco and IAC will be under no obligation whatsoever to its stockholders to distribute
such shares.
Absent a determination of IAC's Board of Directors to the contrary, the Spincos expect that the spin-offs will be effective on
[ ], 2008, the distribution date. In addition, the spin-offs and related transactions are subject to the satisfaction or
waiver (by IAC's Board of Directors in its sole discretion) of the following conditions:
-
- the
registration statement on Form 10 filed by each of the Spincos with respect to its common shares shall have been declared effective by the SEC or become effective
under the Exchange Act, no stop order suspending the effectiveness of such registration statement shall have been issued and no proceedings for that purpose shall have been instituted or threatened by
the SEC;
-
- the
listing of common stock of each of the Spincos shall have been accepted for listing on NASDAQ, subject to compliance with applicable listing requirements;
-
- no
order or other legal restraint or prohibition preventing the consummation of any of the spin-offs or related transactions shall be threatened, pending or in
effect;
-
- any
material consents and governmental authorizations necessary to complete the spin-offs shall have been obtained and be in full force and effect;
-
- the
stockholders of IAC shall have approved, in accordance with the Delaware General Corporation Law (the "DGCL"), a merger agreement providing for the merger
of a wholly-owned subsidiary of IAC with and into IAC pursuant to which all of the outstanding shares of preferred stock of IAC shall be converted into the right to receive cash;
-
- the
IAC Board of Directors shall have received a written solvency opinion, in form and substance acceptable to the IAC Board of Directors, from Duff & Phelps
regarding the spin-offs and related transactions, which opinion shall not have been withdrawn or modified;
-
- IAC
shall have received an opinion of Wachtell, Lipton, Rosen & Katz, in form and substance satisfactory to the IAC Board of Directors, regarding the qualification of
the spin-offs, together with certain related transactions, as transactions that are generally tax free for U.S. federal income tax purposes under Sections 355 and/or 368(a)(1)(D) of
the Code (to the extent such qualification is not addressed by an Internal Revenue Service private letter ruling (the "IRS Ruling") received by IAC), which opinion (and, in the event IAC shall have
received the IRS Ruling, the IRS Ruling) shall not have been withdrawn or modified; and
-
- IAC
shall have received an opinion of Delaware counsel to IAC, in form and substance satisfactory to the IAC Board of Directors, to the effect that the spin-offs
do not constitute a sale, lease or exchange of "all or substantially all" of the assets of IAC requiring approval of the stockholders of IAC under Section 271 of the DGCL.
Reasons for the Separation
During the fall of 2007, IAC's management, in reviewing the strategic agendas and prospects of its various businesses, concluded that a separation of IAC into
five separately traded public companies would best facilitate growth of the businesses. After discussion with the IAC Board of Directors, the Board agreed. Among the factors considered in arriving at
this determination were:
-
- While
the Spincos share common attributes, both with each other and with IAC, they generally face different strategic and competitive challenges. As a result, IAC management
and the IAC Board determined that, in IAC's current configuration, when facing strategic and operating issues for a particular business, whether having to do with transactional alternatives, capital
investment, new business initiatives, compensation or otherwise, considerations of the other
24
businesses
and of the company as a whole had the potential to lead to different decisions than might be made by standalone companies. IAC concluded, therefore, that the current structure may not be
the most responsive to the exigencies of each business and that the spin-offs will enhance the success of each business by enabling IAC and the Spincos to resolve the problems that arise from the
operation of different businesses within the IAC group.
-
- The
lack of a liquid equity currency linked directly to the individual businesses constrained each business' ability to transact in its own industry and to provide
equity-based incentive programs for employees that were entirely dependent on the performance of the specific business.
-
- While
efforts were underway to increase the benefits to each business resulting from being a part of IAC, including through cost savings, better talent development and
deployment, increased business opportunities, and other initiatives, the common attributes of the Spincos were more limited than initially believed, and there was therefore a limit to the benefits to
be realized from such integration and the time horizon for realizing such benefits was substantially longer than IAC had initially believed.
-
- IAC
believed that its stock performance during recent years did not reflect its operating performance or the true value of its businesses. IAC believed that this was in part
because of the complexity involved in understanding a variety of businesses represented by a single equity investment, and that increased transparency and clarity into the different businesses of IAC
would allow investors to more appropriately value the merits, performance and future prospects of the companies.
Because IAC concluded that the separation of these businesses would over time enhance their operating performance, open up strategic alternatives that may otherwise not have been readily
available to them, and facilitate investor understanding and better target investor demand, IAC believes that following the spin-offs, the common stock of the five publicly traded
companies will have a higher aggregate market value than would IAC if it were to remain in its current configuration. No assurances, however, can be given that such higher aggregate market value will
be achieved. The IAC Board of Directors believes that such value increase would further facilitate growth of the separated businesses by reducing the costs of equity compensation and acquisitions
undertaken with equity consideration, in each case resulting in a real and substantial benefit for the companies.
The
IAC Board of Directors considered a number of other potentially negative factors in evaluating the separation, including loss of synergies from operating as one company, potential
disruptions to the businesses as a result of the separation, the potential impact of the separation on the anticipated credit ratings of the Spincos, risks of being unable to achieve the benefits
expected to be achieved by the separation and the reaction of IAC stockholders to the separation, the risk that the plan of execution might not be completed and the one-time and ongoing
costs of the separation. The IAC Board of Directors concluded that the anticipated benefits of the spin-offs outweighed these factors.
In
view of the wide variety of factors considered in connection with the evaluation of the separation and the complexity of these matters, the IAC Board of Directors did not find it
useful to, and did not attempt to, quantify, rank or otherwise assign relative weights to the factors considered. The individual members of the IAC Board of Directors likely may have given different
weights to different factors.
Litigation with Liberty Media Corporation
In January 2008, IAC, Barry Diller and Liberty Media Corporation ("Liberty") commenced actions in the Delaware Chancery Court in which Liberty asserted, among
other things, that Mr. Diller, the Chairman and CEO of IAC, had breached an agreement between Liberty and him and that therefore
25
Liberty had assumed the right to exercise voting control over IAC. The basis for this claim was that IAC did not have the right to consummate the spin-offs with a single class voting
structure and therefore acts in furtherance of the transaction had breached the agreement. After a chancery court decision in IAC and Mr. Diller's favor on March 28, 2008, the parties
agreed, on May 13, 2008, to settle that litigation pursuant to the "Spinco Agreement." As described in more detail below under "Certain Relationships and Related Party
TransactionsAgreements with Liberty Media Corporation," the Spinco Agreement also contains, among other things, provisions that will become effective at the time of the
spin-off of each Spinco with a single class of common stock, including provisions providing Liberty the right to nominate directors to the Spinco's Board of Directors so long as Liberty
maintains specified ownership levels, restrictions on acquisitions and transfers of the securities of the Spinco by Liberty and its affiliates, certain standstill restrictions on Liberty and its
affiliates and registration rights to be granted to Liberty.
Financial Advisor
Allen & Company LLC provided financial advice in connection with the spin-offs. Allen & Company was retained in connection with
the transaction because of the firm's familiarity with the businesses and assets of IAC and the Spincos and the firm's qualifications and reputation.
TREATMENT OF OUTSTANDING IAC COMPENSATORY EQUITY-BASED AWARDS
In November of 2007, IAC's Compensation and Human Resources Committee (the "Committee") made determinations regarding the treatment in the spin-offs of IAC's
compensatory equity-based awards granted on or prior to December 31, 2007. The various adjustments the Committee has determined to make are described below:
- (1)
- All
unvested IAC restricted stock units ("RSUs") granted prior to August 2005 will vest immediately prior to the spin-offs, with awards thereafter settled, in accordance
with applicable law, in shares of common stock of IAC, HSNi, ILG, Ticketmaster and Tree.com, in each case as though the equity holder owned the number of shares of IAC common stock underlying the IAC
RSU award immediately prior to the spin-offs. Based on the most recent available information, it is expected that at the time of the spin-offs HSNi employees, ILG employees,
Ticketmaster employees and Tree.com employees will hold 225,233 RSUs, 116,008 RSUs, 328,887 RSUs and 394,110 RSUs, respectively, subject to this treatment.
- (2)
- All
unvested IAC RSUs scheduled to vest through February 2009 will vest immediately prior to the spin-offs, with awards thereafter settled, in accordance with applicable
law, in shares of common stock of IAC, HSNi, ILG, Ticketmaster and Tree.com, in each case as though the equity holder owned the number of shares of IAC common stock underlying the IAC RSU award
immediately prior to the spin-offs. Based on the most recent available information, it is expected that at the time of the spin-offs HSNi employees, ILG employees, Ticketmaster
employees and Tree.com employees will hold 78,772 RSUs, 39,685 RSUs, 98,306 RSUs and 32,816 RSUs, respectively, subject to this treatment.
- (3)
- Performance-based
IAC RSUs granted in 2007, or Growth Shares, will be converted into non-performance-based IAC RSUs based on "target" value with the same vesting schedule
and will thereafter be subject to the other adjustment and conversion provisions described below. Based on the most recent available information, it is expected that at the time of the
spin-offs HSNi employees, ILG employees, Ticketmaster employees and Tree.com employees will hold 153,464 RSUs, 113,859 RSUs, 192,754 RSUs and 157,948 RSUs, respectively, subject to this
treatment.
- (4)
- With
respect to each IAC RSU award that provides for vesting of 100% of the award following passage of a multi-year period (cliff vesting awards), the portion of the
unvested
26
IAC
RSU award that would have vested through February 2009 if the award had vested on an annual basis will convert into five separate RSU awards with respect to IAC and each of the Spincos, with
appropriate adjustments to the number of shares of common stock underlying each such award to maintain pre- and post spin-off values, but otherwise preserving the same vesting
terms and other applicable terms and conditions. Based on the most recent available information, it is expected that at the time of the spin-offs HSNi employees, ILG employees,
Ticketmaster employees and Tree.com employees will hold 164,907 RSUs, 118,035 RSUs, 193,104 RSUs and 110,203 RSUs, respectively, subject to this treatment (inclusive of converted Growth Shares).
- (5)
- With
respect to all other IAC RSUs that do not vest or convert pursuant to paragraphs (1), (2) or (4) above, the IAC RSUs will convert into an RSU award with
respect to shares of common stock of the company that continues to employ the equity holder following the spin-offs, with appropriate adjustments to the number of shares of common stock
underlying each such award to maintain pre- and post spin-off values, but otherwise preserving the same vesting terms and other applicable terms and conditions. Based on the
most recent available information, it is expected that at the time of the spin-offs HSNi employees, ILG employees, Ticketmaster employees and Tree.com employees will hold 365,071 RSUs,
324,639 RSUs, 373,482 RSUs and 161,424 RSUs, respectively, subject to this treatment (inclusive of converted Growth Shares); and
- (6)
- All
unexercised option awards, whether vested or unvested, will be split among IAC and each of the Spincos based on relative value at the time of the spin-offs, with
appropriate adjustments to the number of shares of common stock underlying each such award and the per share exercise price of each such award to maintain pre- and post
spin-off values, but otherwise preserving the same vesting terms and other applicable terms and conditions. Based on the most recent available information, it is expected that at the time
of the spin-offs HSNi employees, ILG employees, Ticketmaster employees and Tree.com employees will hold 734,633 options, 0 options, 816,784 options and 451,885 options, respectively,
subject to this treatment.
With respect to any IAC compensatory equity-based awards granted after December 31, 2007, those awards will convert into awards with respect to shares of common stock of the
company that continues to employ the equity holder following the spin-offs, with appropriate adjustments to the number of shares underlying each such award and the per share exercise price of each
such award (with respect to options) to maintain pre- and post spin-off values, but otherwise preserving the same vesting terms and other applicable terms and conditions. Based on the most recent
available information, it is expected that at the time of the spin-offs HSNi employees, ILG employees, Ticketmaster employees and Tree.com employees will hold 154,643 RSUs and 1,365,500
options, 199,899 RSUs and 0 options, 99,158 RSUs and 1,326,000 options and 6,451 RSUs and 0 options, respectively, subject to this treatment.
With respect to stock options, the number of shares of common stock subject to any adjusted stock option will be rounded down to the nearest whole share. With respect to restricted stock
units that do not vest in connection with the spin-offs, the number of shares of common stock subject to any adjusted restricted stock unit will be rounded to the nearest whole share. With
respect to restricted stock units that vest in connection with the spin-offs, at IAC's election, the number of shares of common stock that an individual will be entitled to receive in
connection with the spin-offs will either be rounded to the nearest whole share or fractional shares will be aggregated into whole shares, sold in the open market at prevailing market
prices and the aggregate net cash proceeds will be distributed to each holder who otherwise would have been entitled to receive a fractional share in the spin-offs.
27
The
treatment of IAC compensatory equity-based awards held by persons who will be employed by IAC immediately following the spin-offs is generally similar to that described above, with
certain adjustments intended to provide retention incentives for IAC corporate employees.
The
principal objective of the Committee in making these adjustments was one of fairness, with some of the particular considerations being:
-
- A
desire to reward service prior to the spin-offs with stock of the companies that made up IAC before the spin-offs, and reward service after the
spin-offs with stock of the company for which an employee will work after the spin-offs;
-
- A
recognition that the primary motivation for the Growth Share grants, which was to provide increased incentives for employees to focus on the total performance of the
entire IAC conglomerate as opposed to the individual businesses for which they worked through increased volatility of potential rewards, no longer was present given the determination to do the
spin-offs;
-
- An
interest in eliminating the complexities that would be associated with adjusting the 2007 performance conditions among five separate public companies and the possibility
that such adjustments would not be equitable to all holders of the awards; and
-
- Compliance
with the terms of the applicable equity plans, tax laws and accounting requirements.
DIVIDEND POLICY
None of the Spincos currently expects to pay a regular cash dividend. The declaration and payment of future dividends to holders of common stock of a Spinco will
be at the discretion of the board of directors of that Spinco and will depend upon many factors, including its financial condition, earnings, capital requirements of its businesses, covenants
associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors that its board of directors deems relevant.
TRANSFERS TO IAC AND FINANCING
IAC currently expects that in connection with the spin-offs, HSNi will transfer to IAC approximately $390 million in cash; an entity that will
become a subsidiary of ILG prior to the spin-offs will distribute to IAC approximately $390 million in cash and Ticketmaster will distribute to IAC approximately $730 million in cash.
These Spincos expect to finance the amount distributed to IAC through borrowings by the applicable Spinco or its subsidiaries. Additionally, each of these companies may distribute some amount of cash
on hand, but these amounts are not presently knowable and are unlikely to be material. IAC currently expects that the borrowing arrangements will consist of a combination of secured credit facilities
and privately-issued debt securities for each of HSNi, ILG and Ticketmaster, the breakdown of which has yet to be determined. HSNi, ILG and Ticketmaster are each also expected to dividend to IAC prior
to the spin-offs all net receivables owed them by IAC and its affiliates. IAC does not expect Tree.com to incur material indebtedness prior to, or in connection with, the
spin-offs and instead expects to contribute approximately $[ ] to Tree.com prior to its spin-off. These dividends and cash
contributions were determined by IAC after an assessment of the optimal capital structure for each Spinco and for IAC, taking into account each company's cash flow prospects, working capital and other
cash needs, potential acquisition agenda and other relevant factors. In the event the financings do not occur, or less capital is raised than is currently anticipated, IAC expects to reduce the size
of the cash dividends commensurately.
28
CERTAIN INFORMATION WITH RESPECT TO HSNi
BUSINESS OF HSNi
When used with respect to any periods following the spin-offs and unless otherwise indicated, the term "HSNi" refers to HSN, Inc., a Delaware
corporation, which was incorporated in connection with the spin-offs in May 2008 to hold IAC's retailing businesses, subsidiaries and investments (excluding Shoebuy and Jupiter Shop
Channel and certain other equity investments). The following disclosure regarding HSNi's business assumes completion of the spin-offs.
For information regarding the results of operations of HSNi and its segments on a historical basis, see the Combined Financial Statements of HSNi and the disclosure set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results of Operations of HSNi." For information regarding the results of operations of HSNi on a pro forma basis
to give effect to the completion of the spin-offs, see the Unaudited Pro Forma Condensed Combined Financial Statements for HSNi.
Who We Are
HSNi owns and operates HSN, a retailer and interactive lifestyle network offering a broad assortment of products through television home shopping programming on
the HSN television network and HSN.com ("HSN"). HSN strives to transform the shopping experience by incorporating experts, entertainment, inspiration,
solutions, tips and ideas in connection with the sale of products through the HSN television network and HSN.com. HSNi also owns and operates the
Cornerstone Brands portfolio
of catalogs and related websites, including Frontgate, Ballard Designs, Garnet
Hill, Smith+Noble, The Territory Ahead, TravelSmith and Improvements, as well as a limited number of retail stores ("Cornerstone").
HSNi has two operating segments, HSN and Cornerstone. For the fiscal year ended December 31, 2007, HSN and Cornerstone represented approximately 65% and 35%, respectively, of
HSNi's combined revenue.
History
HSNi's predecessor company began broadcasting television home shopping programming from its studios in St. Petersburg in 1981, and by 1985, was
broadcasting this programming through a national network of cable and local television stations 24 hours a day, seven days a week. The company continued to broaden its national distribution
network through a combination of cable, satellite and broadcast systems, and as of December 31, 2007, the HSN television network reached approximately 90.6 million homes in the United
States.
29
The company acquired Improvements, a catalog featuring thousands of innovative home, patio and outdoor products, in June 2001, and significantly grew its catalogs business through the
acquisition of the Cornerstone Brands portfolio of leading print catalogs and related websites in April 2005.
The
company began conducting business online in 1994 and formally launched HSN.com, the online shopping portal for the HSN television
network, in 1999. In connection with the spin-offs, the company, together with certain other of IAC's Retailing businesses, subsidiaries and investments, were contributed to HSNi.
What We Do
HSNi markets and sells a wide range of third party and private label merchandise directly to consumers through HSN, which includes the HSN television network and
its related website, HSN.com, as well as through Cornerstone.
HSNi
is committed to providing an evolving variety and mix of quality products at reasonable prices and brands that resonate with its customers. See "Marketing and
Merchandising." Products offered through HSN include electronics and housewares, jewelry, beauty, apparel, health, home fashions, accessories, vitamins and other products. Featured products include
HSN-branded (or private label) products and third party-branded products, some of which are produced exclusively for HSN, as well as merchandise generally available through other
retailers. Generally, the HSN television network and HSN.com offer the broadest range of products, while the brands and businesses within Cornerstone
primarily offer home furnishings, products and accessories, and casual and leisure apparel.
HSN
HSN includes the HSN television network and its related website, HSN.com. The HSN television network broadcasts
live, customer interactive television home shopping programming 24 hours a day, seven days a week. This programming is intended to promote sales and customer loyalty through a combination of
product quality, value and selection, coupled with product information and entertainment. Programming is divided into separately televised segments, each of which has a host who presents and conveys
information regarding featured products, sometimes with the assistance of a representative from the product vendor.
HSN produces live programming for the HSN television network from its studios in St. Petersburg, Florida and distributes this programming by means of
satellite uplink facilities, which it owns and operates, to a satellite transponder leased by HSN on a full-time basis through May 2019. HSN has entered into a long-term
satellite transponder lease to provide for continued carriage of the HSN television network on a replacement transponder and/or replacement satellite, as applicable, in the event of a failure of the
transponder and/or satellite currently carrying the HSN television network. HSN has also designed business continuity and disaster recovery plans to ensure its continued satellite transmission
capability on a temporary basis in the event of inclement weather or a natural or other disaster.
As
of December 31, 2006 and 2007, the HSN television network reached approximately 89.0 million and 90.6 million, respectively, of the approximately
111.3 million and 112.8 million homes in the United States with a television set, respectively. Television households reached by the HSN television network as of December 31, 2006
and 2007 primarily include approximately 62.4 million and 62.7 million households capable of receiving cable and/or broadcast transmissions and approximately 26.4 million and
27.8 million direct broadcast satellite system, or DBS, households, respectively.
30
HSN has entered into multi-year distribution and affiliation agreements with cable television and DBS operators, collectively referred to in this
document as pay television operators, in the United States to carry the HSN television network, as well as to promote the network by carrying related commercials and distributing related marketing
materials to their respective subscriber bases. In exchange for this carriage and related promotional and other efforts, HSN generally pays these pay television operators a fee, which consists of a
per subscriber fee plus commissions, which are based on a percentage of the net merchandise sales to their subscriber bases. In some cases, pay television operators receive additional compensation in
the form of advertising insertion time on the HSN television network and commission guarantees in exchange for their commitments to deliver a specified number of subscribers. The average overall
length of the terms of the multi-year distribution and affiliation agreements in effect as of June 2008 is 4.6 years. Over time, HSN has moved away from entering into distribution
agreements that require the entire distribution fee to be paid at the outset of the contract. Instead, HSN typically negotiates agreements that require HSN to pay monthly or annual fees, which has led
to distribution agreements with shorter terms. Distribution and affiliation agreements with major and other pay television operators expire from time to time and renewal and negotiation processes with
major pay television operators are typically lengthy. At any given time in the ordinary course of business HSN is likely to be engaged in renewal and/or negotiation processes with one or more pay
television operators. HSN is currently engaged in such a process with a major cable pay television operator regarding an agreement that expired in 2005 and, as has typically been the case in similar
situations in the past, carriage of the HSN television network has continued (and is expected to continue) under rolling short-term extensions (in this case, month-to-month) pending the
conclusion of this process. The ongoing extension of this agreement is on economic terms that are substantially similar to the agreement that expired in 2005. HSN expects that, as in the past, any
long-term extension of the agreement will be on terms that, when taken as a whole, are commercially reasonable to HSN and competitive with the economics of other major cable pay television
operators.
As of December 31, 2007, HSN also had affiliation agreements with 71 low power broadcast television stations for leased carriage of the HSN television
network with terms ranging from several weeks to several years. In exchange for this carriage, HSN pays the broadcast television stations hourly or monthly fixed rates. IAC's subsidiary, Ventana
Television, Inc. ("Ventana") owns 27 of the 71 low power broadcast television stations that carry the HSN network on a full-time basis. IAC intends to file and receive the appropriate
authorization from the Federal Communications Commission ("FCC") before transferring Ventana and its broadcast television licenses to HSNi, as the transfer is subject to FCC approval.
HSN also includes HSN.com, a transactional e-commerce site that sells merchandise offered on the HSN
television network, as well as select merchandise sold exclusively on HSN.com. HSN.com provides
customers with additional content to support and enhance HSN television programming. For example, HSN.com provides users with an online program guide,
value-added video of product demonstrations, live streaming video of the HSN television network, customer-generated product reviews and additional information about HSN show hosts and guest
personalities.
Cornerstone
Cornerstone consists of a number of branded catalogs and related websites, the primary of which are Frontgate, Ballard Designs, Garnet Hill, Smith+Noble,
The Territory Ahead, TravelSmith and Improvements, and
25 retail stores.
31
Frontgate
features premium, high quality bed, bath and kitchen accessories, as well as outdoor, patio, garden and pool furnishings and accessories. Ballard Designs features
European-inspired bed, bath, dining and office furnishings and accessories, as well as rugs, shelving and architectural accents for the home. Garnet Hill offers bed and bath furnishings and soft
goods, as well as apparel and accessories for women and children, and Smith+Noble offers custom home furnishings and window treatments. The Territory Ahead offers casual apparel for men and women and
TravelSmith offers travel wear for men and women and related accessories. Improvements features thousands of innovative home, patio and outdoor products.
The
various brands within Cornerstone generally incorporate on-site photography and real-life settings, coupled with related editorial content describing the
merchandise and depicting situations in which it may be used. Branded catalogs are designed and produced in house, which enables each individual brand to control the production process and reduces the
amount of lead time required to produce a given catalog.
New
editions of full-color catalogs are mailed to customers several times each year, with a total annual circulation in 2007 of approximately 400 million catalogs. The
timing and frequency of catalog circulation varies by brand and depends upon a number of factors, including the timing of the
introduction of new products, marketing campaigns and promotions and inventory levels, among other factors.
Cornerstone
also operates Frontgate.com, BallardDesigns.com, GarnetHill.com, SmithandNoble.com, TheTerritoryAhead.com, TravelSmith.com and
Improvements.com, among other branded websites. These websites serve as additional, alternative storefronts for products featured in corresponding print
catalogs, as well as provide customers with additional content to support and enhance their shopping experience. Additional content provided by these websites, which differs across the various
websites, includes decorating tips and measuring and installation information, a feature that allows customers to browse the corresponding catalog on line and online design centers, gift registries
and travel centers.
Supply
HSN and Cornerstone purchase products by way of short- and long-term contracts and purchase orders, including products made to their respective
specifications, as well as name brand merchandise and lines from third party vendors, typically under certain exclusive rights. The terms of these contracts and purchase orders vary depending upon the
underlying products, the retail channel in which the products will ultimately be sold and the method of sale. In some cases, these contracts provide for the payment of additional amounts to vendors in
the form of commissions, the amount of which is based upon the achievement of agreed upon sales targets, among other milestones. In addition, in the case of some purchases, HSNi businesses may have
certain return, extended payment and/or termination rights. The mix and source of products generally depends upon a variety of factors, including price and availability, and HSNi manages inventory
levels through periodic, ongoing analyses of anticipated and current sales. No single vendor accounted for more than 5% of HSNi's combined net sales in 2007, 2006 or 2005.
Marketing and Merchandising
HSN continuously works to bring customers a broad assortment of new and existing products in a compelling, informative and entertaining format. For example, HSN
frequently collaborates with experts in a variety of fields to present special events on the HSN television network featuring HSN products and relevant expert content. In most cases, these events are
staged at HSN's television studios, and to a lesser extent, staged at venues associated with featured products. Online versions of certain special events are also featured on HSN.com for a limited time
period following their broadcast on the HSN television network.
32
In
an effort to promote its own differentiated brand, HSN seeks to provide its customers with unique products that can only be purchased through HSN. HSN frequently partners with leading
personalities and brands to develop product lines exclusive to HSN and believes that these affiliations enhance the awareness of the HSN brand among consumers generally, as well as increase the extent
to which HSN and/or products sold through HSN are featured in the media. In some cases, vendors have agreed to market their HSN affiliation to their existing customers
(i.e., by way of e-mail notifying customers when their products will be featured on the HSN television network).
HSN
also engages in co-promotional partnerships with major media companies to secure print advertising in national fashion, style and/or lifestyle publications to market HSN
to prospective customers in its target demographic, as well as search engine marketing and targeted offline advertising around the holidays and other key promotional periods.
The
Cornerstone brands differentiate themselves by offering customers an assortment of innovative proprietary and branded apparel and home products. In many cases, Cornerstone, seeks to
secure exclusive distribution rights for certain products. In addition, Cornerstone employs in-house designers or partners with leading manufacturers to develop exclusive new technology,
such as wrinkle free fabrications. The various Cornerstone brands use their respective websites to promote special sales events and e-mail marketing to promote special offers, including
cross-promotions for other Cornerstone brands. In addition, Cornerstone partners with third parties to offer promotional events such as sweepstakes and/or other advertising agreements. HSNi believes
that these affiliations enhance the awareness of the Cornerstone brands among consumers as well as strengthen its various brands overall.
Order Entry, Fulfillment and Customer Service
HSNi provides customers with convenient options in connection with the purchase, payment and shipment of merchandise, some of which vary by brand, business or
product. Products may be purchased online or through sales and service centers, and, in the case of Cornerstone only, by way of traditional catalog sales order form submissions. In addition, in the
case of HSN only, products may be purchased by phone through an automated attendant system or, in limited markets, by remote control through pay television set-top boxes.
In
addition to traditional payment options, such as credit and debit cards, payment options include private label credit cards and, in the case of HSN only, Flexpay, pursuant to which
customers may pay for select merchandise in two to six interest-free, monthly credit or debit card payments. See "Risk Factors Relating to the Business of HSNi Following the
Spin-OffsFlexpay Program." HSN also offers its customers the convenience of ordering products under the Autoship program, pursuant to which customers may arrange to have products
automatically shipped and billed at scheduled intervals. Standard and express shipping options are available and customers may generally return most merchandise for a full refund or exchange in
accordance with applicable return policies (which vary by brand and business), subject to restocking fees for custom merchandise in the case of
products sold through Cornerstone. Returns generally must be received within specified time periods after purchase, ranging from a minimum of thirty days to a maximum of one year, depending upon the
applicable policy.
HSNi
seeks to fulfill customer orders and process returns quickly and accurately from a network of fulfillment centers located, for HSN, in Tennessee, California and Virginia, and for
Cornerstone, in Ohio. HSNi contracts with several third party carriers and other fulfillment partners to ensure the reliable and timely delivery of products to its customers and processing of returns.
Customers
can also generally track the status of their orders through HSN.com and the various websites operated by Cornerstone, confirm
information regarding shipping and, in some cases, confirm the availability of inventory and establish and manage personal accounts. Customers may communicate
33
directly
with customer service via e-mail or by telephone, with call center representatives available seven days a week.
Competition
HSNi brands and businesses operate in a highly competitive environment. These brands and businesses are in direct competition for consumers with traditional
offline and online retailers (both television and internet retailers), ranging from large department stores to specialty shops, electronic retailers, direct marketing retailers, mail order and catalog
companies, infomercial retailers, wholesale clubs and discount retailers. In addition, the HSN television network competes for access to customers and audience share with other conventional forms of
entertainment and content. The price and availability of programming for pay television systems affect the availability of distribution for HSN television programming and the compensation that must be
paid to pay television operators for related carriage and competition for channel capacity and placement continues to increase. Principal competitive factors for HSNi brands and businesses include
(i) brand recognition, (ii) value, quality and selection of merchandise, (iii) customer experience, including customer service and reliability of fulfillment and delivery services
and (iv) convenience and accessibility of sales channels.
Employees
As of December 31, 2007, HSNi employed approximately 5,500 full-time employees and approximately 1,100 part-time employees. No HSNi
employees are represented by unions or other similar organizations and HSNi considers its relations with its employees to be good.
Properties
HSNi owns its corporate headquarters in St. Petersburg, Florida, which consist of approximately 600,000 square feet of office space and include television
studios, showrooms, broadcast facilities and administrative offices for HSN, as well as an HSN fulfillment center in Piney Flats, Tennessee. HSNi leases two additional HSN fulfillment centers in
Fontana, California and Roanoke, Virginia pursuant to long-term leases that expire in 2011 and 2015, as well as other properties in various locations in the United States for executive and
administrative offices and data centers. Cornerstone leases substantially all of its properties, consisting of administrative offices, retail outlets and fulfillment centers in West Chester, Ohio, as
well as 25 retail stores and outlets in various locations throughout the United States, all pursuant to long-term leases with expiration date ranging from 2008 to 2018.
All
leases with HSNi brands and businesses are at prevailing market rates. HSNi believes that the duration of each lease is adequate and does not anticipate any future problems renewing
or obtaining suitable leases for its principal properties. HSNi believes that its principal properties, whether owned or leased, are currently adequate for the purposes for which they are used and are
suitably maintained for these purposes. From time to time HSNi considers various alternatives related to its long term facilities needs. While HSNi management believes existing facilities are adequate
to meet its short term needs, it may become necessary to lease or acquire additional or alternative space to accommodate future growth.
HSNi Legal Proceedings
In the ordinary course of business, HSNi and its subsidiaries are parties to litigation involving property, personal injury, contract, intellectual property and
other claims. The amounts that may be recovered in such matters may be subject to insurance coverage or, where the claim arises from a product sold by HSNi's businesses, indemnity from the
manufacturer. HSNi does not believe that such ordinary course litigation will have a material effect on its business, financial condition or results of operations.
Rules of the Securities and Exchange Commission require the description of material pending legal proceedings, other than ordinary, routine litigation incident to the registrant's
business, and advise that
34
proceedings ordinarily need not be described if they primarily involve damage claims for amounts (exclusive of interest and costs) not exceeding 10% of the current assets of the registrant and its
subsidiaries on a consolidated basis. In the judgment of management, none of the pending litigation matters which HSNi and its subsidiaries are defending, including those described below, involves or
is likely to involve amounts of that magnitude.
35
RISK FACTORS RELATING TO THE BUSINESS OF HSNi FOLLOWING THE SPIN-OFFS
HSNi's business, financial condition and results of operations are subject to certain risks that are described below and in the section "Risk Factors" beginning
on page [ ]. You should carefully consider these risks and uncertainties. While HSNi believes that the risks and uncertainties described below and elsewhere
in this information statement include the most significant risk factors that should be considered by HSNi's investors, these risks and uncertainties are not the only ones facing HSNi and its
businesses.
Third Party Pay Television RelationshipsHSNi depends on relationships with pay television operators and any adverse changes in these
relationships could adversely affect its business, financial condition and results of operations.
HSNi is dependent upon the pay television operators with whom it enters into distribution and affiliation agreements to carry the HSN television network.
Distribution and affiliation agreements with major pay television operators expire from time to time and in some cases, renewals are not agreed upon prior to the expiration of a given agreement and
the HSN television network continues to be carried by the relevant pay television operator without an effective affiliation agreement in place. Renewal and negotiation processes with pay television
operators are typically lengthy and HSNi is currently engaged in the renewal and/or negotiation processes with certain major cable pay television operators regarding agreements that expired as early
as 2005, with carriage of the HSN network continuing under short-term extensions pending the conclusion of these processes. However, HSNi may be unable to successfully pursue the renewal,
or negotiate new, distribution and affiliation agreements with these or other providers to carry the HSN television network on acceptable terms, if at all.
The
cessation of carriage of the HSN television network by a major pay television operator or a significant number of smaller pay television operators for a prolonged period of time
could adversely affect HSNi's business, financial condition and results of operations. While HSNi believes that it will be able to continue to successfully manage the distribution process in the
future, certain changes in distribution levels, as well as increases in commission rates and/or other fees payable for carriage, could occur notwithstanding these efforts.
Third Party Vendor and Other RelationshipsHSNi depends on relationships with vendors, manufacturers and other third parties, and any
adverse changes in these relationships could adversely affect its business, financial condition and results of operations.
HSNi businesses purchase merchandise from a wide variety of third party vendors, manufacturers and other sources pursuant to short- and long-term
contracts and purchase orders. The ability of HSNi businesses to indentify and establish relationships with these parties, as well as access quality merchandise in a timely and efficient manner on
acceptable terms and cost, can be challenging. In particular, HSNi businesses purchase a significant amount of merchandise from vendors and manufacturers abroad, and have experienced (and expect to
continue to experience) increased costs for goods sourced in these markets, particularly in China. HSNi depends on the ability of vendors and manufacturers in the U.S. and abroad to produce and
deliver goods that meet applicable quality standards, which is impacted by a number of factors not within the control of these parties, such as political or financial instability, trade restrictions,
tariffs, currency exchange rates and transport capacity and costs, among others. In particular, Cornerstone is dependent, in significant part, upon independent, third party manufacturers to produce
private label merchandise.
Late
delivery of merchandise or delivery of merchandise that does not meet applicable quality standards could cause HSNi businesses to miss customer delivery dates or delay scheduled
promotions, which would result in the failure to meet customer expectations and could cause customers to cancel orders or cause HSNi businesses to be unable to source merchandise in sufficient
quantities, which
36
could
result in lost sales. The failure of HSNi businesses to identify new vendors and manufacturers, maintain relationships with a significant number of existing vendors and manufacturers and/or
access quality merchandise in a timely and efficient manner on acceptable terms and cost, could adversely affect HSNi's business, financial condition and results of operations.
Channel Capacity and Placement for the HSN Television NetworkThe failure to secure suitable placement for the HSN television network would
adversely affect HSNi's business, financial condition and results of operations.
HSNi is dependent upon the continued ability of HSN to compete for television viewers. Effectively competing for television viewers is dependent, in substantial
part, on the ability of HSN to secure suitable placement, in other words, the placement of the HSN television network within a suitable programming tier at a low channel position placement. The advent
of digital compression technologies and the adoption of digital cable has resulted in increased channel capacity, which together with other changing laws, rules and regulations regarding cable
television ownership, impacts the ability of HSN to secure suitable channel placement. While increased channel capacity could provide a means through which the HSN television network could be more
widely distributed, it could also adversely affect the ability to attract television viewers to the HSN television network to the extent it results in:
-
- higher
channel position placement for the HSN television network;
-
- placement
of the HSN television network in digital programming tiers, which generally have lower levels of television viewer penetration than basic or expanded basic
programming tiers;
-
- competitors
entering the marketplace; or
-
- more
programming options being available to the viewing public in the form of new television networks and time-shifted viewing
(e.g., personal video recorders, video-on-demand, interactive television and streaming video over broadband internet
connections).
If
the HSN television network is carried exclusively in a system on a digital programming tier, HSN will experience a reduction in revenue to the extent that the digital programming tier
has less television viewer penetration than the basic or expanded basic programming tier. In addition, HSN may experience a further reduction in revenue due to increased television viewing audience
fragmentation and to the extent that not all televisions sets within a digital cable home are equipped to receive television programming in a digital format. HSNi's future success will also depend, in
part, on the ability of HSN to anticipate and adapt to technological changes and to offer elements of the HSN television network via new technologies in a cost-effective manner that meet
customer demands and evolving industry standards.
MarketingHSNi may not attract and retain customers in a cost-effective manner, which could adversely affect its business,
financial condition and results of operations.
HSNi's long-term success, in large part, depends on the continued ability of HSNi businesses to attract new and retain existing customers. In an
effort to do so, HSNi and its businesses engage in various marketing and merchandising initiatives, which involve the expenditure of considerable money and resources, particularly in the case of the
production and distribution of HSN television programming and catalogs, and to a lesser but increasing extent, online advertising. HSNi and its businesses have spent, and expect to continue to spend,
increasing amounts of money on, and devote greater resources to, certain of these initiatives, particularly in connection with the growth and maintenance of HSNi brands generally, as well as in the
continuing efforts of HSNi businesses to increasingly engage customers through online channels. These initiatives, however, may not resonate with existing customers or consumers generally or may not
be cost-effective. In addition, HSNi believes
37
that costs associated with the production and distribution of HSN television programming, paper and printing costs for catalogs and costs associated with online marketing, including search engine
marketing (primarily the purchase of relevant keywords) are likely to increase in the foreseeable future, and if significant, could have an adverse effect on HSNi's business, financial condition and
results of operations to the extent that they do not result in corresponding increases in sales.
Customer Preferences and TrendsHSNi businesses may not be able to accurately predict and/or respond in a timely manner to evolving customer
preferences and trends and industry standards, which could adversely affect HSNi's business, financial condition and results of operations.
HSNi's success depends, in significant part, on the ability of HSNi businesses to accurately predict, and respond in a timely manner to, changes in customer
preferences and fashion, lifestyle and other trends and industry standards. While product mix and price points are continuously monitored and adjusted in an attempt to satisfy consumer demand and
respond to changing economic and business conditions, HSNi businesses may not be successful in these efforts, and any sustained failure could result in excess inventory and related markdowns, which,
if significant, would have a material adverse affect on HSNi's business, financial conditions and results of operations.
In
addition, sales by HSNi businesses through online channels are continuing to increase and these businesses continue to increasingly attempt to engage customers through online
channels. The e-commerce industry is characterized by evolving industry standards, frequent new service and product introductions and enhancements, as well as changing customer demands, to
which HSNi businesses may not be able to adapt quickly enough and/or in a cost-effective manner, and the failure to do so could have an adverse effect on HSNi's business, financial
condition and results of operations.
Adverse Events and TrendsAdverse economic and business conditions could adversely affect HSNi's business, financial condition and results
of operations.
Retailers generally are particularly sensitive to adverse global economic and business conditions, which could result in a loss of consumer confidence and related
decreases in consumer expenditures, particularly discretionary expenditures. These and any other adverse economic and business conditions could result in a decrease in sales, which would have an
adverse impact on HSNi's business, financial condition and result of operations, which could be material to the extent that any such conditions were to continue on a prolonged basis.
Flexpay ProgramUnplanned losses experienced in connection with the Flexpay program could adversely affect HSNi's business, financial
condition and results of operations.
HSN offers Flexpay, pursuant to which customers may pay for certain merchandise in two to six interest-free, monthly credit or debit card payments.
HSNi maintains allowances for doubtful accounts of estimated losses resulting from the inability of customers to make required payments. While actual losses due to the inability of customers to make
required payments have historically been within estimates, HSNi may not continue to experience these losses at the same rate as it has historically or its actual losses in any given period may exceed
related estimates. HSN has continued to offer more products through Flexpay and customers have increasingly used Flexpay to pay for purchases. As Flexpay balances grow, HSNi expects that it will
continue to experience these losses at greater rates, which will require HSNi to maintain greater allowances for doubtful accounts of estimated losses than it has historically. A significant increase
in losses of this nature could adversely affect HSNi's business, financial condition and results of operations.
38
Delivery CostsIncreased delivery costs could adversely affect HSNi's business, financial condition and results of operations.
HSNi businesses are impacted by increases in shipping rates charged by various shipping vendors relating to the procurement of merchandise from vendors and
manufacturers, the shipment of merchandise to customers and the mailing of catalogs, which over the past few years have increased significantly in comparison to historical levels. HSNi currently
expects that shipping and postal rates will continue to increase. In the case of deliveries to customers, HSNi has negotiated favorable shipping rates, which increase at agreed upon levels over time,
with one independent, third party shipping
company pursuant to a long-term contract. If this relationship were to terminate or if the shipping company was unable to fulfill its obligations under the contract for any reason, HSNi
would have to work with other shipping companies to deliver merchandise to customers, which would most likely be at less favorable rates. Any increase in shipping rates and related fuel and other
surcharges passed on to HSNi by this or any other shipping company would adversely impact profits, given that HSNi may not be able to pass these increased costs directly to customers or offset them by
increasing prices without a detrimental effect on customer demand.
Ability to Broadcast the HSN Television NetworkThe continued or permanent inability to broadcast the HSN television network would adversely
affect HSNi's business, financial condition and results of operations.
HSNi's success is dependent upon the continued ability of HSN to transmit the HSN television network to broadcast and pay television operators from its satellite
uplink facilities, which transmission is subject to FCC compliance. HSN has entered into a long-term satellite transponder lease to provide for continued carriage of the HSN television
network on a replacement transponder and/or replacement satellite, as applicable, in the event of a failure of the transponder and/or satellite currently carrying the HSN television network. Although
HSNi believes that every reasonable measure is being taken to ensure continued satellite transmission capability, termination or interruption of satellite transmissions may occur. HSNi has designed
business continuity and disaster recovery plans to ensure continued satellite transmission capability on a temporary basis in the event of inclement weather or a natural or other disaster.
HSN is affiliated with a number of low power broadcast television station licensees (including Ventana and certain third party low power broadcast television station licensees
collectively, the "Low Power Licensees") that broadcast programming pursuant to licenses from the FCC. These Low Power Licensees are subject to regulation by the FCC under the Communications Act of
1934, as amended, which prohibits the operation of broadcast television stations except in accordance with a license issued by the FCC and empowers the FCC to issue, revoke, modify and renew broadcast
television licenses, approve the transfer of control of any entity holding such licenses, determine the location of stations, regulate the equipment used by stations, adopt necessary regulations and
impose penalties for related violations. All of the Ventana-owned broadcast stations carry the HSN television network and Ventana is fully responsible for such stations' compliance. The failure of the
Low Power Licensees to comply with the terms of the broadcast licenses could result in the inability to broadcast the HSN television network on over-the-air facilities, as well as penalties. The
prolonged or permanent interruption of satellite transmission capability or other inability to transmit the HSN television network for any reason, as well as related costs incurred, would have a
material adverse effect on HSNi's business, financial condition and results of operations.
Potential Product Liability ClaimsHSNi businesses may be subject to claims for representations made in connection with the sale and
promotion of merchandise or for harm experienced by customers who purchase merchandise from HSNi businesses.
The manner in which HSNi businesses sell and promote merchandise and related claims and representations made in connection with these efforts is regulated by
federal and state law. Since
39
October 1996, HSN has been subject to a consent order issued by the Federal Trade Commission (the "FTC"), which terminates on the later of April 15, 2019, or twenty years from the most recent
date that the United States or the FTC files a complaint in federal court alleging any violation thereunder. Pursuant to this consent order, HSN is prohibited from making claims for specified
categories of products, including claims that a given product can cure, treat or prevent any disease or have an effect on the structure or function of the human body, unless it has competent and
reliable scientific evidence to substantiate such claims. Violation of this consent order may result in the imposition of significant civil penalties for non-compliance and related redress
to consumers and/or the issuance of an injunction enjoining HSN from engaging in prohibited activities. The FTC periodically investigates the business and operation of HSN on an ongoing basis for
purposes of determining its compliance with the consent order. Other regulations may also affect the claims and manner in which HSNi can market its products through its businesses. For example, the
Food and Drug Administration has specific regulations regarding claims that can be made about food products, and regulates marketing claims that can be made for cosmetic beauty products and
over-the-counter drugs, which include acne products, all of which are sold through HSN. Also, the Environmental Protection Agency requires products that make certain types of
claims, such as "anti-bacterial," to be registered with them prior to making such claims, which products are also sold through HSN.
HSNi businesses may be exposed to potential liability from claims by purchasers or from federal, state and local regulators and law enforcement agencies, including, but not limited to,
for personal injury, wrongful death and damage to personal property relating to merchandise sold and misrepresentation of merchandise features and benefits. In certain instances, HSNi businesses have
the right to seek indemnification for related liabilities from its vendors and may require such vendors to carry minimum levels of product liability and errors and omissions insurance. These vendors,
however, may be unable to obtain suitable coverage or maintain this coverage on acceptable terms, or this insurance may provide inadequate coverage against all potential claims or even be available
with respect to any particular claim.
While HSNi believes that its businesses have structured their operations and vendor and manufacturer relationships in a manner to ensure compliance with federal, state and local laws
with respect to the sale and promotion of merchandise, HSNi or its businesses may be held liable for product liability claims or for representations made in connection with the sale and promotion of
merchandise. If significant, any such liability could adversely affect HSNi's business, financial conditions and results of operations.
Compliance and Changing Laws, Rules and RegulationsFailure to comply with existing laws, rules and regulations, or to obtain and maintain
required licenses and rights, could adversely affect HSNi's business, financial condition and results of operations.
The failure of HSNi businesses to comply with existing laws, rules and regulations, or to obtain required licenses and rights, could adversely affect HSNi's
business, financial condition and results of operations. HSNi businesses market and provide a broad range of merchandise through online and offline channels. As a result, they are subject to a wide
variety of statutes, rules, regulations, policies and procedures in various jurisdictions which are subject to change at any time, including laws regarding consumer protection, privacy, the regulation
of retailers generally, the importation, sale and promotion of merchandise and the operation of retail stores and warehouse facilities, as well as laws and regulations applicable to the internet and
businesses engaged in online commerce, such as those regulating the sending of unsolicited, commercial electronic mail. In addition, unfavorable changes in the laws, rules and regulations applicable
to HSNi and its businesses could decrease demand for merchandise offered by HSNi businesses, increase costs and/or subject HSNi to additional liabilities, which could have an adverse effect on its
business, financial condition and results of operations.
40
Various
regulations impact the marketing efforts of HSNi brands and businesses. For example, both the FTC's Telemarketing Sales Rule, the FCC's Telephone Consumer Protection Act and
similar state rules outline procedures that must be followed when telemarketing to customers and many states also have laws regulating telemarketing. Online sales and e-mail marketing
efforts of HSNi brands and businesses are subject to general commercial law, as well as to specific laws governing electronic commerce. For instance, laws administered by the FTC place restrictions on
the manner and content of e-mail marketing campaigns.
Online sales must comply with a variety of existing and new federal and state laws dealing with privacy, intellectual property, taxation, the provision of online payment services and
electronic contracts. While U.S. Supreme Court decisions currently restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the internet, a
number of states, as well as the U.S. Congress, have been considering initiatives that could limit or supersede this position, and New York State laws regarding the imposition of tax collection
obligations are expected to be amended in June 2008 to require online vendors and service providers with $10,000 or more per year in affiliate sales (sales sourced through affiliated websites, agents
or representatives based in New York State) to collect sales tax. If any of these initiatives are successful, HSNi businesses could be required to collect sales and use taxes. The imposition by the
federal or state and local governments of various taxes and related obligations upon internet commerce and online vendors and service providers could create administrative burdens for HSNi businesses,
put HSNi businesses at a competitive disadvantage to the extent that similar obligations are not imposed upon their competitors and could decrease future sales.
While HSNi believes that the practices of its businesses have been structured in a manner to ensure compliance with these laws and regulations, federal or state regulatory authorities
may take a contrary position. The failure of HSNi and/or any of its businesses to comply with these laws and regulations could result in fines and/or proceedings against HSNi and/or its businesses by
governmental agencies and/or consumers, which could adversely affect HSNi's business, financial condition and results of operations.
41
CAPITALIZATION
The following table presents HSNi's cash and cash equivalents and capitalization as of March 31, 2008 on an historical basis and on an unaudited pro forma
basis for the separation and the financing. Pro forma for the separation and the financing includes the $450 million in indebtedness that HSNi expects to hold at separation. In connection with
the separation, HSNi is expected to distribute the net proceeds of the financing to IAC except for $50 million which it will retain. The separation of HSNi and the related financing
transactions are described in the notes to the Unaudited Pro Forma Condensed Combined Balance Sheet under the Unaudited Pro Forma Condensed Combined Financial Statements as if the separation and the
related transactions and events had been consummated on March 31, 2008.
The
assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and HSNi believes such assumptions are reasonable under the
circumstances. Such adjustments are subject to change based upon the finalization of the terms of the separation and financing.
This
table should be read in conjunction with "Selected Historical Financial Data," "Transfers to IAC and Financing," "Description of Capital Stock of the Spincos," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of HSNi," the combined financial statements of HSNi and the "Unaudited Pro Forma Condensed Combined Financial Statements" and
accompanying notes included in this information statement.
The
table below is not necessarily indicative of HSNi's cash and cash equivalents and capitalization had the separation and the related financing transactions been completed on the date
assumed. The capitalization table below may not reflect the capitalization or financial condition which would have resulted had HSNi been operating as an independent, publicly-traded company at that
date and is not necessarily indicative of HSNi's future capitalization or financial condition.
|
|
As of March 31, 2008
|
|
|
Historical
|
|
Unaudited
Pro Forma
for the
Separation
and
Financing
|
|
|
(In millions)
|
Cash and cash equivalents |
|
$ |
8 |
|
$ |
50 |
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
Bank credit facility and notes |
|
$ |
|
|
$ |
450 |
|
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
450 |
|
|
|
|
|
Invested equity |
|
|
2,986 |
|
|
2,590 |
|
|
|
|
|
Total capitalization |
|
$ |
2,986 |
|
$ |
3,040 |
|
|
|
|
|
42
SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical combined financial information for HSN, Inc. ("HSNi"). This data was derived, in part, from the
historical combined financial statements of HSNi included elsewhere in this document and reflects the operations and financial position of HSNi at the dates and for the periods indicated. The
information in this table should be read in conjunction with the combined financial statements and accompanying notes and other financial data pertaining to HSNi included herein. However, this
financial information does not necessarily reflect what the historical financial position and results of operations of HSNi would have been had HSNi been a stand-alone company during the periods
presented.
|
|
Year Ended December 31,
|
|
Three Months
Ended March 31,
|
|
|
2007
|
|
2006
|
|
2005(1)
|
|
2004
(unaudited)
|
|
2003
(unaudited)
|
|
2008
(unaudited)
|
|
2007
(unaudited)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
2,908,242 |
|
$ |
2,877,954 |
|
$ |
2,670,951 |
|
$ |
1,905,903 |
|
$ |
1,763,689 |
|
$ |
676,886 |
|
$ |
666,705 |
Operating income |
|
|
169,791 |
|
|
213,196 |
|
|
195,152 |
|
|
127,748 |
|
|
104,223 |
|
|
15,078 |
|
|
30,147 |
Earnings from continuing operations |
|
|
105,233 |
|
|
133,532 |
|
|
127,077 |
|
|
84,235 |
|
|
62,047 |
|
|
9,406 |
|
|
18,652 |
Net income |
|
|
164,804 |
|
|
122,817 |
|
|
223,221 |
|
|
79,048 |
|
|
77,344 |
|
|
8,346 |
|
|
17,086 |
|
|
December 31,
|
|
March 31,
|
|
|
2007
|
|
2006
|
|
2005(1)
|
|
2004
(unaudited)
|
|
2003
(unaudited)
|
|
2008
(unaudited)
|
|
|
(In thousands)
|
Balance Sheet Data (end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
147,185 |
|
$ |
340,592 |
|
$ |
320,991 |
|
$ |
241,871 |
|
$ |
189,194 |
|
$ |
200,235 |
Total assets |
|
|
4,220,631 |
|
|
4,458,167 |
|
|
4,527,376 |
|
|
3,988,728 |
|
|
3,935,580 |
|
|
4,200,329 |
Invested equity |
|
|
2,942,886 |
|
|
3,123,716 |
|
|
3,158,360 |
|
|
2,464,651 |
|
|
2,501,750 |
|
|
2,986,371 |
- (1)
- Includes
the results of Cornerstone Brands, Inc. since its acquisition on April 1, 2005.
43
HSN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial Statements of HSN, Inc. and subsidiaries ("HSNi") reflect adjustments to the historical
combined financial statements of HSNi to give effect to the separation and related financing transactions described in the notes to the Unaudited Pro Forma Condensed Combined Financial Statements as
of March 31, 2008 for the Unaudited Pro Forma Condensed Combined Balance Sheet and as of January 1, 2007 and January 1, 2008 for the
Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2007 and the three months ended March 31, 2008, respectively.
The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and HSNi believes such assumptions are reasonable under the
circumstances. While at this time HSNi does not expect material changes to the terms of the separation, the finalization of the financing described in the notes hereto is still subject to credit
market conditions at the time that the financing actually occurs. Given the volatility in the credit markets, it is possible that material changes may occur with respect to the financing.
The following Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the historical combined financial statements of HSNi and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of HSNi included in this information statement.
These Unaudited Pro Forma Condensed Combined Financial Statements are not necessarily indicative of HSNi's results of operations or financial condition had the separation and related
transactions been completed on the dates assumed. Also, they may not reflect the results of operations or financial condition which would have resulted had HSNi been operating as an independent
publicly traded company during such periods. In addition, they are not necessarily indicative of HSNi's future results of operations or financial condition.
These Unaudited Pro Forma Condensed Combined Financial Statements are forward looking information within the meaning of "Forward-Looking Statements" as described on
pages 2-3 of this Information Statement.
44
HSN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2008
|
|
Historical
|
|
Pro Forma
Adjustments
|
|
Notes
|
|
Pro Forma
|
|
|
(In thousands, except per share data)
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
8,017 |
|
$ |
438,819 |
|
(a) |
|
$ |
50,000 |
|
|
|
|
|
|
(396,836 |
) |
(b) |
|
|
|
Other current assets |
|
|
574,788 |
|
|
|
|
|
|
|
574,788 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
582,805 |
|
|
41,983 |
|
|
|
|
624,788 |
Non-current assets |
|
|
3,617,524 |
|
|
11,181 |
|
(a) |
|
|
3,628,705 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
4,200,329 |
|
$ |
53,164 |
|
|
|
$ |
4,253,493 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND INVESTED EQUITY |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
382,570 |
|
$ |
|
|
|
|
$ |
382,570 |
Long-term debt |
|
|
|
|
|
450,000 |
|
(a) |
|
|
450,000 |
Other long-term liabilities |
|
|
831,388 |
|
|
|
|
|
|
|
831,388 |
INVESTED EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
Common shares, $0.01 par value;authorized; 55,747,109 issued and outstanding on a pro forma basis |
|
|
|
|
|
557 |
|
(b) |
|
|
557 |
Additional paid-in capital |
|
|
|
|
|
2,587,736 |
|
(b) |
|
|
2,587,736 |
Invested capital |
|
|
4,530,799 |
|
|
(4,530,799 |
) |
(b) |
|
|
|
Receivables from IAC and subsidiaries |
|
|
(1,545,670 |
) |
|
1,545,670 |
|
(b) |
|
|
|
Accumulated other comprehensive income |
|
|
1,242 |
|
|
|
|
|
|
|
1,242 |
|
|
|
|
|
|
|
|
|
|
Total invested equity |
|
|
2,986,371 |
|
|
(396,836 |
) |
|
|
|
2,589,535 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND INVESTED EQUITY |
|
$ |
4,200,329 |
|
$ |
53,164 |
|
|
|
$ |
4,253,493 |
|
|
|
|
|
|
|
|
|
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements are an integral part of these statements.
45
HSN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
MARCH 31, 2008
|
|
Historical
|
|
Pro Forma
Separation
Adjustments
|
|
Notes
|
|
Pro Forma
for the
Separation
|
|
Pro Forma
Financing
Adjustments
|
|
Notes
|
|
Final
Pro Forma
for the
Separation
and
Financing
|
|
|
(In thousands, except per share data)
|
Revenue |
|
$ |
676,886 |
|
$ |
|
|
|
|
$ |
676,886 |
|
$ |
|
|
|
|
$ |
|
Operating expenses |
|
|
661,808 |
|
|
529 |
|
(c) |
|
|
662,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276 |
|
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
15,078 |
|
|
(805 |
) |
|
|
|
14,273 |
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
15 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
15 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
15,093 |
|
|
(805 |
) |
|
|
|
14,288 |
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(5,687 |
) |
|
299 |
|
(f) |
|
|
(5,388 |
) |
|
|
|
(f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
9,406 |
|
$ |
(506 |
) |
|
|
$ |
8,900 |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:(g) |
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
|
|
Diluted earnings per share from continuing operations |
|
$ |
|
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements are an integral part of these statements.
46
HSN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007
|
|
Historical
|
|
Pro Forma
Separation
Adjustments
|
|
Notes
|
|
Pro Forma
for the
Separation
|
|
Pro Forma
Financing
Adjustments
|
|
Notes
|
|
Final
Pro Forma
for the
Separation
and
Financing
|
|
|
(In thousands, except per share data)
|
Revenue |
|
$ |
2,908,242 |
|
$ |
|
|
|
|
$ |
2,908,242 |
|
$ |
|
|
|
|
$ |
|
Operating expenses |
|
|
2,738,451 |
|
|
1,633 |
|
(c) |
|
|
2,741,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,103 |
|
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
169,791 |
|
|
(2,736 |
) |
|
|
|
167,055 |
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
252 |
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e) |
|
|
|
|
Other expense |
|
|
(256 |
) |
|
|
|
|
|
|
(256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
169,787 |
|
|
(2,736 |
) |
|
|
|
167,051 |
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(64,554 |
) |
|
1,017 |
|
(f) |
|
|
(63,537 |
) |
|
|
|
(f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
105,233 |
|
$ |
(1,719 |
) |
|
|
$ |
103,514 |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:(g) |
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
|
|
Diluted earnings per share from continuing operations |
|
$ |
|
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements are an integral part of these statements.
47
HSN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
- (a)
- In
connection with the separation, HSNi expects to raise $450 million through a combination of privately issued debt securities (the "Bonds") and secured credit facilities (the
"Term Loan"). In addition, HSNi expects to negotiate a $ million revolving credit facility (the "RCF"). The total costs expected to be incurred in connection with the issuance of
the Bonds and borrowings under the Term Loan and establishing the RCF are $11.2 million. The net proceeds are expected to be approximately $438.8 million. The Bonds are expected to have
a maturity of years from the date of issuance and the Term Loan is expected to have a term of years. The RCF is expected to have a term of
years. The interest rate on the Bonds is estimated to be % and LIBOR plus % for the Term Loan. The RCF is expected to have a fee
of %
for the unused portion.
-
(b)
- To
effect the terms of the separation as follows:
- (i)
- The
transfer of approximately $396.8 million in cash to IAC prior to HSNi's separation from IAC which was raised from the financing referred to in note (a)
above, HSNi will retain $50 million in cash upon the separation;
- (ii)
- The
extinguishment of the receivable from IAC and subsidiaries; and
- (iii)
- The
issuance of 55.7 million shares to effect the transfer of the ownership of HSNi from IAC to IAC's shareholders based upon an expected exchange ratio of
1/5th a share of HSNi for each share of IAC and the number of IAC common shares outstanding as of March 31, 2008 before giving effect to the 1 for 2
reverse stock split of IAC shares that is expected to be effected in connection with the separation.
To
the extent that the net proceeds from the Bonds and Term Loan are less than $438.8 million, as described in note (a) above, there would be a corresponding reduction in the transfer of
cash to IAC.
-
(c)
- HSNi
expects to incur additional costs related to being a stand-alone, public company. These costs have been estimated to be $9.7 million on an annual basis. These costs relate
to the following:
-
- additional
personnel including accounting, tax, treasury, internal audit and legal personnel;
-
- professional
fees associated with audits, tax and other services;
-
- increased
insurance premiums;
-
- increased
health and welfare benefit costs;
-
- costs
associated with a board of directors;
-
- increased
franchise taxes, stock exchange listing fees, fees for preparing and distributing periodic filings with the Securities and Exchange Commission; and
-
- other
administrative costs and fees.
48
HSN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
The
total costs referred to above were compared to the corporate allocations from IAC for the three months ended March 31, 2008 and for the year ended December 31, 2007 in order to
determine the incremental costs expected to be incurred for each period as follows:
|
|
Three Months Ended
March 31, 2008
|
|
Year Ended
December 31, 2007
|
|
|
|
(In thousands)
|
|
Estimated stand-alone, public company costs |
|
$ |
2,366 |
|
$ |
9,745 |
|
Less: corporate allocations |
|
|
(1,837 |
) |
|
(8,112 |
) |
|
|
|
|
|
|
Incremental costs of being a stand-alone, public company |
|
$ |
529 |
|
$ |
1,633 |
|
|
|
|
|
|
|
This
amount excludes the $1.4 million of estimated one-time recruiting fees; professional fees for legal and tax services (e.g. initial benefit plan design); and other costs
(e.g. initial stock exchange listing fees) expected to be incurred in initially establishing HSNi as a stand-alone public company. These costs are therefore not expected to recur.
- (d)
- To
reflect the additional compensation expense associated with equity-based awards that will be granted only upon consummation of the separation.
The
awards related to the consummation of the separation are expected to be granted to the Chief Executive Officer of HSNi in the form of stock options. The issuance of these awards is contingent upon
the consummation of the separation. The expense related to these awards is included as a pro forma adjustment because they will vest over four years and will therefore have an impact on the ongoing
operations of HSNi. The amount of the award was determined using a Black Scholes calculation. The aggregate estimated value of the award is being amortized to expense on a straight-line
basis over the four year vesting period of the awards. This does not reflect non-recurring compensation expense related to modifications of existing vested stock options and restricted stock units
that will be made in connection with the separation described below.
Vested stock options and unvested stock options to purchase shares of IAC common stock will be modified as follows in connection with the separation:
Each
option will convert into an option to purchase shares of common stock of all five companies, with adjustments to the number of shares subject to each option and the option exercise prices based
on the relative values of IAC and the other four companies following the separation, with the intent to generally maintain equivalent value immediately pre and post the transaction.
49
HSN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
A
calculation of the estimated value of the vested options immediately prior to the separation and immediately after the separation was performed using the Black Scholes model. The incremental charge
of $35 thousand resulted from the higher estimated value of the vested stock options after the separation. This higher value is due to higher estimated weighted average expected volatility of
the stock price of the five companies after the separation than the expected volatility of IAC's stock price. The expense is a one-time charge because the options are fully vested and
there is no future service requirement.
The modification related to IAC issued restricted stock units ("RSUs") relates to the accelerated vesting, upon the consummation of the separation, of all RSUs granted prior to August 8, 2005
and all awards that were scheduled to vest prior to February 28, 2009. The estimated expense of $6.5 million is the previously unrecognized expense associated with these awards. The
expense is treated as non-recurring because after the separation no future service is required with respect to these awards.
There may be additional stock-based awards granted in connection with the separation but the amount of such awards, if any, has not yet been determined and no expense with respect thereto has been
reflected herein.
- (e)
- This
reflects the incremental interest expense related to the financing referred to in note (a) above. It includes interest expense at an assumed rate of % on the
Bonds and LIBOR plus % on the Term Loan, LIBOR is assumed to be %, the aggregate assumed rate is therefore %. It also reflects expense
at % on
the RCF which is assumed to be unused. The interest expense calculation includes the amortization of debt issuance costs over the applicable term of each portion of the financing. An assumed 25 basis
point change in the interest rate would result in an increase or decrease to interest expense by $ million for the Bonds and $ million for the Term Loan.
- (f)
- To
reflect the tax effect of the pro forma adjustments at an assumed effective tax rate of 37.2% which represents a federal statutory rate of 35% and a state effective statutory rate
of 2.2%.
- (g)
- Earnings
per share and weighted average shares outstanding reflect the historical number of common shares used to calculate IAC's earnings per share, adjusted based on an expected
exchange ratio of 1/5th of a share of HSNi for each share of IAC. These amounts reflect the portion of outstanding equity-based awards that were included in
IAC's dilutive earnings per share calculation. Pro forma earnings per share is calculated using the following:
|
|
Three Months Ended
March 31, 2008
|
|
Year Ended
December 31, 2007
|
|
|
(In thousands)
|
Earnings from continuing operations |
|
$ |
|
|
$ |
|
|
|
|
|
|
Basic shares outstandingweighted average shares |
|
|
55,753 |
|
|
57,137 |
Other dilutive securities including stock options, warrants and restricted stock and share units |
|
|
1,496 |
|
|
2,729 |
|
|
|
|
|
Diluted shares outstandingweighted average shares |
|
|
57,249 |
|
|
59,866 |
|
|
|
|
|
50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF HSNi
The following discussion describes the financial condition and results of operations of HSN, Inc. ("HSNi") as though HSNi were a separate
company as of the dates and for the periods presented and includes the businesses, assets and liabilities that will comprise HSNi following the spin-off.
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying HSNi as one of those five companies. We refer to the separation transaction herein as the "spin-off." In connection with the spin-off, HSNi was incorporated as a
Delaware corporation in May 2008. HSNi currently does not have any material assets or liabilities, nor does it engage in any business or other activities and, other than in connection with the
spin-off, will not acquire or incur any material assets or liabilities, nor will it engage in any business or other activities. Upon completion of the spin-off, HSNi will
primarily consist of HSN and Cornerstone, the businesses that formerly comprised IAC's Retailing segment. HSN consists of the HSN television network and HSN.com, and Cornerstone includes the Cornerstone
Brands portfolio of leading print catalogs and related websites, as well as a limited number of retail
stores. HSNi will not include the equity investment in Jupiter Shop Channel, the investment in Arcandor AG and the related contingent value right. The businesses to be operated by HSNi following the
spin-off are referred to herein as the "HSNi Businesses." HSNi will also include the entities described below in the Management Overview under the heading "Discontinued Operations."
Basis of Presentation
The historical combined financial statements of HSNi and its subsidiaries and the disclosure set forth in this Management's Discussion and Analysis of Financial
Condition and Results of Operations of HSNi reflect the contribution or other transfer to HSNi of all of the subsidiaries and assets and the assumption by HSNi of all of the liabilities relating to
the HSNi Businesses in connection with the
spin-off and the allocation to HSNi of certain IAC corporate expenses relating to the HSNi Businesses. Accordingly, the historical combined financial statements of HSNi reflect the
historical financial position, results of operations and cash flows of the HSNi Businesses since their respective dates of acquisition by IAC, based on the historical consolidated financial statements
and accounting records of IAC and using the historical results of operations and historical bases of the assets and liabilities of the HSNi Businesses with the exception of accounting for income
taxes. For purposes of these financial statements, income taxes have been computed for HSNi on an as if stand-alone, separate tax return basis. These financial statements are prepared on a combined,
rather than a consolidated, basis because they exclude certain investments and assets that were owned, either directly or indirectly, by legal entities that comprise the HSNi Businesses. The ownership
of these investments and assets will be retained by IAC after the spin-off. These combined financial statements present IAC's and its subsidiaries net investment in the HSNi Businesses as
invested equity in lieu of shareholders' equity. Intercompany transactions and accounts have been eliminated.
In
the opinion of HSNi's management, the assumptions underlying the historical combined financial statements of HSNi are reasonable. However, this financial information does not
necessarily reflect what the historical financial position, results of operations and cash flows of HSNi would have been had HSNi been a stand-alone company during the periods presented.
51
MANAGEMENT'S OVERVIEW
HSNi markets and sells a wide range of third party and private label merchandise directly to consumers through (i) television home shopping programming
broadcast on the HSN television network, (ii) catalogs, which consist primarily of the Cornerstone Brands portfolio of leading print catalogs and (iii) websites, which consist primarily
of HSN.com and branded websites operated by Cornerstone Brands.
HSNi's
television home shopping business and related internet commerce is referred to herein as "HSN" and all catalog operations and related internet commerce are collectively referred
to herein as "Cornerstone."
Sources of Revenue
HSN revenue includes merchandise sales originating from the live television broadcast of its programming 24 hours per day, seven days a week and the HSN.com website. HSN also sells merchandise through its "Autoship" program under which customers receive scheduled merchandise shipments according to a
pre-determined calendar.
Cornerstone
sells private label and third party merchandise. The primary brands within the Cornerstone business portfolio include Frontgate, Ballard Designs, Garnet Hill, Smith+Noble,
The Territory Ahead, TravelSmith and Improvements.
Products and Customers
HSNi sells a wide array of merchandise across its various channels of distribution. HSN merchandise categories primarily consist of jewelry, apparel &
accessories, health & beauty and home & other. Cornerstone merchandise categories generally consist of home furnishings (including indoor/outdoor furniture, window treatments and other
home-related goods) and apparel & accessories.
HSNi
management believes that, combined with a multi-channel distribution strategy, merchandise diversification appeals to a broader segment of potential customers and is an important
part of its overall business strategy. HSNi is continually developing new merchandise offerings from existing, potential and future suppliers, to supplement its existing product lines.
Channels of Distribution; Marketing Costs
HSNi markets and offers products directly to customers through television programming, catalogs and branded websites, allowing customers to conveniently and
directly transact with HSNi. HSN's live television programming is distributed primarily through cable and satellite distribution agreements. HSN reached approximately 90.6 million,
89.0 million and 89.0 million households as of December 31, 2007, 2006 and 2005, respectively, and believes its television network reaches approximately 80% of the available
households in the United States. Catalog circulation was 400.8 million and 421.2 million in 2007 and 2006, respectively, and 336.1 million from its date of acquisition in April
2005. Catalog circulation fluctuates by brand, generally driven by seasonal considerations and customer demand trends. Although the majority of HSNi's marketing costs are incurred in the distribution
of its television programming and catalog circulation, HSNi has and expects to continue to invest in online and offline advertising to build its brands and drive traffic to its websites.
In
addition, some of the HSNi Businesses manage affiliate programs, pursuant to which they pay commissions and fees to third parties based on revenue earned. These distribution channels
might also offer their own products, as well as those of other third parties, that compete with those made available and offered by the HSNi Businesses.
52
Sales
and marketing expense as a percentage of revenue increased to approximately 20% in both 2007 and 2006 from approximately 19% in 2005.
Access to Supply
The HSNi Businesses purchase merchandise from a wide variety of third party vendors, manufacturers and other sources pursuant to short- and long-term
contracts and purchase orders. In particular, the HSNi Businesses purchase a significant amount of merchandise from vendors and manufacturers abroad, particularly China. HSNi depends on the ability of
vendors and manufacturers in the U.S. and abroad to produce and deliver goods that meet applicable quality standards. Cornerstone, in particular, is dependent, in significant part, upon independent,
third party manufacturers to produce private label merchandise. In addition, HSNi provides certain supplier partners with important customer acquisition channels through its multiple brands and
businesses.
Discontinued Operations
Discontinued operations consist of HSNi Businesses that engaged in television retailing and other forms of television-based commerce in Europe, primarily in
Germany and the United Kingdom. Discontinued operations in Germany consist of EUVÍA, a group of companies that were primarily engaged in television game-based entertainment
and commerce; and Home Shopping Europe GmbH & Co. KG, and its affiliated station HSE24 ("HSE"), a television and internet retailer. Discontinued operations in the United Kingdom
consist of Quiz TV Limited a television game-based entertainment network and iBuy, a television and internet auction-formatted retailer.
During
the second quarter of 2005, HSNi sold its 48.6% ownership interest in EUVÍA. During the second quarter of 2006, Quiz TV Limited ceased operations and during the
fourth quarter of 2006, iBuy was classified as held for sale. Additionally, in the second quarter of 2007, both iBuy's assets and
HSE were sold. Accordingly, discontinued operations in the accompanying combined statements of operations and cash flows include EUVÍA and HSE through June 2, 2005 and
June 19, 2007, respectively. Quiz TV Limited and iBuy are presented as discontinued operations in the accompanying combined balance sheets and combined statements of operations and cash flows
for all periods presented.
2006/2007 and Recent Developments
HSNi made a significant leadership change in April 2006 with the appointment of a new Chief Executive Officer. Executive and key personnel changes ensued,
continuing into 2007. These changes were motivated by a desire to improve HSNi's operating performance and better position HSNi for future growth. These new executive leaders aligned their staffs,
repositioned merchandise, evaluated supplier relationships and redefined business processes in support of new company strategies primarily focused on defining a clear and differentiated brand. As part
of these strategies, HSNi re-launched the HSN.com website with, among other improvements, streaming video and enhanced navigation capabilities; improved its television programming through
the use of new and upgraded sets, on-air talent and overall presentation; improved quality of service with the focus of driving retention and repeat customers; and the elimination of
non-core businesses.
While these actions gave rise to increased operating expenses, primarily in the form of employee acquisition and transition costs, they were undertaken as discrete parts of HSNi's
strategy to create an identity for itself as a lifestyle, editorial, programmed commerce network that provides great products with innovative and engaging presentation.
In
April 2007, largely as a result of increasing cable and satellite distribution costs, HSN ceased operating America's Store, a home shopping network that reached an average of
14.3 million and
53
15.0 million
households during 2006 and 2005, respectively. America's Store sales were $15.9 million, $88.6 million and $86.7 million in 2007, 2006, and 2005, respectively.
As
a part of executing its strategies, HSNi disposed of certain merchandise lines and discontinued vendor relationships not aligned with its evolving brand identity. In addition, while
seeking merchandise that aligned with its brand identity, it acquired certain merchandise that did not perform to expectations with its customers, resulting in excess on-hand inventory.
Much of this excess merchandise inventory was discounted and sold at clearance-level prices on TV, over the internet, through promotional catalogs, in outlet stores, or liquidated through wholesalers.
With the changes noted above and its more diversified product assortment, HSNi believes HSN will continue to show year over year sales and profitability growth in 2008 assuming a
reasonably stable
retail environment. HSN will continue to refine its product assortment in support of its improved brand identity.
In connection with the preparation of its consolidated financial statements as of and for the six months ended June 30, 2008, HSNi performed a test of the goodwill of its
reporting units, HSN and Cornerstone, during June 2008. The timing of the second quarter goodwill impairment test was accelerated, in part, due to the filing of an amendment, on June 26, 2008,
to the Form 10 of HSNi which was initially filed in connection with the planned separation.
HSNi prepared discounted cash flow analyses and reviewed the resulting valuations in the context of implied valuations based upon market multiples of EBITDA and the expected trading
range of value of HSNi after the separation. Based upon these analyses, HSNi believes that the goodwill of its HSN reporting unit is not impaired.
However, HSNi believes that the goodwill of Cornerstone is impaired. This impairment is due, in part, to the significant deterioration in the macro economic environment for retailers,
particularly in the home and apparel categories (which are Cornerstone's primary markets), and the negative impact of these markets on Cornerstone's performance and the related reduction in market
valuations for retailers. The effect of these market conditions has been exacerbated by execution issues and turnover of management of certain catalogs within Cornerstone. Cornerstone is expected to
incur an operating loss for the first six months of 2008 compared to operating income of $13.7 million in the comparable year ago period. While we expect full year profitability for
Cornerstone, its results are expected to be significantly lower than 2007.
HSNi has estimated the goodwill impairment to be approximately $300 million. In accordance with SFAS 142, "Goodwill and Other Intangible Assets," HSNi is currently
performing a step-two impairment analysis and expects to complete this process in connection with its close process for the second quarter of 2008. While the aforementioned charge is an
estimate, HSNi does not expect the final analysis to be materially different.
HSN, as a multi category retailer, has been able to adjust its product assortment more easily to react to consumer demand. HSN expects improved operating results over the comparable
period in the prior year for the second quarter of 2008.
54
Results of Operations for the Years Ended December 31, 2007, 2006 and 2005
Revenue
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
HSN |
|
$ |
1,892,582 |
|
0 |
% |
$ |
1,884,650 |
|
0 |
% |
$ |
1,887,661 |
|
Cornerstone |
|
|
1,016,091 |
|
2 |
% |
|
994,621 |
|
27 |
% |
|
783,743 |
|
Inter-segment elimination |
|
|
(431 |
) |
67 |
% |
|
(1,317 |
) |
(191 |
)% |
|
(453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
2,908,242 |
|
1 |
% |
$ |
2,877,954 |
|
8 |
% |
$ |
2,670,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
primarily relates to the sale of merchandise and is reduced by incentive discounts and sales returns. In accordance with Staff Accounting Bulletin 104, revenue is recorded when
delivery to the customer has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment.
HSNi's sales policy allows customers to return merchandise for a full refund or exchange, subject in some cases to restocking fees and exceptions to certain merchandise.
Revenue
in 2007 increased $30.3 million from 2006 primarily due to slight growth from Cornerstone, while revenue from HSN remained relatively flat. Online sales continued to grow
at a double digit rate in 2007. Revenue from HSN grew 4%, excluding America's Store which ceased operations on April 3, 2007. HSNi's revenue reflects a 2% increase in average price point,
partially offset by a 1% decrease in units shipped. Average price point was $60.09 in 2007, up from $58.70 in 2006. Overall units shipped in 2007 were negatively impacted by reduced revenue associated
with the shutdown of America's Store. Revenue from America's Store in 2007 was approximately $15.9 million compared to $88.6 million in 2006.
Revenue
in 2006 increased $207.0 million from 2005 principally reflecting the inclusion of Cornerstone Brands since its acquisition in April 2005 and subsequent growth of
Cornerstone in 2006. Revenue benefited from a 7% increase in units shipped, a 2% increase in average price point, partially offset by a 110 basis point increase in return rates. Average price point
and units shipped were $58.70 and 54.3 million, respectively, in 2006, up from $57.72 and 50.7 million, respectively, in 2005.
Revenue from HSN in 2007 increased $7.9 million. Excluding America's Store, revenue reflect a 2% increase in average price point and a 3% increase in units
shipped, partially offset by a 70 basis point increase in average return rates. The increase in average price point in 2007 was primarily due to a shift in product mix to the electronics/housewares
category (included in home & other) from the health & beauty category. Electronics/housewares merchandise generally carry a higher average price point than health & beauty
merchandise offerings. HSN manages its product mix to provide a balance between satisfying existing customer demand, generating interest from potential viewers and customers, providing new merchandise
or values to its viewership and maximizing airtime and internet efficiency. Return rates at HSN in 2007 were 19.6%, up from 18.7% in 2006, primarily driven by overall higher return rates in several
product categories.
55
Product
mix from HSN is provided in the table below:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Jewelry |
|
18 |
% |
18 |
% |
18 |
% |
Apparel & accessories |
|
13 |
% |
13 |
% |
12 |
% |
Health & beauty |
|
19 |
% |
20 |
% |
20 |
% |
Home & other |
|
50 |
% |
49 |
% |
50 |
% |
|
|
|
|
|
|
|
|
Total |
|
100 |
% |
100 |
% |
100 |
% |
|
|
|
|
|
|
|
|
Revenue
from HSN in 2006 decreased $3.0 million from 2005, primarily due to a 3% increase in units shipped, offset by a 160 basis point increase in return rates and a 2% decrease
in average price point. Overall, HSN experienced a decrease in TV sales of products in the electronic/housewares and health & beauty categories, which contributed to flat revenue, despite
double digit online sales growth. In addition, revenue from HSN was also adversely impacted by higher overall return rates in several product categories, as well as product mix shifts into categories
with generally higher average return rates. Return rates at HSN in 2006 were 18.7%, up from 17.1% in 2005.
Revenue from Cornerstone in 2007 increased $21.5 million from 2006 primarily due to a 5% increase in average price point, partially offset by a 2% decrease
in units shipped resulting principally from a planned decrease in circulation at certain catalog brands.
Revenue
from Cornerstone in 2006 increased $210.9 million from 2006 reflecting the inclusion of Cornerstone Brands since its acquisition in April 2005 and subsequent growth of
Cornerstone in 2006. On a pro forma basis, assuming Cornerstone Brands had been acquired on January 1, 2005, revenue growth in 2006 would have been $29.3 million, or 3%, benefiting
primarily from increased units shipped, due, in part, to higher catalog circulation and increased average price point.
56
Cost of Sales
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
HSN |
|
$ |
1,252,098 |
|
3 |
% |
$ |
1,218,606 |
|
1 |
% |
$ |
1,208,364 |
|
Cornerstone |
|
|
568,381 |
|
4 |
% |
|
547,914 |
|
25 |
% |
|
439,946 |
|
Inter-segment elimination |
|
|
(431 |
) |
67 |
% |
|
(1,317 |
) |
(191 |
)% |
|
(453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
1,820,048 |
|
3 |
% |
$ |
1,765,203 |
|
7 |
% |
$ |
1,647,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
63% |
|
125 bp |
|
|
61% |
|
(36) bp |
|
|
62% |
|
Gross margins |
|
|
37% |
|
(125) bp |
|
|
39% |
|
36 bp |
|
|
38% |
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Cost of salesHSN |
|
$1,252,098 |
|
3% |
|
$1,218,606 |
|
1% |
|
$1,208,364 |
As a percentage of HSN revenue |
|
66% |
|
150 bp |
|
65% |
|
65 bp |
|
64% |
HSN gross margins |
|
34% |
|
(150) bp |
|
35% |
|
(65) bp |
|
36% |
Cost of salesCornerstone |
|
$568,381 |
|
4% |
|
$547,914 |
|
25% |
|
$439,946 |
As a percentage of Cornerstone revenue |
|
56% |
|
85 bp |
|
55% |
|
(105) bp |
|
56% |
Cornerstone gross margins |
|
44% |
|
(85) bp |
|
45% |
|
105 bp |
|
44% |
Cost
of sales consists primarily of the cost of products sold, as well as shipping and handling costs and compensation and other employee-related costs (including stock-based
compensation) for personnel engaged in warehouse functions. Cost of products sold includes merchandise cost, inbound freight and duties and in the case of HSN, certain allocable general and
administrative costs, including certain warehouse costs.
Cost
of sales in 2007 increased $54.8 million from 2006, primarily due to an increase of $44.2 million in the cost of products sold, $4.4 million of which relates to
an increase in inventory reserves, a shift in mix to lower gross margin products, an increase of $8.2 million in shipping and handling costs and the effect of merchandise liquidation and
markdowns, all of which contributed to a decrease in overall gross margins of 125 basis points to 37.4%. Higher return rates negatively impact both revenue and gross margins as higher returns result
in higher warehouse processing costs and higher inventory markdowns for goods that are not resalable at full retail price. The impact of the increase in overall return rates on gross margins is
$10.8 million in 2007.
Cost
of sales in 2006 increased $117.3 million from 2005, primarily due to an increase of $74.2 million in cost of products sold and $38.8 million in shipping and
handling costs. Included in these increases is the impact of the acquisition of Cornerstone Brands on April 1, 2005. On a pro forma basis, assuming Cornerstone Brands had been acquired on
January 1, 2005, cost of sales in 2006 would have increased $14.9 million, or 1%. Overall gross margins increased 36 basis points to 38.7% driven primarily by a shift in sales mix to
higher full price items, and lower fulfillment costs as a percentage of merchandise cost at Cornerstone. Although HSNi benefited from higher gross margins at Cornerstone, gross margins at HSN declined
60 basis points due to higher return rates and increased shipping and handling costs. Gross margins in 2005 were impacted by a $5.8 million favorable adjustment to certain accrued liabilities.
The impact of the increase in overall return rates on gross margins was $16.4 million in 2006.
57
Selling and marketing expense
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
272,896 |
|
5 |
% |
$ |
260,794 |
|
4 |
% |
$ |
249,912 |
Cornerstone |
|
|
323,015 |
|
(0 |
)% |
|
324,203 |
|
29 |
% |
|
250,965 |
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expense |
|
$ |
595,911 |
|
2 |
% |
$ |
584,997 |
|
17 |
% |
$ |
500,877 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
20% |
|
16 bp |
|
|
20% |
|
157 bp |
|
|
19% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Selling and marketing expenseHSN |
|
$272,896 |
|
5% |
|
$260,794 |
|
4% |
|
$249,912 |
As a percentage of HSN revenue |
|
14% |
|
58 bp |
|
14% |
|
60 bp |
|
13% |
Selling and marketing expenseCornerstone |
|
$323,015 |
|
(0)% |
|
$324,203 |
|
29% |
|
$250,965 |
As a percentage of Cornerstone revenue |
|
32% |
|
(81) bp |
|
33% |
|
57 bp |
|
32% |
Selling
and marketing expense consists primarily of advertising and promotional expenditures, compensation and other employee-related costs (including stock-based compensation) for
personnel
engaged in customer service and sales functions and on-air distribution costs. Advertising and promotional expenditures primarily include catalog production and distribution costs
("catalog circulation costs") and online marketing, including fees paid to search engines and third party distribution partners.
Selling and marketing expense in 2007 increased $10.9 million from 2006, primarily due to increases of $6.7 million in on-air distribution costs at HSN,
$6.2 million in compensation and other employee-related costs and $4.2 million in advertising and promotional expenditures, which is net of a decrease of $6.6 million in catalog
circulation costs. The increase in on-air distribution costs is primarily related to newly executed contracts with cable and satellite distribution partners. Compensation and other
employee-related costs increased in the current year period due in part to a 15% increase in headcount as well as increased management transition costs.
Selling
and marketing expense in 2006 increased $84.1 million from 2005, primarily due to the full year inclusion of Cornerstone Brands and subsequent growth of Cornerstone in
2006, as well as an increase of $9.4 million in on-air distribution costs at HSN. Excluding the impact of Cornerstone, selling and marketing expense increased $10.9 million
from 2005 primarily driven by a $9.4 million increase in on-air distribution costs and an increase in compensation and other employee-related costs.
58
General and administrative expense
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
141,379 |
|
7 |
% |
$ |
131,538 |
|
3 |
% |
$ |
127,417 |
Cornerstone |
|
|
70,576 |
|
29 |
% |
|
54,723 |
|
25 |
% |
|
43,763 |
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense |
|
$ |
211,955 |
|
14 |
% |
$ |
186,261 |
|
9 |
% |
$ |
171,180 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
7% |
|
82 bp |
|
|
6% |
|
6 bp |
|
|
6% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
General and administrative expenseHSN |
|
$141,379 |
|
7% |
|
$131,538 |
|
3% |
|
$127,417 |
As a percentage of HSN revenue |
|
7% |
|
49 bp |
|
7% |
|
23 bp |
|
7% |
General and administrative expenseCornerstone |
|
$70,576 |
|
29% |
|
$54,723 |
|
25% |
|
$43,763 |
As a percentage of Cornerstone revenue |
|
7% |
|
144 bp |
|
6% |
|
(8) bp |
|
6% |
General
and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax,
human resources, information technology and executive management functions, facilities costs and fees for professional services.
General
and administrative expense in 2007 increased $25.7 million from 2006, primarily due to higher compensation and other employee-related costs of $14.3 million and
increases of $3.9 million in bad debt expense and $3.4 million in professional fees. Between 2006 and 2007, HSNi invested in leadership by increasing compensation and expanding its
management team. General and administrative expense was
further impacted by increases in compensation and other employee-related costs associated with retail store expansion and internet development at Cornerstone. The increase in bad debt expense is
primarily due to increased Flexpay sales. Flexpay, which is offered exclusively through HSN, allows customers to pay for merchandise in interest free monthly payments over a
2-6 month period. Flexpay sales were 54% and 48% of HSN's net merchandise sales for 2007 and 2006, respectively. HSNi expects to incur increased costs related to the additional
financial and legal requirements associated with being a separate public company, as well as increased non-cash compensation associated with the modification of existing stock-based compensation
awards in connection with the spin-off and the grant of new awards post spin-off.
General
and administrative expense in 2006 increased $15.1 million from 2005, primarily due to the acquisition of Cornerstone Brands on April 1, 2005 and an increase in
compensation and other employee-related costs principally related to management transition.
Effective
January 1, 2006, HSNi adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the
modified prospective transition method. There was no impact to the amount of stock-based compensation recorded in the combined statements of operations for the years ended December 31, 2006 and
2005 as a result of adopting SFAS 123R. HSNi has been recognizing expense for all stock-based grants since August 9, 2005, in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") due to the modification resulting from the Expedia spin-off. The majority of stock-based compensation expense is reflected in general and
administrative expense. As of December 31, 2007, there was approximately $23.0 million of unrecognized compensation cost, net of estimated forfeitures, related to
59
all
equity-based awards, which is expected to be recognized over a weighted average period of approximately 2.7 years.
Production and programming expense
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
58,913 |
|
5 |
% |
$ |
56,224 |
|
3 |
% |
$ |
54,849 |
Cornerstone |
|
|
138 |
|
(76 |
)% |
|
576 |
|
(11 |
)% |
|
645 |
|
|
|
|
|
|
|
|
|
|
|
Production and programming expense |
|
$ |
59,051 |
|
4 |
% |
$ |
56,800 |
|
2 |
% |
$ |
55,494 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
2% |
|
6 bp |
|
|
2% |
|
(10) bp |
|
|
2% |
Production and programming expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in production and
programming at HSN.
Production
and programming expense in 2007 increased $2.3 million from 2006, primarily due to an increase of $2.9 million in compensation and other employee-related costs
and a charge of $2.0 million in connection with the termination of a contract for a satellite no longer in use. These increases were partially offset by lower broadcast fees related to the shut
down of America's Store in April 2007.
Production
and programming expense in 2006 increased $1.3 million from 2005, primarily due to increased expenses related to compensation and other employee-related costs.
Depreciation
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
25,404 |
|
(13 |
)% |
$ |
29,082 |
|
(17 |
)% |
$ |
35,216 |
Cornerstone |
|
|
8,959 |
|
9 |
% |
|
8,191 |
|
43 |
% |
|
5,731 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
34,363 |
|
(8 |
)% |
$ |
37,273 |
|
(9 |
)% |
$ |
40,947 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
1% |
|
(11) bp |
|
|
1% |
|
(24) bp |
|
|
2% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
DepreciationHSN |
|
$25,404 |
|
(13)% |
|
$29,082 |
|
(17)% |
|
$35,216 |
As a percentage of HSN revenue |
|
1% |
|
(20) bp |
|
2% |
|
(32) bp |
|
2% |
DepreciationCornerstone |
|
$8,959 |
|
9% |
|
$8,191 |
|
43% |
|
$5,731 |
As a percentage of Cornerstone revenue |
|
1% |
|
6 bp |
|
1% |
|
9 bp |
|
1% |
Depreciation
in 2007 and 2006 decreased $2.9 million and $3.7 million, respectively, primarily due to certain fixed assets becoming fully depreciated at HSNi, partially
offset by the incremental depreciation associated with capital expenditures made throughout 2006 and 2007. The increase in capital expenditures relates primarily to Cornerstone's distribution, call
center and retail store expansion, and internet related initiatives.
60
Operating Income Before Amortization
Operating Income Before Amortization is a Non-GAAP measure and is defined in "HSNi's Principles of Financial Reporting".
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
148,303 |
|
(23 |
)% |
$ |
193,139 |
|
(12 |
)% |
$ |
220,013 |
Cornerstone |
|
|
50,771 |
|
(23 |
)% |
|
66,027 |
|
37 |
% |
|
48,308 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income Before Amortization |
|
$ |
199,074 |
|
(23 |
)% |
$ |
259,166 |
|
(3 |
)% |
$ |
268,321 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
7% |
|
(216) bp |
|
|
9% |
|
(104) bp |
|
|
10% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Operating Income Before AmortizationHSN |
|
$148,303 |
|
(23)% |
|
$193,139 |
|
(12)% |
|
$220,013 |
As a percentage of HSN revenue |
|
8% |
|
(241) bp |
|
10% |
|
(141) bp |
|
12% |
Operating Income Before AmortizationCornerstone |
|
$50,771 |
|
(23)% |
|
$66,027 |
|
37% |
|
$48,308 |
As a percentage of Cornerstone revenue |
|
5% |
|
(164) bp |
|
7% |
|
47 bp |
|
6% |
Operating
Income Before Amortization in 2007 decreased $60.1 million from 2006, primarily due to a 125 basis point decrease in gross margins, increased general and administrative
expense of $25.7 million and increased selling and marketing expense of $10.9 million.
Operating Income Before Amortization in 2006 decreased $9.2 million from 2005, primarily due to higher operating costs associated with increased catalog circulation and a
$9.4 million increase in on-air distribution costs at HSN, partially offset by higher revenue noted above and a 36 basis point increase in gross margins.
Operating income
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
134,866 |
|
(18 |
)% |
$ |
163,904 |
|
3 |
% |
$ |
159,794 |
Cornerstone |
|
|
34,925 |
|
(29 |
)% |
|
49,292 |
|
39 |
% |
|
35,358 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
169,791 |
|
(20 |
)% |
$ |
213,196 |
|
9 |
% |
$ |
195,152 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
6% |
|
(157) bp |
|
|
7% |
|
10 bp |
|
|
7% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Operating IncomeHSN |
|
$134,866 |
|
(18)% |
|
$163,904 |
|
3% |
|
$159,794 |
As a percentage of HSN revenue |
|
7% |
|
(157) bp |
|
9% |
|
23 bp |
|
8% |
Operating IncomeCornerstone |
|
$34,925 |
|
(29)% |
|
$49,292 |
|
39% |
|
$35,358 |
As a percentage of Cornerstone revenue |
|
3% |
|
(152) bp |
|
5% |
|
44 bp |
|
5% |
Operating
income in 2007 decreased $43.4 million from 2006, primarily due to the decrease in Operating Income Before Amortization described above, a $4.4 million increase
in amortization of non-cash marketing and a $0.4 million increase in non-cash compensation expense, partially offset by a $21.5 million decrease in amortization
of intangibles resulting from certain intangible assets being fully
61
amortized
in 2006 and 2007. The amortization of non-cash marketing referred to in this report consists of non-cash marketing and advertising secured by IAC from Universal
Television as part of the IAC transaction pursuant to which Vivendi Universal Entertainment, LLLP ("VUE") was created, and the subsequent transaction by which IAC sold its partnership interests in
VUE.
Operating
income in 2006 increased $18.0 million from 2005, despite the decrease in Operating Income Before Amortization described above primarily due to a $25.2 million
decrease in the amortization of intangibles resulting from certain intangible assets being fully amortized in 2006 and a $2.0 million decrease in non-cash compensation expense.
Income tax provision
In 2007 and 2006, HSNi recorded an income tax provision for continuing operations of $64.6 million and $79.2 million, respectively, which represents
effective tax rates of 38% and 37%, respectively. These
tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes. In 2005, HSNi recorded a tax provision for continuing operations of $66.3 million
which represents an effective tax rate of 34%. The 2005 tax rate is lower than the federal statutory rate of 35% due principally to a decrease in net deferred tax liabilities due to a change in HSNi's
state effective tax rate partially offset by state and local income taxes.
HSNi
adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109" effective
January 1, 2007. The cumulative effect of the adoption resulted in a decrease of $0.2 million to retained earnings. As of January 1, 2007 and December 31, 2007, HSNi had
unrecognized tax benefits of approximately $5.2 million and $11.7 million, respectively, which included accrued interest of $0.9 million and $2.8 million, respectively.
By
virtue of previously filed separate company and consolidated tax returns with IAC, HSNi is routinely under audit by federal, state, local and foreign authorities in the area of income
tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient
to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the
reserves for tax contingencies and the amounts owed by HSNi are recorded in the period they become known.
The
Internal Revenue Service ("IRS") is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of
HSN. The statute of limitations for these years has been extended to December 31, 2008. Tax filings in various state, local and foreign jurisdictions are currently under examinations, the most
significant of which are Florida, New York state and New York City, for various tax years after December 31, 2001. These examinations are expected to be completed by late 2008. HSNi believes
that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $2.3 million within twelve months of the current reporting date due to the reversal of
deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized benefits cannot be made, but are not
expected to be significant.
Under
the terms of the tax sharing agreement, which will be executed in connection with the spin-off, IAC will generally retain the liability related to federal and state returns filed
on a consolidated or unitary basis for all periods prior to the spin-off.
Discontinued operations
Discontinued operations in the accompanying combined statements of operations include EUVÍA and HSE through June 2, 2005 and June 19,
2007, respectively. Quiz TV Limited and iBuy are
62
presented
as discontinued operations in the accompanying combined financial statements for all periods presented. Income (loss) from these discontinued operations in 2007, 2006 and 2005 was income of
$29.0 million, losses of $10.7 million and income of $22.8 million, respectively, net of tax. Income from discontinued operations, net of tax, in 2007 primarily includes the
income of HSE. Losses from discontinued operations, net of tax, in 2006 primarily includes the losses of iBuy and Quiz TV Limited, partially offset by the income of HSE. Income from discontinued
operations, net of tax, in 2005 primarily includes the income of HSE and EUVÍA.
Additionally,
HSNi recognized after-tax gains in 2007 and 2005 of $30.6 million and $73.3 million on the sales of HSE and EUVÍA, respectively.
63
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2007, HSNi had $6.2 million of cash and cash equivalents.
Net
cash provided by operating activities attributable to continuing operations was $137.6 million and $167.7 million in 2007 and 2006, respectively. The decrease of
$30.1 million in net cash provided by operating activities reflects a decrease in income from continuing operations of $28.3 million combined with a decrease in depreciation and
amortization of intangibles of $24.5 million and a decrease of cable and satellite distribution fees and amortization of $7.8 million. The decrease in depreciation and amortization of
intangibles reflects a higher percentage of HSNi's depreciable/amortizable assets reaching the end of their estimated useful lives in 2007 as compared to the prior year, while the reduction in cable
and satellite distribution fees reflects the trend of HSNi negotiating shorter-term agreements with its cable and satellite distribution partners. Also affecting cash provided by operating
activities in 2007 were increases in accounts receivable, primarily due to an increase in Flexpay sales, inventories and accounts payable and other current liabilities. During 2007,
inventory increased by $3.5 million to $317.4 million from $313.9 million at December 31, 2006, primarily due to increased merchandise purchases as well as lower than
anticipated sales at Cornerstone.
Net
cash used in investing activities attributable to continuing operations in 2007 of $140.2 million resulted primarily from cash transfers of $91.6 million to IAC and
capital expenditures of $48.7 million. The cash transfers to IAC relate primarily to the transfer of HSNi's excess cash to IAC in connection with IAC's centrally managed U.S. treasury function.
Net cash used in investing activities attributable to continuing operations in 2006 of $224.4 million resulted primarily from cash transfers of $188.3 million to IAC and capital
expenditures of $36.0 million.
Net
cash provided by financing activities attributable to continuing operations in 2007 and 2006 of $2.4 million and $2.3 million, respectively, was primarily due to excess
tax benefits from stock-based awards.
Net cash used in discontinued operations in 2007 and 2006 of $48.5 million and $38.2 million, respectively, relates primarily to the operations of HSE and iBuy. HSNi does
not expect future cash flows associated with existing discontinued operations to be material.
64
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
|
|
(In thousands)
|
Purchase obligations(a) |
|
$ |
135,023 |
|
$ |
43,871 |
|
$ |
80,698 |
|
$ |
10,454 |
|
$ |
|
Operating leases |
|
|
131,171 |
|
|
29,832 |
|
|
48,704 |
|
|
32,520 |
|
|
20,115 |
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
266,194 |
|
$ |
73,703 |
|
$ |
129,402 |
|
$ |
42,974 |
|
$ |
20,115 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- The
purchase obligations primarily relate to cable contracts and include obligations for future cable distribution and commission guarantees.
|
|
Amount of Commitment Expiration Per Period
|
Other Commercial Commitments*
|
|
Total Amounts
Committed
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
|
|
(In thousands)
|
Letters of credit and surety bonds |
|
$ |
25,390 |
|
$ |
25,078 |
|
$ |
|
|
$ |
312 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
- *
- The
letters of credit ("LOCs") primarily consist of trade LOCs, which are used for inventory purchases. Trade LOCs are guarantees of payment based upon the delivery of goods. The surety
bonds primarily consist of customs bonds, which relate to the import of merchandise into the United States.
Off-Balance Sheet Arrangements
Other than the items described above, HSNi does not have any off-balance sheet arrangements as of December 31, 2007.
65
Results of Operations for the Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007
Revenue
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
HSN |
|
$ |
478,973 |
|
5 |
% |
$ |
454,053 |
|
Cornerstone |
|
|
197,954 |
|
(7 |
)% |
|
212,775 |
|
Inter-segment elimination |
|
|
(41 |
) |
67 |
% |
|
(123 |
) |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
676,886 |
|
2 |
% |
$ |
666,705 |
|
|
|
|
|
|
|
|
|
Revenue primarily relates to the sale of merchandise and is reduced by incentive discounts and sales returns. In accordance with Staff Accounting Bulletin 104, revenue is recorded when
delivery to the customer has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment.
HSNi's sales policy allows customers to return merchandise for a full refund or exchange, subject in some cases to restocking fees and exceptions to certain merchandise.
Revenue in 2008 increased $10.2 million from 2007 primarily due to 9% growth at HSN, excluding America's Store which ceased operations on April 3, 2007, partially offset by
a decline of 7% at Cornerstone. Revenue from America's Store in 2007 was approximately $15.9 million. Online sales continued to grow at a double digit rate in the first quarter of 2008. HSNi's
revenue reflects a 3% increase in average price point on comparable units shipped. Average price point is $61.20 in 2008, up from $59.49 in 2007.
Revenue from HSN in 2008 increased $24.9 million, reflecting a 5% increase in average price point on comparable units shipped, partially offset by a 90
basis point increase in average return rates. The increase in average price point in 2008 is primarily due to a shift in product mix from the health & beauty category to the home division
(including electronics and cookware). Electronics merchandise generally carries a higher average price point than health & beauty merchandise offerings. During the first quarter of 2008, HSN
continued to improve sales efficiency and increased the number and spend of active customers. Return rates at HSN in 2008 were 20.0%, up from 19.1% in 2007, primarily driven by overall higher return
rates in several product categories.
Product mix from HSN is provided in the table below:
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Jewelry |
|
16 |
% |
17 |
% |
Apparel & accessories |
|
13 |
% |
12 |
% |
Health & beauty |
|
18 |
% |
21 |
% |
Home & other |
|
53 |
% |
50 |
% |
|
|
|
|
|
|
Total |
|
100 |
% |
100 |
% |
|
|
|
|
|
|
Revenue from Cornerstone in 2008 decreased $14.8 million from 2007 primarily due to a 4% decrease in units shipped and a 2% decrease in average price
point. Cornerstone, which operates in the
66
home and apparel merchandise categories, was negatively affected by lower consumer demand and aggressive competitive action in this difficult retail environment. Revenue was also negatively impacted
by a 15% decrease in catalog circulation.
Cost of sales
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
HSN |
|
$ |
324,092 |
|
8% |
|
$ |
300,988 |
|
Cornerstone |
|
|
117,351 |
|
(0)% |
|
|
117,841 |
|
Inter-segment elimination |
|
|
(41 |
) |
67% |
|
|
(123 |
) |
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
441,402 |
|
5% |
|
$ |
418,706 |
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
65% |
|
241 bp |
|
|
63% |
|
Gross margins |
|
|
35% |
|
(241) bp |
|
|
37% |
|
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Cost of salesHSN |
|
$ |
324,092 |
|
8% |
|
$ |
300,988 |
As a percentage of HSN revenue |
|
|
68% |
|
137 bp |
|
|
66% |
HSN gross margins |
|
|
32% |
|
(137) bp |
|
|
34% |
Cost of salesCornerstone |
|
$ |
117,351 |
|
(0)% |
|
$ |
117,841 |
As a percentage of Cornerstone revenue |
|
|
59% |
|
390 bp |
|
|
55% |
Cornerstone gross margins |
|
|
41% |
|
(390) bp |
|
|
45% |
Cost of sales consists primarily of the cost of products sold, shipping and handling costs and compensation and other employee-related costs (including stock-based compensation) for
personnel engaged in warehouse functions. Cost of products sold includes merchandise cost, inbound freight and duties and in the case of HSN, certain allocable general and administrative costs,
including certain warehouse costs.
Cost of sales in 2008 increased $22.7 million from 2007, primarily due to an increase of $18.9 million in the cost of products sold and an increase of $3.1 million
in shipping and handling costs. The increase in cost of sales as a percentage of revenue was due to a decrease in gross margins of 390 basis points and 137 basis points at Cornerstone and HSN,
respectively. The decrease in gross margins at Cornerstone was principally due to an aggressive increase in promotional pricing and clearance activity, a higher return rate and an increase in
fulfillment costs. The decrease in gross margins at HSN was due to a shift in product mix to lower gross margin products, primarily electronics and cookware, the effect of merchandise clearance sales
and higher shipping and handling costs, partially offset by lower inventory reserves. Higher return rates negatively impact gross margins as higher returns result in higher warehouse processing costs
and higher inventory markdowns for goods that are not resalable at full retail price. The year over year impact of the increase in overall return rates on gross margins is $2.6 million.
67
Selling and marketing expense
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
67,698 |
|
(1)% |
|
$ |
68,511 |
Cornerstone |
|
|
69,052 |
|
2% |
|
|
67,942 |
|
|
|
|
|
|
|
Selling and marketing expense |
|
$ |
136,750 |
|
0% |
|
$ |
136,453 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
20% |
|
(26) bp |
|
|
20% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Selling and marketing expenseHSN |
|
$ |
67,698 |
|
(1)% |
|
$ |
68,511 |
As a percentage of HSN revenue |
|
|
14% |
|
(95) bp |
|
|
15% |
Selling and marketing expenseCornerstone |
|
$ |
69,052 |
|
2% |
|
$ |
67,942 |
As a percentage of Cornerstone revenue |
|
|
35% |
|
295 bp |
|
|
32% |
Selling and marketing expense consists primarily of advertising and promotional expenditures, compensation and other employee-related costs (including stock-based compensation) for
personnel engaged in customer service and sales functions and on-air distribution costs. Advertising and promotional expenditures primarily include catalog production and distribution
costs and online marketing, including fees paid to search engines and third party distribution partners.
Selling and marketing expense in 2008 increased $0.3 million from 2007, primarily due to an increase of $3.7 million in compensation and other employee-related costs,
partially offset by decreases of $2.5 million in on-air distribution costs at HSN and $0.8 million in advertising and promotional expenditures. Compensation and other
employee-related costs increased in the current year period due in part to a 7% increase in headcount as well as increased management transition costs as the prior year period was favorably impacted
by the reversal of accrued severance expense. The decrease in on-air distribution costs is primarily due to lower broadcast fees related to the shut down of America's Store in April 2007.
General and administrative expense
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
37,943 |
|
11% |
|
$ |
34,171 |
Cornerstone |
|
|
16,431 |
|
(17)% |
|
|
19,795 |
|
|
|
|
|
|
|
General and administrative expense |
|
$ |
54,374 |
|
1% |
|
$ |
53,966 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
8% |
|
(6) bp |
|
|
8% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
General and administrative expenseHSN |
|
$ |
37,943 |
|
11% |
|
$ |
34,171 |
As a percentage of HSN revenue |
|
|
8% |
|
40 bp |
|
|
8% |
General and administrative expenseCornerstone |
|
$ |
16,431 |
|
(17)% |
|
$ |
19,795 |
As a percentage of Cornerstone revenue |
|
|
8% |
|
(100) bp |
|
|
9% |
68
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax,
human resources, information technology and executive management functions, facilities costs and fees for professional services.
General and administrative expense in 2008 increased $0.4 million from 2007, primarily due to an increase of $2.6 million in bad debt expense, partially offset by a
decrease of $2.0 million in professional fees. The increase in bad debt expense is primarily due to increased Flexpay sales. Flexpay, which is offered exclusively through HSN, allows customers
to pay for merchandise in interest free monthly payments over a 2-6 month period. Flexpay sales were 54% and 48% of HSN's net merchandise sales for 2008 and 2007, respectively. The
decrease in professional fees is primarily due to lower legal fees at Cornerstone. HSNi expects to incur increased costs related to the additional financial and legal requirements associated with
being a separate public company, as well as increased non-cash compensation associated with the modification of existing stock-based
compensation awards in connection with the spin-off and the grant of new awards in connection with and subsequent to the spin-off.
General and administrative expense includes non-cash compensation expense of $2.5 million in both 2008 and 2007. As of March 31, 2008, there was approximately
$29.2 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is currently expected to be recognized over a weighted average period of
approximately 3.0 years (exclusive of the impact of the modification related to the spin-off, which consists of the accelerated vesting of certain unvested restricted stock units
and the modification of all unvested and vested stock options).
Production and programming expense
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
14,341 |
|
(4)% |
|
$ |
14,867 |
Cornerstone |
|
|
2 |
|
(84)% |
|
|
13 |
|
|
|
|
|
|
|
Production and programming expense |
|
$ |
14,343 |
|
(4)% |
|
$ |
14,880 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
2% |
|
(11) bp |
|
|
2% |
Production and programming expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in production and
programming at HSN.
Production and programming expense in 2008 decreased $0.5 million from 2007, primarily due to lower broadcast fees related to the shut down of America's Store in April 2007,
partially offset by an increase of $0.6 million in compensation and other employee-related costs.
69
Depreciation
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
6,550 |
|
2% |
|
$ |
6,414 |
Cornerstone |
|
|
2,476 |
|
21% |
|
|
2,054 |
|
|
|
|
|
|
|
Depreciation |
|
$ |
9,026 |
|
7% |
|
$ |
8,468 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
1% |
|
6 bp |
|
|
1% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
DepreciationHSN |
|
$ |
6,550 |
|
2% |
|
$ |
6,414 |
As a percentage of HSN revenue |
|
|
1% |
|
(5) bp |
|
|
1% |
DepreciationCornerstone |
|
$ |
2,476 |
|
21% |
|
$ |
2,054 |
As a percentage of Cornerstone revenue |
|
|
1% |
|
29 bp |
|
|
1% |
Depreciation in 2008 increased $0.6 million from 2007, primarily due to the incremental depreciation associated with capital expenditures made throughout 2007 and 2008, partially
offset by certain fixed assets becoming fully depreciated during the period.
Operating Income Before Amortization
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
29,935 |
|
(1)% |
|
$ |
30,271 |
Cornerstone |
|
|
(5,904 |
) |
NM |
|
|
6,996 |
|
|
|
|
|
|
|
Operating Income Before Amortization |
|
$ |
24,031 |
|
(36)% |
|
$ |
37,267 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
4% |
|
(204) bp |
|
|
6% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Operating Income Before AmortizationHSN |
|
$ |
29,935 |
|
(1)% |
|
$ |
30,271 |
As a percentage of HSN revenue |
|
|
6% |
|
(42) bp |
|
|
7% |
Operating Income Before AmortizationCornerstone |
|
$ |
(5,904 |
) |
NM |
|
$ |
6,996 |
As a percentage of Cornerstone revenue |
|
|
(3)% |
|
NM |
|
|
3% |
Operating Income Before Amortization in 2008 decreased $13.2 million from 2007, primarily due to a 241 basis point decrease in gross margins and an increase of $2.6 million
in bad debt expense. Operating Income Before Amortization at HSN declined 1% to $29.9 million, primarily driven by a decrease in gross margins of 137 basis points. Gross margins were adversely
impacted by a shift in mix to lower gross margin products, primarily electronics and cookware, an increase of $4.3 million in shipping and handling costs and the effect of merchandise clearance
and promotional pricing, partially offset by lower inventory reserves. Operating Income Before Amortization at Cornerstone declined from $7.0 million in 2007 to a loss of $5.9 million in
2008, primarily driven by a decrease in gross margins of 390 basis points reflecting the impact of promotional pricing in response to the current retail environment.
70
Operating income (loss)
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
HSN |
|
$ |
24,491 |
|
(11)% |
|
$ |
27,448 |
Cornerstone |
|
|
(9,413 |
) |
NM |
|
|
2,699 |
|
|
|
|
|
|
|
Operating income |
|
$ |
15,078 |
|
(50)% |
|
$ |
30,147 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
|
2% |
|
(229) bp |
|
|
5% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Operating incomeHSN |
|
$ |
24,491 |
|
(11)% |
|
$ |
27,448 |
As a percentage of HSN revenue |
|
|
5% |
|
(93) bp |
|
|
6% |
Operating (loss) incomeCornerstone |
|
$ |
(9,413 |
) |
NM |
|
$ |
2,699 |
As a percentage of Cornerstone revenue |
|
|
(5)% |
|
NM |
|
|
1% |
Operating income in 2008 decreased $15.1 million from 2007, primarily due to the decrease in Operating Income Before Amortization described above.
Operating income of $24.5 million at HSN for 2008 reflects $3.7 million in amortization of non-cash marketing, non-cash compensation expense of
$1.6 million, an increase of $0.4 million and amortization of intangibles of $0.1 million, a decrease of $1.5 million.
Operating loss of $9.4 million at Cornerstone for 2008 reflects amortization of intangibles of $2.1 million, a decrease of $0.4 million and non-cash
compensation expense of $1.5 million, a decrease of $0.4 million.
The decrease in amortization of intangibles at both HSN and Cornerstone resulted from certain intangible assets being fully amortized in 2007. The amortization of non-cash
marketing referred to in this report consists of non-cash marketing and advertising secured by IAC from Universal Television as part of the IAC transaction pursuant to which Vivendi
Universal Entertainment, LLLP ("VUE") was created, and the subsequent transaction by which IAC sold its partnership interests in VUE.
The disappointing results for the first quarter at Cornerstone were due, in large part, to the continuing difficult macro environment for retailers, particularly in the home and apparel
categories. HSNi is taking actions in response to this environment, including reducing inventory purchases and capital and operating expenditures and revisiting merchandising and marketing, including
catalog circulation, strategies. While HSNi expects full year profitability at Cornerstone, HSNi expects the remainder of 2008 to be challenging, with near term profit growth unlikely.
Income tax provision
For the three months ended March 31, 2008 and 2007, HSNi recorded tax provisions for continuing operations of $5.7 million and $11.5 million,
respectively, which represent effective tax rates of 38%. The tax rates for the three months ended March 31, 2008 and 2007 are higher than the federal statutory rate of 35% due principally to
state taxes.
As of December 31, 2007 and March 31, 2008, HSNi had unrecognized tax benefits of approximately $8.9 million. Included in unrecognized tax benefits at
March 31, 2008 is approximately $8.8 million for tax positions included in IAC's consolidated tax return filings that will remain a liability of IAC after the spin-off. HSNi
recognizes interest and, if applicable, penalties related to unrecognized
71
tax benefits in income tax expense. Included in income tax expense for 2008 is $0.1 million, net of related deferred taxes, for interest on unrecognized tax benefits. At March 31, 2008,
HSNi has accrued $3.0 million for the payment of interest. There are no material accruals for penalties.
By virtue of previously filed separate company and consolidated tax returns with IAC, HSNi is routinely under audit by federal, state, local and foreign authorities in the area of income
tax. These audits include questioning the timing and the amount of deductions and the allocation of income among
various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon
resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by HSNi are recorded in the period they become known. HSNi
believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $2.5 million within twelve months of the current reporting date due to the reversal of
deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits cannot be made, but are not
expected to be significant.
Under the terms of the tax sharing agreement, which will be executed in connection with the spin-off, IAC will generally retain the liability related to federal and state
returns filed on a consolidated or unitary basis for all periods prior to the spin-off.
Discontinued operations
Discontinued operations in the accompanying combined statements of operations include Home Shopping Europe GMbH & Co. KG, and its affiliated station HSE24 ("HSE")
through March 31, 2007. Quiz TV Limited and iBuy are presented as discontinued operations in the accompanying combined financial statements for all periods presented. Losses from these
discontinued operations in 2008 and 2007 were $1.1 million and $1.6 million, respectively, net of tax. Loss from discontinued operations, net of tax, in 2008 primarily includes the
losses of iBuy. Loss from discontinued operations, net of tax, in 2007 primarily includes the losses of iBuy, partially offset by the income of HSE.
72
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2008, HSNi had $8.0 million of cash and cash equivalents.
Net cash used in operating activities attributable to continuing operations was $20.8 million in 2008 compared to $39.2 million in 2007, an improvement of
$18.4 million, despite a decrease of $9.2 million in earnings from continuing operations. This improvement was due to a $16.0 million decrease in inventories reflecting better
inventory management at HSN, a significantly smaller increase in prepaid expenses and other current assets due to timing and a larger decrease in accounts receivable.
Net cash provided by investing activities attributable to continuing operations in 2008 of $21.7 million resulted primarily from cash transfers of $28.3 million from IAC,
partially offset by capital expenditures of $6.6 million. The cash transfers from IAC relate to IAC's centrally managed U.S. treasury function. Net cash provided by investing activities
attributable to continuing operations in 2007 of $35.0 million resulted primarily from cash transfers of $43.1 million from IAC, partially offset by capital expenditures of
$8.2 million.
Net cash used in financing activities attributable to continuing operations in 2008 was less than $0.1 million. Net cash provided by financing activities attributable to
continuing operations in 2007 of $1.2 million was due to excess tax benefits from stock-based awards.
Net cash provided by discontinued operations in 2008 and 2007 of $1.7 million and $10.7 million, respectively, relates primarily to the operations of HSN International and
HSE, respectively. HSNi does not expect future cash flows associated with existing discontinued operations to be material.
HSNi anticipates that it will need to make capital and other expenditures in connection with the development and expansion of its operations.
In connection with the separation, HSNi expects to raise $450 million through a combination of privately issued debt securities (the "Bonds") and secured credit facilities (the
"Term Loan"). In addition, HSNi expects to negotiate a revolving credit facility (the "RCF"). The total costs expected to be incurred in connection with the issuance of the Bonds and borrowings under
the Term Loan and establishing the RCF are $11.2 million. The net proceeds are expected to be approximately $438.8 million. In connection with the separation, HSNi is expected to
distribute the net proceeds of the financing to IAC except for $50 million which it will retain. To the extent that the net proceeds from the Bonds and Term Loans are less than
$438.8 million there would be a corresponding reduction in the transfer of cash to IAC. HSNi will describe the terms of these new credit facilities and other indebtedness once HSNi has
negotiated such terms. Upon completion of the spin-off, intercompany receivable balances will be extinguished.
HSNi's ability to fund its cash and capital needs will be affected by its ongoing ability to generate cash from operations, the overall capacity and terms of its financing arrangements
as discussed above, and access to the equity markets. Given the volatility in the financial markets, IAC and HSNi continue to monitor the markets closely and will take steps to maintain financial
flexibility and an appropriate capital structure.
73
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
Less Than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than 5 Years
|
|
|
(In thousands)
|
Purchase obligations(a) |
|
$ |
133,953 |
|
$ |
47,096 |
|
$ |
81,162 |
|
$ |
5,695 |
|
$ |
|
Operating leases |
|
|
129,802 |
|
|
31,369 |
|
|
41,859 |
|
|
33,664 |
|
|
22,910 |
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
263,755 |
|
$ |
78,465 |
|
$ |
123,021 |
|
$ |
39,359 |
|
$ |
22,910 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- The
purchase obligations primarily relate to cable contracts and include obligations for future cable distribution and commission guarantees.
74
HSNi'S PRINCIPLES OF FINANCIAL REPORTING
HSNi reports Operating Income Before Amortization as a supplemental measure to generally accepted accounting principles ("GAAP"). This measure is one of the
primary metrics by which HSNi evaluates the performance of its businesses, on which its internal budgets are based and by which management is compensated. HSNi believes that investors should have
access to the same set of tools that it uses in analyzing its results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be
considered a substitute for or superior to GAAP results. HSNi provides and encourages investors to examine the reconciling adjustments between the GAAP and non-GAAP measure which are
discussed below.
Definition of HSNi's Non-GAAP Measure
Operating Income Before Amortization is defined as operating income excluding, if applicable:
(1) non-cash compensation expense and amortization of non-cash marketing, (2) amortization of intangibles and goodwill impairment, (3) pro forma
adjustments for significant acquisitions, and (4) one-time items. HSNi believes this measure is useful to investors because it represents the operating results from the HSNi
Businesses, taking into account depreciation, which HSNi believes is an ongoing cost of doing business, but excluding the effects of any other non-cash expenses. Operating Income Before
Amortization has certain limitations in that it does not take into account the impact to HSNi's statement of operations of certain expenses, including non-cash compensation,
non-cash marketing and acquisition-related accounting. HSNi endeavors to compensate for the limitations of the non-GAAP measure presented by also providing the comparable GAAP
measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measure.
Pro Forma Results
HSNi has not presented Operating Income Before Amortization for 2005 on a pro forma basis for the Cornerstone acquisition because the results of Cornerstone were
included in the reported results for the majority of 2005.
One-Time Items
Operating Income Before Amortization is presented before one-time items, if applicable. These items are truly one-time in nature and
non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods
presented in this report, there are no one-time items.
Non-Cash Expenses That Are Excluded From HSNi's Non-GAAP Measure
Non-cash compensation expense consists principally of expense associated with the grants, including
unvested grants assumed in acquisitions, of restricted stock, restricted stock units and stock options. These expenses are not paid in cash, and HSNi will include the related shares in its future
calculations of diluted shares outstanding. Upon vesting of restricted stock and restricted stock units and the exercise of certain stock options, the awards will be settled, at HSNi's discretion, on
a net basis, with HSNi remitting the required tax withholding amount from its current funds.
Amortization of non-cash marketing consists of non-cash advertising provided to HSNi by IAC. The
non-cash marketing was secured by IAC from Universal Television as part of the IAC transaction pursuant to which VUE was created, and the subsequent transaction by which IAC sold its
partnership interests in VUE (collectively referred to as the "NBC Universal Advertising"). The NBC Universal Advertising is available for television advertising on various NBC Universal network and
cable channels without any cash cost.
75
The
NBC Universal Advertising is excluded from Operating Income Before Amortization because it is non-cash and is incremental to the marketing and advertising that HSNi would
otherwise undertake as a result of its ordinary cost/benefit marketing planning process. Accordingly, HSNi's aggregate level of advertising, and the increased concentration of that advertising on NBC
Universal network and cable channels, does not reflect what HSNi's advertising effort would otherwise be without these credits. As a result, management believes that treating the NBC Universal
Advertising as an expense does not appropriately reflect its true cost/benefit relationship, nor does it best reflect HSNi's long-term level of advertising expenditures. Nonetheless, while
the benefits directly attributable to television advertising are always difficult to determine, and especially so with respect to the NBC Universal Advertising due to its incrementality and heavy
concentration, it is likely that HSNi does derive benefits from it, though management believes such benefits are generally less than those received through its regular marketing and advertising for
the reasons stated above. Operating Income Before Amortization therefore has the limitation of including those benefits while excluding the associated expense.
Amortization of intangibles is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the
intangible assets of the acquired company, such as distribution agreements, customer relationships and merchandise agreements, are valued and amortized over their estimated lives. HSNi believes that
since intangibles represent costs incurred by the acquired company to build value prior to acquisition, they were part of transaction costs.
RECONCILIATION OF OPERATING INCOME BEFORE AMORTIZATION
For a reconciliation of Operating Income Before Amortization to operating income for HSNi's operating segments and to net income in total for the years ended
December 31, 2007, 2006 and 2005, see Note 9 to the combined financial statements.
Critical Accounting Policies and Estimates
The following disclosure is provided to supplement the descriptions of HSNi's accounting policies contained in Note 2 to the combined financial statements
in regard to significant areas of judgment. HSNi's management is required to make certain estimates and assumptions during the preparation of its combined financial statements in accordance with GAAP.
These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the combined financial statements. They also
impact the reported amount of net income during any period. Actual results could differ from those estimates. Because of the size of the financial statement elements to which they relate, some of
HSNi's accounting policies and estimates have a more significant impact on its combined financial statements than others. What follows is a discussion of some of HSNi's more significant accounting
policies and estimates.
HSNi reviews the carrying value of all long-lived assets, primarily property and equipment and definite-lived intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), impairment is considered to have occurred whenever the carrying value of a long-lived asset exceeds the sum of the undiscounted cash
flows that is expected to result from the use and eventual disposition of the asset. The determination of cash flows is based upon assumptions that may not occur. The value of long-lived
assets that is subject to assessment for impairment in accordance with SFAS 144 is $172.6 million at December 31, 2007.
76
Goodwill impairment is determined using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its
carrying amount, including goodwill. In performing the first step, HSNi determines the fair value of its reporting units by using a discounted cash flow ("DCF") analysis. Determining fair value using
a DCF analysis requires the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. If
the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not required. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the goodwill impairment test is required to be performed to measure the amount of impairment, if any. The second step of the goodwill
impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the
amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess.
The
impairment test for indefinite-lived intangible assets involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the
indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of indefinite-lived intangible assets are
determined using a DCF valuation analysis that employs a "relief from royalty" methodology in estimating the fair value of its trade names and trademarks. Significant judgments inherent in this
analysis include the determination of royalty rates, discount rates and the terminal growth rates.
Goodwill
and indefinite-lived intangible assets, primarily trade names and trademarks, are tested annually for impairment as of October 1st or earlier upon the
occurrence of certain events or substantive changes in circumstances. HSNi's 2007 annual impairment assessment did not identify an impairment. HSNi's reporting units are currently operating in dynamic
and challenged industry segments. To illustrate the magnitude of potential impairment charges relative to future changes in estimated fair value, had the estimated fair value of HSNi's reporting units
and their respective indefinite-lived intangible assets been hypothetically lower by 10% as of October 1, 2007, the aggregate book value of goodwill and indefinite-lived intangible assets would
have exceeded fair value by approximately $166.0 million at HSN and $74.0 million at Cornerstone. Had the estimated fair values of HSNi's reporting units and their respective
indefinite-lived intangible assets been hypothetically lower by 20% as of October 1, 2007, the book value of goodwill and indefinite lived-intangible assets would have exceeded fair value by
approximately $441.0 million at HSN and $156.0 million at Cornerstone.
Revenue from HSNi primarily consists of merchandise sales and is reduced by incentive discounts and sales returns. In accordance with Staff Accounting Bulletin
104, revenue is recorded when delivery to the customer has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and rewards of ownership, which is
generally on the date of shipment. HSNi's sales policy allows customers to return merchandise for a full refund or exchange, subject in some cases to restocking fees and exceptions for certain
merchandise. Allowances for returned merchandise and other adjustments (including reimbursed shipping and handling costs) are provided based upon past experience. HSNi's returns reserves at
December 31, 2007 and 2006 were based upon estimated return rates of 18.4% and 17.7%, respectively, which were arrived at based upon historical levels of actual returns. Actual levels of
product returns may vary from these estimates.
77
HSNi makes judgments as to its ability to collect outstanding receivables and provide allowances when it is assessed that all or a portion of the receivable will
not be collected. HSNi determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, its previous loss history and the condition of the
general economy. HSNi writes off accounts receivable when they become uncollectible. As of December 31, 2007, HSNi's allowance for doubtful accounts is $8.1 million.
Estimates of deferred income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 8, and reflect
management's assessment of actual future taxes to be paid on items reflected in the combined financial statements, giving consideration to both timing and the probability of realization. As of
December 31, 2007, the balance of deferred tax liabilities, net, is $795.4 million. Actual income taxes could vary from these estimates due to future changes in income tax law, state
income tax apportionment or the outcome of any review of IAC's tax returns by the IRS, as well as actual operating results of HSNi that vary significantly from anticipated results. Effective
January 1, 2007, HSNi adopted the provisions of FIN 48. As a result of the adoption of FIN 48, HSNi recognizes liabilities for uncertain tax positions based on the
two-step process prescribed by the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more
likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the
probability of various possible outcomes. HSNi considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not
accurately anticipate actual outcomes.
Inventories are valued at the lower of cost or market, cost being determined based upon the first-in, first-out method. Market is
determined on the basis of net realizable value, giving consideration to obsolescence and other factors. Net realizable value is estimated by HSNi based upon historical sales data, the age of
inventory, the quantity of goods on hand and the ability to return merchandise to vendors. The actual net realizable value may vary from estimates due to changes in customer tastes or viewing habits,
or judgmental decisions made by merchandising personnel when ordering new products. As of December 31, 2007, HSNi had $317.4 million of inventory on hand.
Seasonality
Seasonality impacts HSNi, with revenue highest in the fourth quarter, but not to the same extent it impacts the retail industry in general.
New Accounting Pronouncements
Refer to Note 2 to the combined financial statements for a description of recent accounting pronouncements.
78
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
During the second quarter of 2003, one of HSNi's foreign subsidiaries entered into a foreign exchange forward contract with a notional amount of
$38.6 million which was used to hedge against the change in value of a liability denominated in a currency other than the subsidiary's functional currency. In connection with the sale of HSE,
HSNi unwound the foreign exchange forward contract during June 2007. Prior to unwinding this contract, all foreign exchange remeasurement gains and losses related to the contract and liability were
recognized each period in the statements of operations and were offsetting. Subsequent to the sale of HSE, HSNi does not have significant exposure to foreign currency risk and does not hold any
derivative instruments at December 31, 2007 or March 31, 2008.
79
Management of HSNi
HSNi Board of Directors and Executive Officers
The following table sets forth information as to persons who are expected to serve as HSNi directors and executive officers following the spin-offs.
The HSNi Board of Directors, the composition of which will comply with the independence requirements under the current standards imposed by the Marketplace Rules of the Nasdaq Stock Market (the
"Marketplace Rules"), is currently expected to consist of directors.
Name
|
|
Age
|
|
Position(s)
|
Mindy Grossman |
|
50 |
|
Chief Executive Officer and Director of HSNi |
Roxane Al-Fayez |
|
51 |
|
President and Chief Executive Officer of Cornerstone Brands, Inc. |
Mark P. Ethier |
|
48 |
|
Executive Vice President and Chief Operations Officer of HSN |
William Lynch |
|
38 |
|
Executive Vice President/General ManagerMarketing, Content & Dot Com of HSN |
Lynne Ronon |
|
55 |
|
Executive Vice President, Merchandising of HSN |
Judy Schmeling |
|
48 |
|
Executive Vice President and Chief Financial Officer of HSNi |
James P. Warner |
|
43 |
|
Executive Vice President and General Counsel of HSNi |
Directors
Background information about those individuals who are expected to serve as directors of HSNi appears below.
Mindy Grossman, age 50, will serve as Chief Executive Officer and director of HSNi upon completion of the spin-offs.
Ms. Grossman currently serves as Chief Executive Officer of IAC Retailing, a position she has held since April 2006. A 30-year veteran of the retail and apparel industries,
Ms. Grossman joined IAC from Nike, Inc., where she served as Vice President and head of the company's global apparel business from October 2000 to March 2006. Prior to Nike,
Ms. Grossman was President and CEO at Polo Jeans Company from October 1995 to October 2000. Ms. Grossman was Vice President of New Business at Polo Ralph Lauren Corporation from October
1994 to October 1995 and President of the Chaps Ralph Lauren division of Warnaco's Menswear division from September 1991 to October 1994. Ms. Grossman was Vice President of Sales and
Merchandising at Tommy Hilfiger from June 1987 to September 1991. Ms. Grossman began her career working for a variety of other apparel companies. Ms. Grossman serves on the Board of
Directors at the National Retail Federation, as well as the East Harlem School at Exodus House in New York. She is the Chairperson of the Fashion Institute of Technology's Executive Women in Fashion
Advisory Board, and is a member of the advisory board of the J. Baker School of Retail at the Wharton School of Business.
Executive Officers
Background about HSNi's executive officers who are not expected to serve as directors appears below.
Roxane Al-Fayez, age 51, will serve as HSNi's President and Chief Executive Officer of Cornerstone Brands, Inc. upon
completion of the spin-offs. Ms. Al-Fayez currently serves as President and Chief Executive Officer of Cornerstone Brands, Inc., a subsidiary of HSN, a position
she has held since April 2007. Prior to this time, Ms. Al-Fayez served as Executive Vice President, Chief Marketing Officer of Victoria's Secret Direct and Chief Administrative
Officer of Bath & Body Works Direct, both divisions of Limited Brands Inc., from August 2005 through October 2006. Previously, Ms. Al-Fayez served as Executive Vice
President of Direct
Operations, Distribution and Information Technology of J. Crew Group from October 2003 through August 2005. Prior to joining J. Crew, Ms. Al-Fayez was Vice President of Operations
at Gap Inc. Direct from August 1997 to October 2003.
80
Mark P. Ethier, age 48, will serve as Executive Vice President and Chief Operations Officer of HSN upon completion of the
spin-offs, which position he has held since December 2004. He had previously served as Executive Vice President of Operations since July 2001. Prior to joining HSN, Mr. Ethier
worked for The Walt Disney Company in the Disney Stores business unit from March 1997 to July 2001 in capacities of Senior Vice President Global Operations and Vice President/Chief Information
Officer. Prior to joining Walt Disney, Mr. Ethier held the position of Vice President of Operations at Pacific Linen, a specialty retailer of home goods from March 1994 to March 1997, and prior
to that held positions of Vice President of Operations at Builders Emporium, a hardware chain in Southern California, and Vice President of Technology at Ames Department stores, a Northeastern
Discount Store chain. Mr. Ethier started his career at Sage-Allen Company, a family owned department store chain in Connecticut in 1981.
William Lynch, age 38, will serve as Executive Vice President/General ManagerMarketing, Content & Dot Com of HSN upon
completion of the spin-offs, which position he has held since November 2007. Prior to that, Mr. Lynch served as Executive Vice President/General ManagerDot Com from
December 2006 to October 2007. Mr. Lynch has also been President and Chief Executive Officer of Gifts.com, Inc., a subsidiary of IAC, since November 2004. Prior to joining IAC,
Mr. Lynch was a founder of Bandera Capital, an investment firm specializing in investing in the search marketing and e-commerce sector, where he served as a Principal from January
2004 to November 2004. Prior to Bandera Capital, Mr. Lynch was Vice President/General ManagerWeb Marketing and E-Commerce of Palm, Inc. from November 2000 to
January 2004. Prior to Palm, Mr. Lynch held various senior level brand management positions for consumer product companies, including Diageo, Seagram/Universal and Scout Electromedia, a
Chase-Flatiron and Idealab-funded start-up, based in San Francisco.
Lynne Ronon, age 55, will serve as Executive Vice President, Merchandising of HSN upon completion of the spin-offs, which
position she has held since October 2007. Prior to joining HSN, Ms. Ronon was Senior Vice President North Asia for Burberry from December 2003 to September 2007. Prior to joining Burberry,
Ms. Ronon worked at Lane Crawford, a luxury department store based in Hong Kong, from November 2001 to July 2003. Ms. Ronon served as a consultant to Lane Crawford from 2001 to 2002 and
then as Senior Vice President Commercial between 2002 and 2003. Prior to her tenure with Lane Crawford, Ms. Ronon held various positions at Saks Fifth Avenue from August 1986 to August 2001,
including Senior Vice President Chief Merchant from 2000 to 2001, Senior Vice President General Merchandise Manager from 1995 to 2000, Vice President Divisional Merchandise Manager from 1987 to 1995,
and Buyer for Petites from 1986 to 1987. Prior to Saks Fifth Avenue, Ms. Ronon held various positions at Gimbels East in New York and Philadelphia.
Judy Schmeling, age 48, will serve as Executive Vice President and Chief Financial Officer of HSNi upon completion of the
spin-offs. She currently serves as Executive Vice President and Chief Financial Officer of IAC Retailing, a position she has held since February 2002. Ms. Schmeling has held
positions of increasing responsibility since joining HSN in September 1994. Prior to her role as Executive Vice President and Chief Financial Officer, Ms. Schmeling served as Senior Vice
President Finance from November 1999 to February 2002. Ms. Schmeling also served as Chief Operating Officer of HSN's international operations from January 2001 to February 2002.
Ms. Schmeling served as Vice President, Strategic Planning and Analysis of HSN from January 1998 to November 1999. Ms. Schmeling served as Director of Investor Relations and Operating
Vice President, Finance of HSN from September 1994 to January 1998 during the time in which HSN was a separately traded public company. Prior to joining HSN, Ms. Schmeling was Managing Director
of Tunstall Consulting, Inc., a corporate financial planning firm, from 1986 to 1994. Ms. Schmeling began her career at Deloitte & Touche, an international public accounting firm
where she held various positions from 1982 to 1986.
James P. Warner, age 43, will serve as Executive Vice President and General Counsel of HSNi upon completion of the spin-offs.
Mr. Warner currently serves as Executive Vice President and General Counsel of IAC Retailing, a position he has held since March 2007. Prior to joining IAC Retailing, Mr. Warner was
based in London and served as Senior Vice President, European Counsel of
81
Ticketmaster,
a subsidiary of IAC. Mr. Warner joined Ticketmaster in January 2001 as its Vice President and European Counsel. Prior to joining Ticketmaster, Mr. Warner served as an
associate and then as a partner at DMA Legal, a London law firm, between October 1997 and December 2000. Prior to that, Mr. Warner was an associate at Hemenway & Barnes in Boston, from
1993 to 1997. Mr. Warner was a law clerk to the Justices of the Massachusetts Superior Court from 1992 to 1993. Mr. Warner serves on the Board of the Electronic Retailing Association.
Committees of the Board of Directors
Concurrent with the completion of the spin-offs, the HSNi Board of Directors will establish the following committees, with committee membership to be
determined: the Audit Committee, the Compensation and Human Resources Committee, the Nominating Committee and the Executive Committee.
Audit Committee. The Audit Committee of the HSNi Board of Directors will consist of three persons and
the composition of the committee will satisfy the independence requirements under the current standards imposed by the rules of the SEC and the Marketplace Rules. The HSNi Board of Directors will
determine which member of the Audit Committee is an "audit committee financial expert," as such term is defined in applicable SEC rules.
The
Audit Committee will function pursuant to a written charter adopted by the HSNi Board of Directors, pursuant to which it will be granted the responsibilities and authority necessary
to comply with Rule 10A-3 of the Securities Exchange Act of 1934, as amended. The Audit Committee will be appointed by the HSNi Board of Directors to assist the Board with a variety
of matters, including monitoring (1) the integrity of HSNi's financial statements, (2) the effectiveness of HSNi's internal control over financial reporting, (3) the
qualifications and independence of HSNi's independent registered public accounting firm, (4) the performance of HSNi's internal audit function and independent registered public accounting firm
and (5) the compliance by HSNi with legal and regulatory requirements.
Compensation and Human Resources Committee. The Compensation and Human Resources Committee will be
authorized to exercise all of the powers of the HSNi Board of Directors with respect to matters pertaining to compensation and benefits, including, but not limited to, salary matters, incentive/bonus
plans, stock compensation plans, retirement programs and insurance plans. The composition of this committee will satisfy the independence requirements under the current standards imposed by the
Marketplace Rules, as well as applicable SEC and Internal Revenue Service rules.
Nominating Committee. The Nominating Committee will be responsible for identifying individuals
qualified to become members of HSNi's Board of Directors, recommending to the Board director nominees for the annual meeting of shareholders and otherwise on an as needed basis. The composition of
this committee will satisfy the independence requirements under the current standards imposed by the Marketplace Rules.
Executive Committee. The Executive Committee will have all the power and authority of the HSNi Board
of Directors, except those powers specifically reserved to the HSNi Board of Directors by Delaware law or HSNi's organizational documents.
Other Committees. In addition to the foregoing committees, the HSNi Board of Directors, by
resolution, may from time to time establish other committees of the HSNi Board of Directors, consisting of one or more of its directors.
Director Compensation
Non-Employee Director Arrangements. Each member of the HSNi Board of Directors will
receive an annual retainer in the amount of $50,000. Each member of the Audit and Compensation and Human Resources Committees (including their respective chairs) will receive an additional annual
retainer in the amount of $10,000. Each member of the Nominating Committee will receive an
additional annual retainer in the amount of $5,000. Lastly, the chair of each of the Audit and Compensation and Human Resources Committees will receive an additional annual chairperson retainer in the
amount of $15,000.
82
In addition, each non-employee director will receive a grant of restricted stock units with a dollar value of $100,000 upon his or her initial election to the HSNi Board of
Directors and annually thereafter upon re-election on the date of HSNi's annual meeting of stockholders. The terms of these restricted stock units provide for (i) vesting in two
equal annual installments commencing on the first anniversary of the grant date, (ii) cancellation and forfeiture of unvested units in their entirety upon termination of service with the HSNi
Board of Directors and (iii) full acceleration of vesting upon a change in control of HSNi. Non-employee directors are also reimbursed for all reasonable expenses incurred in
connection with attendance at HSNi Board and Committee meetings.
The Compensation and Human Resources Committee will have primary responsibility for establishing non-employee director compensation arrangements, which are designed to
provide competitive compensation necessary to attract and retain high quality non-employee directors and to encourage ownership of HSNi stock to further align directors' interests with
those of HSNi's stockholders. When considering non-employee director compensation arrangements, HSNi management will provide the Compensation and Human Resources Committee with information
regarding various types of non-employee director compensation arrangements and practices of select peer companies.
Deferred Compensation Plan for Non-Employee Directors. Under HSNi's Deferred Compensation
Plan for Non-Employee Directors, non-employee directors will be able to defer all or a portion of their Board and Board Committee fees. Eligible directors who defer all or any
portion of these fees can elect to have such fees applied to the purchase of share units, representing the number of shares of HSNi common stock that could have been purchased on the relevant date, or
credited to a cash fund. If any dividends are paid on HSNi common stock, dividend equivalents will be credited on the share units. The cash fund will be credited with deemed interest at an annual rate
equal to the weighted average prime lending rate of JPMorgan Chase Bank. After a director ceases to be a member of the HSNi Board of Directors, he or she will receive (i) with respect to share
units, such number of shares of HSNi common stock as the share units represent and (ii) with respect to the cash fund, a cash payment in an amount equal to deferred amounts, plus accrued
interest. These payments will be made in either one lump sum or up to five installments, as previously elected by the eligible director at the time of the related deferral election.
Director Independence
Under the Marketplace Rules, HSNi's Board will have a responsibility to make an affirmative determination that those members of its Board that serve as
independent directors do not have any relationships with HSNi and its businesses that would impair their independence. In connection with these determinations, HSNi's Board will review information
regarding transactions, relationships and arrangements involving HSNi and its businesses and each director that it deems relevant to independence, including those required by the Marketplace Rules.
This information is obtained from director responses to a questionnaire circulated by HSNi management, HSNi records and publicly available information. Following these determinations, HSNi management
will monitor those transactions, relationships and arrangements that are relevant to such determinations, as well as solicit updated information potentially relevant to independence from internal
personnel and directors, to determine whether there have been any developments that could potentially have an adverse impact on HSNi's prior independence determinations.
Compensation Committee Interlocks and Insider Participation
HSNi's Board of Directors will have a Compensation and Human Resources Committee. It is expected that none of the members of this Committee will be or will have
been in the past an officer or employee of HSNi or any of its businesses at the time of their respective service on the Committee.
83
HSNi Executive Compensation
Compensation Discussion and Analysis
To date, the compensation of HSNi's executive officers has been predominantly determined by IAC, acting in effect as HSNi's compensation committee. IAC's
compensation process is principally driven by IAC's General Counsel, who has primary responsibility for administering compensation and making compensation recommendations, with all material decisions
approved by IAC's Chairman and Chief Executive Officer and, where appropriate, the Compensation Committee of IAC's Board of Directors (specifically with respect to all awards of IAC equity).
This Compensation Discussion and Analysis deals exclusively with historical information while HSNi has been part of IAC. Following the spin-off, HSNi will have an independent
board of directors, which will in turn have a compensation committee with responsibility for establishing HSNi's compensation philosophy and programs and determining appropriate payments and awards to
its executive officers. Because HSNi's compensation committee has not yet been established, HSNi cannot predict what compensation philosophies and programs will be adopted following the
spin-off, and therefore this historical report is not necessarily indicative of the practices HSNi will follow when it is an independent public company.
In general, IAC has been responsible for establishing bonus pools and equity pools for HSNi, and then such pools are allocated throughout HSNi, with IAC directly establishing all
compensation elements for HSNi's CEO, while the HSNi CEO makes the determinations for HSNi's other executive officers, subject to IAC's review and approval.
Neither HSNi nor IAC has an ongoing relationship with any particular compensation consulting firm, though IAC has from time to time retained the services of consultants on specific
occasions regarding broad-based IAC compensation programs. At no time has a consultant been engaged with respect to compensation of any of HSNi's executive officers.
HSNi's executive officer compensation program is designed to increase long-term stockholder value by attracting, retaining, motivating and rewarding
leaders with the competence, character, experience and ambition necessary to enable HSNi to meet its growth objectives.
When establishing compensation packages for a given executive, HSNi follows a flexible approach, making decisions based on a host of factors particular to a given executive situation,
including HSNi's
firsthand experience with the competition for recruiting and retaining executives, negotiation and discussion with the relevant individual, competitive survey data, internal equity considerations and
other factors HSNi deems relevant at the time.
Similarly, HSNi has not followed an arithmetic approach to establishing compensation levels and measuring and rewarding performance, as these often fail to adequately take into account
the multiple factors that contribute to success at the individual and business level. In any given period, HSNi may have multiple objectives, and these objectives, and their relative importance, often
change as the competitive and strategic landscape shifts, even within a given compensation cycle. As a result, formulaic approaches often over-compensate or under-compensate a given
performance level. Accordingly, HSNi has historically avoided the use of strict formulas or pre-set performance targets in its compensation practices and has relied primarily on a discretionary
approach.
84
HSNi's compensation packages for executive officers have primarily consisted of salary, annual bonuses, long-term incentives (typically equity awards, and in
certain instances, cash plans), perquisites and other benefits. Prior to making specific decisions related to any particular element of compensation, HSNi typically reviews the total compensation of
each executive, evaluating the executive's total near and long-term compensation in the aggregate. HSNi determines which element or combinations of compensation elements (salary, bonus or
equity) can be used most effectively to further its compensation objectives; however, all such decisions are subjective, and made on a facts and circumstances basis without any prescribed relationship
between the various elements of the total compensation package.
General. HSNi typically negotiates a new executive officer's starting salary upon arrival, based on the executive's prior
compensation history, prior compensation levels for the particular position within HSNi, HSNi's location, salary levels of other executives within HSNi, salary levels available to the
individual in alternative opportunities, reference to certain survey information and the extent to which HSNi desires to secure the executive's services.
Once established, salaries can increase based on a number of factors, including the assumption of additional responsibilities, internal equity, periodic market checks and other factors
which demonstrate an executive's increased value to HSNi.
HSNi utilizes various salary surveys depending upon the position to determine a market relevant range of salaries for each position. At least two surveys are used in each analysis. HSNi
uses the following surveys: Towers Perrin Compensation Data Bank, Towers Perrin Retail/Wholesale Executive Compensation Survey, and the Mercer Premium Executive Remuneration Survey. Depending on a
variety of individualized factors, HSNi endeavors to pay at or above the median salary range for the relevant position; however there is no rigid approach.
2007. In 2007, Ms. Schmeling and Mr. Lynch each received salary increases in connection with entering into new
employment agreements with HSNi. Based on survey and anecdotal data, HSNi determined that Ms. Schmeling's salary did not appropriately reflect her level of responsibility within the company,
resulting in an increase of $50,000 to $400,000. Mr. Lynch assumed the responsibilities for HSN marketing and content in addition to his leadership of the online business, and as such a new
salary was negotiated reflecting an increase from $350,000 to $450,000. Mr. Warner's salary of $315,000 was negotiated as part of his agreement to move to Tampa and assume the role of General
Counsel.
2008. In 2008, Mr. Warner's salary was increased to $350,000 in connection with his increased responsibilities in
connection with the spin-off, and Mr. Ethier's salary was increased to $450,000 in connection with the addition of operating responsibilities relating to HSNi's catalogs business.
Both of these increases were based on survey data and internal equity considerations.
General. HSNi's bonus program is designed to reward performance on an annual basis. Because of the variable nature of the
bonus program, and because in any given year bonuses have the potential to make up a significant amount of an executive's total compensation, it provides an important incentive tool to achieve HSNi's
annual objectives.
After consultation with HSNi management, IAC establishes the annual bonus pool for HSNi based on its assessment of HSNi's performance for the completed year. In large part, success has
been measured based on HSNi's growth in profitability, but this is measured subjectively both in absolute terms over the prior year and in comparison to HSNi's competitors, taking into account
economic and
85
other factors, without any pre-established targets on which compensation levels are based. Additionally, consideration has sometimes been given to achievement of various strategic
objectives over the course of the year and other factors IAC and HSNi's management deem relevant. No quantified weight has been given to any particular consideration and there has generally been no
formulaic calculation. Rather, IAC has engaged in an overall assessment of appropriate bonus levels based on a subjective interpretation of all the relevant criteria.
IAC establishes the bonus of the HSNi CEO, taking into account her contractual bonus opportunity of 100% of salary which was established by negotiation as part of the inducement for
Ms. Grossman to join HSNi. The specific bonus is established in large part based on the same considerations used in establishing the bonus pool for HSNi generally.
Ms. Grossman then establishes the bonus payments for the other executive officers out of the HSNi-wide bonus pool. Each executive officer has an annual bonus target,
established by a combination of negotiation, internal equity and reference to survey data. Specific bonus payouts are determined based on the size of the bonus pool generally and the HSNi CEO's
assessment of individual performance. The annual bonus target for Mr. Lynch is sixty-percent of salary and the annual target bonuses for Ms. Schmeling, Mr. Ethier and
Mr. Warner are each fifty-percent of salary.
HSNi generally pays bonuses shortly after year-end following finalization of financial results for the prior year.
2007. HSNi experienced poor financial performance on both a sales and profit basis. However, HSNi's strategic repositioning
plan began to take hold in the fourth quarter, with significantly improved year-over-year performance, providing a promising lead in to 2008. Based purely on annual profit
performance, no bonuses would have been paid; however, IAC believed it was important to reward the late-year trend reversal and to provide increased motivation for key performers for 2008.
Accordingly, a bonus pool was established that was significantly below aggregate target levels, but which provided for some level of reward compensation for key contributors, as generally determined
by the HSNi CEO. The size of this pool was established on a purely subjective basis. In 2007, the performance of HSNi's catalogs business was not a significant factor in determining bonus compensation
for HSNi's executive officers, as the executives of the HSN business and the catalogs business were compensated separately, though this is likely to change following the spin-off.
Out of the established bonus pool, IAC awarded Ms. Grossman a bonus of $500,000 while the other named executive officers received bonuses of $100,000 (Mr. Warner and
Mr. Ethier), $120,000 (Ms. Schmeling) and $150,000 (Mr. Lynch). Because of the limited bonus pool available, these allocations were not particularly based on bonus targets but
instead on subjective determinations of the HSNi CEO relating to the appropriate levels to reward, retain and motivate each individual.
General. HSNi believes that ownership shapes behavior, and that by providing a meaningful portion of an executive officer's
compensation in stock, an executive's incentives are aligned with the stockholders' interests in a manner that drives better performance over time. As part of IAC, that led to each HSNi executive
officer receiving IAC equity awards on a regular basis.
In setting particular award levels, the predominant objectives are providing the person with effective retention incentives, appropriate reward for past performance, and incentives for
strong future performance. Appropriate levels to meet these goals may vary from year to year, and from individual to individual, based on a variety of factors.
The annual corporate performance factors relevant to setting bonus amounts that were discussed above, while taken into account, are generally less relevant in setting annual equity
awards, as the
86
awards tend to be more forward looking, and are a longer-term retention and reward instrument than annual bonuses.
Awards to the HSNi CEO are made by IAC. Additionally, IAC establishes a pool for annual equity awards which Ms. Grossman allocates to the company's employees, including the
executive officers, subject to IAC's approval. In establishing the equity pool for HSNi, IAC has taken into account historical practices, its view of market compensation generally, the dilutive impact
of equity grants across IAC, and other relevant factors. Additionally, IAC approves any equity grants recommended to be made to HSNi executives outside of the annual process. Executive officers
receive grants that are subjectively determined based on the HSNi CEO's view of how best to allocate the equity pool for retention, reward and motivation based on a host of subjective factors
(including past contribution, retention risk, contribution potential, and market data), with grants equal to annual salary being a basic guideline.
Except where otherwise noted, HSNi grants equity awards following year-end after finalization of financial results for the prior year. The meeting of the Compensation and
Human Resources Committee of the IAC Board at which the awards are made is generally scheduled months in advance and without regard to the timing of the release of earnings or other material
information.
Restricted Stock Units. Until 2008, IAC used restricted stock units, or RSUs, as its exclusive equity compensation tool for
HSNi's executive officers. Through 2006, these awards generally vested in equal annual installments over five years (annual vesting RSUs), or cliff vested at the end of five years (cliff-vesting
RSUs). Annual vesting awards were intended to provide frequent rewards and near-term retention incentives, while cliff-vesting RSUs provided more of a long-term retention
mechanism.
In February 2007, IAC implemented a new equity instrument, Growth Shares, which were RSU grants that cliff vested at the end of three years in varying amounts depending upon growth in
IAC's publicly reported metric, Adjusted Earnings Per Share, with certain modifications.
These awards were introduced throughout IAC to more closely link long-term reward with IAC's overall performance and to provide greater retentive effect by providing the
opportunity to earn greater amounts through increased IAC performance. However, in connection with the spin-off, these awards will be converted into three-year cliff-vesting
awards at the "target" value (or 50% of the shares actually granted), without variability based on performance. For information regarding the reasons behind this conversion, see "The
SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
Stock Options. In 2008, IAC used non-qualified stock options as its primary equity compensation tool for HSNi's
executive officers to continue the shift to performance-based equity that began with the granting of Growth Shares in 2007. IAC believes that following the spin-offs, HSNi's performance
will have a greater correlation to the HSNi stock price than it did to IAC's price in the current conglomerated structure, thus making stock options a more targeted equity incentive tool. Stock
options generally vest in equal installments over four years. IAC continues to use RSUs with a cliff vesting schedule in certain cases to reward executive leadership, contribution and to provide a
retention mechanism.
2007. Ms. Grossman received a grant of 12,547 Growth Shares (at target value) which reflected the fact that she had
received a larger grant upon her commencement with HSNi in May 2006. Mr. Lynch received a grant of 11,768 annual vesting RSUs in connection with the employment agreement entered into at the end
of 2006. The other executive officers each received a combination of Growth Shares and annual vesting RSUs pursuant to the methodology outlined above in amounts reflected in the tables below.
87
2008. Ms. Grossman received 50,000 RSUs that cliff vest at the end of four years and 250,000 IAC options that vest
annually over four years. Ms. Grossman also entered into an employment agreement that will become effective upon the consummation of the spin-off (the "New Grossman Employment
Agreement") pursuant to which Ms. Grossman will receive, following the spin-off, three tranches of options priced based on enterprise values of $2.1 billion,
$2.5 billion and $2.9 billion (or, if greater, the fair market value at the time of grant), each of which is intended to yield $3.33 million of compensation in the event HSNi's
equity value, plus a number equal to the amount of debt HSNi has outstanding at the time of the spin-off, is equal to $3.4 billion.
Additionally, the New Grossman Employment Agreement provides for a cash-based incentive plan which provides from $0 to $4,000,000 in the aggregate in potential payments at
the end of year 3 and the end of year 4 based on compounded annual EBITA growth of HSNi between 10% and 15% from 2007 levels.
Mr. Lynch received a grant of 50,000 annual vesting RSUs in connection with his entering into a new employment agreement and assuming additional responsibilities at the end of
2007, while Ms. Schmeling, Mr. Ethier and Mr. Warner received option grants of 42,500, 42,500 and 31,500 IAC options, respectively, pursuant to the general methodology described
above.
Spin-Off Adjustments. In the spin-off, equity awards denominated in IAC stock will be adjusted as
described in "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
Presuming
the spin-off transactions occur prior to February 2009, the following table reflects the effect of these adjustments on all equity awards held by HSNi's executive
officers:
|
|
Upon Completion of the Spin-Off
|
Name
|
|
RSUs
that will
vest(#)
|
|
RSUs that
will convert
exclusively
into RSUs of
HSNi and
vest on
regular
schedule(#)
|
|
RSUs that will
be split among
the post-
transaction
companies and
vest after
February 2009
on regular
schedule(#)
|
|
Options
outstanding at
December 31,
2007all of which
will be split among
the post-
transaction
companies(#)
|
|
Options
granted
after
December 31,
2007all of
which
will be
converted
into options
of HSNi(#)
|
Mindy Grossman |
|
|
|
94,277 |
|
21,728 |
|
|
|
250,000 |
Mark Ethier |
|
43,249 |
|
25,096 |
|
24,903 |
|
|
|
42,500 |
William Lynch |
|
2,354 |
|
57,061 |
|
|
|
|
|
|
Judy Schmeling |
|
49,349 |
|
12,155 |
|
8,362 |
|
9,501 |
|
42,500 |
James Warner |
|
3,908 |
|
5,249 |
|
2,928 |
|
3,130 |
|
31,500 |
- *
- Excludes
6,682, 12,616, 11,288 and 3,515 RSUs that vested since December 31, 2007 or will vest prior to August 1, 2008 for Ms. Grossman, Mr. Ethier,
Ms. Schmeling and Mr. Warner, respectively.
HSNi believes that providing executives with severance and change of control protection is critical to allowing executives to fully value the forward looking
elements of their compensation packages, and therefore limit retention risk during uncertain times. Accordingly, HSNi's employment agreements and equity awards generally provide for salary
continuation in the event of certain employment terminations beyond the control of the executive, as well as varying degrees of accelerated equity vesting in the event of a change of control of HSNi.
88
Ms. Grossman, who lives in New York but spends the majority of her professional time at HSNi's headquarters in Florida, received reimbursement of a variety
of her Florida living and travel expenses, along with an associated tax gross-up. Under other limited circumstances, HSNi's executive officers have received non-cash and
non-equity compensatory benefits. The values of these benefits are reported under the heading "Other Annual Compensation" in this filing pursuant to applicable rules, and are generally
considered in determining overall compensation levels. Nonetheless, despite the fact that it reports Ms. Grossman's Florida reimbursements as compensation, HSNi does not believe
Ms. Grossman receives a personal benefit as a result of such reimbursements, as they merely compensate her for the incremental expenses of commuting to and working in Florida, while her family
continues to reside in New York. The executive officers do not participate in any deferred compensation or retirement program other than IAC's 401(k) plan.
IAC's practice has been to structure HSNi's compensation program in such a manner so that the compensation HSNi pays is deductible by IAC for federal income tax
purposes. However, because the company's executive officers will now be subject to the limitations on deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended, and
were not previously, certain compensatory arrangements established prior to the spin-off but that will be paid following the spin-off may not result in deductible compensation
for HSNi.
Summary Compensation Table
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock Awards
($)(1)
|
|
All Other Compensation
($)(2)
|
|
Total
($)
|
Mindy Grossman
CEO |
|
2007 |
|
1,000,000 |
|
500,000 |
|
499,331 |
|
128,178 |
|
2,127,509 |
Mark Ethier
EVP and COO |
|
2007 |
|
400,000 |
|
100,000 |
|
819,260 |
|
7,750 |
|
1,327,010 |
William Lynch
EVP, HSN.com, Marketing and Content |
|
2007 |
|
356,731 |
|
150,000 |
|
129,503 |
|
205,949 |
|
842,183 |
Judy Schmeling
EVP and CFO |
|
2007 |
|
387,500 |
|
120,000 |
|
681,413 |
|
7,750 |
|
1,196,663 |
James Warner
EVP and General Counsel(3) |
|
2007 |
|
259,687 |
|
110,000 |
|
153,482 |
|
40,984 |
|
564,153 |
- (1)
- Reflects
the dollar amount recognized by IAC for financial statement reporting purposes for the fiscal year ended December 31, 2007, in accordance with SFAS 123R, for
IAC restricted stock units ("RSUs") awarded in and prior to 2007 under IAC's stock and annual incentive plans. These amounts do not, therefore, represent the value of IAC equity compensation awarded
or realized in 2007. For further discussion of IAC's accounting for its equity compensation plans, see Note 4 of IAC's audited financial statements for the fiscal year ended December 31,
2007 included in its Annual Report on Form 10-K filed with the SEC on February 29, 2008. For information on awards made and realized in 2007, see the "Grants of
Plan-Based Awards" and "Option Exercises and Stock Vested" tables below.
89
- (2)
- See
the table below for additional information on amounts for 2007. Pursuant to SEC rules, perquisites and personal benefits are not reported for any named executive for whom such
amounts were less than $10,000 in the aggregate for the fiscal year.
|
|
Mindy
Grossman
|
|
Mark
Ethier
|
|
William
Lynch
|
|
Judy
Schmeling
|
|
James
Warner
|
Housing |
|
$ |
58,500 |
|
|
|
|
|
|
|
|
|
|
|
|
Relocation expenses |
|
|
|
|
|
|
|
$ |
194,468 |
|
|
|
|
$ |
25,785 |
Personal travel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,180 |
Tax Payments(a) |
|
|
52,923 |
|
|
|
|
|
3,731 |
|
|
|
|
|
6,112 |
Automobile |
|
|
9,005 |
|
|
|
|
|
|
|
|
|
|
|
|
401(k) plan company match |
|
|
7,750 |
|
$ |
7,750 |
|
|
7,750 |
|
$ |
7,750 |
|
|
4,907 |
|
|
|
|
|
|
|
|
|
|
|
|
Total All Other Compensation |
|
$ |
128,178 |
|
$ |
7,750 |
|
$ |
205,949 |
|
$ |
7,750 |
|
$ |
40,984 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- Represents
tax reimbursements on income imputed (i) to Ms. Grossman related to housing provided in Florida; (ii) to Mr. Lynch related to relocation to
Florida; and (iii) to Mr. Warner related to relocation to Florida and certain personal travel.
- (3)
- Includes
compensation earned by Mr. Warner from January 1March 12, 2007 as an employee of Ticketmaster, a subsidiary of IAC. Such amounts were
converted to U.S. dollars based on an average exchange rate for 2007 of 1GBP to $0.49987.
Grants of Plan-Based Awards
The table below provides information regarding IAC equity awards granted to HSNi's named executives in 2007.
|
|
|
|
Estimated Future Payouts Under
Equity Incentive Plan Awards(1)(2)
|
|
All other
stock
awards:
Number of
shares of
stock or
units(#)(2)
|
|
|
|
|
|
|
Grant Date
Fair Value of
Stock and
Option
Awards($)(3)
|
Name
|
|
Grant Date
|
|
Threshold
(#)
|
|
Target
(#)
|
|
Maximum
(#)
|
Mindy Grossman |
|
2/16/07 |
|
697 |
|
12,547 |
|
25,094 |
|
|
|
499,998 |
Mark Ethier |
|
2/16/07 |
|
279 |
|
5,018 |
|
10,036 |
|
5,019 |
|
399,975 |
William Lynch |
|
2/16/07 |
|
|
|
|
|
|
|
11,768 |
|
349,980 |
Judy Schmeling |
|
2/16/07 |
|
697 |
|
12,546 |
|
25,092 |
|
5,019 |
|
699,966 |
James Warner |
|
2/16/07 |
|
244 |
|
4,392 |
|
8,784 |
|
4,391 |
|
350,002 |
- (1)
- Reflects
performance-based RSU awards which cliff vest at the end of three years in varying amounts depending upon growth in IAC's publicly reported metric, Adjusted Earnings Per
Share, with certain modifications. The threshold amount represents 5.56% of the target payout, which amount would vest upon achieving the minimum growth threshold. These awards will be converted into
three year cliff-vesting awards in the spin-offs as described under "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
- (2)
- RSU
award recipients would be credited with amounts for cash dividends paid on IAC common stock, with such additional amounts vesting concurrently with the related RSU award. For
information on the treatment of RSU awards granted to HSNi's named executives upon a termination of employment or a change in control, see the discussion under Potential Payments Upon Termination or
Change in Control below.
90
- (3)
- The
fair value of equity incentive plan awards is based on the target amount.
Outstanding Equity Awards at Fiscal Year-End
The table below provides information regarding various IAC equity awards held by HSNi's named executives as of December 31, 2007. The market value of all
RSU awards is based on the closing price of IAC common stock as of December 31, 2007 ($26.92), the last trading day of 2007.
|
|
|
|
|
|
|
|
Stock Awards(1)(2)
|
|
|
Option Awards(1)
|
|
|
|
|
|
|
|
|
Equity incentive
plan awards:
Market or payout
value of unearned
shares, units or
other rights that
have not vested
($)(4)
|
Name
|
|
Number of
securities
underlying
unexercised
Options
(#)(3)
(Exercisable)
|
|
Option
exercise
price
($)
|
|
Option
expiration
date
|
|
Number of
shares or
units of
stock that
have not
vested
(#)(4)
|
|
Market value
of shares or
units of stock
that have not
vested
($)(4)
|
|
Equity incentive
plan awards:
Number of
unearned shares,
units or other rights
that have not vested
(#)(4)
|
Mindy Grossman |
|
|
|
|
|
|
|
|
60,140 |
|
1,618,969 |
|
697 |
|
16,394 |
Mark Ethier |
|
|
|
|
|
|
|
|
100,846 |
|
2,714,774 |
|
279 |
|
7,511 |
William Lynch |
|
|
|
|
|
|
|
|
9,415 |
|
253,452 |
|
|
|
|
Judy Schmeling |
|
2,500
7,001
|
|
$ $
|
31.00
26.46
|
|
12/20/09
12/16/11
|
|
68,608 |
|
1,846,927 |
|
697 |
|
18,763 |
James Warner |
|
1,437
583
1,110
|
|
$ $ $
|
11.43
17.22
33.13
|
|
2/20/11
5/15/11
3/19/11
|
|
11,208 |
|
301,719 |
|
244 |
|
6,568 |
- (1)
- For
a discussion regarding how these IAC equity awards will be treated in the spin-offs, see "The SeparationTreatment of Outstanding IAC Compensatory
Equity-Based Awards."
- (2)
- Amounts
shown for equity incentive plan awards are based on achieving the minimum growth threshold in accordance with SEC rules.
- (3)
- On
August 9, 2005, IAC completed the separation of its travel and travel-related businesses and investments (other than Interval and TV Travel Shop) into an independent public
company (the "Expedia Spin-Off"). In connection with the Expedia Spin-Off, each then-vested option to purchase shares of IAC common stock was converted into an
option to purchase shares of IAC common stock and an option to purchase shares of Expedia common stock. Adjustments were made to the number of shares subject to each IAC and Expedia stock option to
give effect to the one-for-two reverse stock split effected in connection with the Expedia Spin-Off and to the corresponding exercise prices based on the relative
market capitalizations of IAC and Expedia at the time of the Expedia Spin-Off. The adjusted IAC and Expedia stock options otherwise have the same terms and conditions, including exercise
periods, as the corresponding vested IAC stock options outstanding immediately prior to the Expedia Spin-Off.
For
the named executives, any value realized upon the exercise of Expedia stock options is treated for tax purposes as compensation payable to them in their respective capacities as executive officers
of the Company. Accordingly, information regarding Expedia stock options held by HSNi's named executives as of December 31, 2007 appears in the table immediately below and
91
information
regarding any exercises of Expedia stock options by such named executives is reported in the Option Exercises and Stock Vested table below.
Name
|
|
Number of Options
(#)
|
|
Option Exercise Price
($)
|
|
Option Expiration Date
|
Judy Schmeling |
|
2,500
7,500
7,500 |
|
$ $ $ |
24.82
20.06
21.19 |
|
12/20/09
4/25/11
12/16/11 |
- (4)
- The
table below provides the following information regarding RSU awards held by HSNi's named executives as of December 31, 2007: (i) the grant date of each award,
(ii) the number of RSUs outstanding (on an aggregate and grant-by-grant basis), (iii) the market value of RSUs outstanding as of December 31, 2007,
(iv) the vesting schedule for each award and (v) the total number of RSUs that vested or are scheduled to vest in each of the fiscal years ending December 31, 2008, 2009, 2010,
2011 and 2012.
|
|
Number of
Unvested
RSUs as
of 12/31/07
|
|
Market Value
of Unvested
RSUs as
of 12/31/07
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting Schedule (#)
|
Grant Date
|
|
(#)
|
|
($)
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
Mindy Grossman |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/17/06(a) |
|
26,729 |
|
719,545 |
|
6,682 |
|
6,682 |
|
6,682 |
|
6,683 |
|
|
|
5/17/06(b) |
|
33,411 |
|
899,424 |
|
|
|
|
|
|
|
33,411 |
|
|
|
2/16/07(c) |
|
12,547 |
|
337,765 |
|
|
|
|
|
12,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
72,687 |
|
1,956,734 |
|
6,682 |
|
6,682 |
|
19,229 |
|
40,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Judy Schmeling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/12/03(d) |
|
2,472 |
|
66,546 |
|
2,472 |
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
5,014 |
|
134,977 |
|
2,507 |
|
2,507 |
|
|
|
|
|
|
|
2/10/05(a) |
|
8,483 |
|
228,362 |
|
2,827 |
|
2,828 |
|
2,828 |
|
|
|
|
|
2/10/05(b) |
|
37,703 |
|
1,014,965 |
|
|
|
|
|
37,703 |
|
|
|
|
|
2/6/06(a) |
|
9,917 |
|
266,966 |
|
2,479 |
|
2,479 |
|
2,479 |
|
2,480 |
|
|
|
2/16/07(a) |
|
5,019 |
|
135,111 |
|
1,004 |
|
1,004 |
|
1,004 |
|
1,004 |
|
1,004 |
|
2/16/07(c) |
|
12,546 |
|
337,739 |
|
|
|
|
|
12,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
81,154 |
|
2,184,666 |
|
11,289 |
|
8,818 |
|
56,560 |
|
3,484 |
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Ethier |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/12/03(d) |
|
2,252 |
|
60,624 |
|
2,252 |
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
5,899 |
|
158,801 |
|
2,949 |
|
2,950 |
|
|
|
|
|
|
|
2/4/04(b) |
|
29,490 |
|
793,871 |
|
|
|
29,490 |
|
|
|
|
|
|
|
2/10/05(a) |
|
10,181 |
|
274,073 |
|
3,394 |
|
3,393 |
|
3,394 |
|
|
|
|
|
2/6/06(a) |
|
12,073 |
|
325,005 |
|
3,018 |
|
3,018 |
|
3,018 |
|
3,019 |
|
|
|
2/6/06(b) |
|
35,932 |
|
967,289 |
|
|
|
|
|
|
|
35,932 |
|
|
|
2/16/07(a) |
|
5,019 |
|
135,111 |
|
1,003 |
|
1,004 |
|
1,004 |
|
1,004 |
|
1,004 |
|
2/16/07(c) |
|
5,018 |
|
135,085 |
|
|
|
|
|
5,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
105,864 |
|
2,849,859 |
|
12,616 |
|
39,855 |
|
12,434 |
|
39,955 |
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
William Lynch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/16/07(e) |
|
9,415 |
|
253,452 |
|
2,354 |
|
2,353 |
|
2,354 |
|
2,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
9,415 |
|
253,452 |
|
2,354 |
|
2,353 |
|
2,354 |
|
2,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Warner |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/12/03(d) |
|
541 |
|
14,564 |
|
541 |
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
1,181 |
|
31,793 |
|
590 |
|
591 |
|
|
|
|
|
|
|
2/10/05(a) |
|
2,795 |
|
75,241 |
|
931 |
|
931 |
|
933 |
|
|
|
|
|
2/6/06(a) |
|
2,300 |
|
61,916 |
|
575 |
|
575 |
|
575 |
|
575 |
|
|
|
2/16/07(a) |
|
4,391 |
|
118,206 |
|
878 |
|
878 |
|
878 |
|
878 |
|
879 |
|
2/16/07(c) |
|
4,392 |
|
118,233 |
|
|
|
|
|
4,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
15,600 |
|
419,952 |
|
3,515 |
|
2,975 |
|
6,778 |
|
1,453 |
|
879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (a)
- These
awards vest in five equal annual installments on each of the first five anniversaries of the grant date, subject to continued employment.
- (b)
- These
awards vest in one lump sum installment on the fifth anniversary of the grant date, subject to continued employment.
- (c)
- Represents
the initial "target" awards. See the Grants of Plan-Based Awards table and footnote (1) thereto.
- (d)
- These
awards vest in four equal annual installments, beginning on the second anniversary of the grant date, subject to continued employment.
- (e)
- These
awards vest in five equal annual installments on each of the first five anniversaries of October 20, 2006, the date Mr. Lynch joined HSN, subject to continued
employment.
Option Exercises and Stock Vested
The table below provides information regarding the number of shares acquired by HSNi's named executives during 2007 upon the exercise of stock options and the
vesting of RSU awards and the related value realized, in each case, excluding the effect of any applicable taxes. The dollar value realized upon exercise of stock options represents the difference
between (i) the sale price of the shares acquired on exercise for simultaneous exercise and sale transactions and (ii) the exercise price of the stock option, multiplied by the number of
stock options that were exercised. The dollar value
93
realized upon vesting of RSUs represents the closing price of IAC common stock on the applicable vesting date multiplied by the number of RSUs so vesting.
|
|
Option Awards
|
|
Stock Awards
|
Name
|
|
Number of Shares Acquired on Exercise
(#)
|
|
Value Realized on Exercise
($)
|
|
Number of Shares Acquired on Vesting
(#)
|
|
Value Realized on Vesting
($)
|
Mindy Grossman |
|
|
|
|
|
6,682 |
|
254,718 |
Mark Ethier(1) |
|
39,375 |
|
257,962 |
|
12,279 |
|
474,429 |
William Lynch |
|
|
|
|
|
2,353 |
|
63,225 |
Judy Schmeling |
|
|
|
|
|
11,189 |
|
439,960 |
James Warner(1) |
|
2,604 |
|
39,080 |
|
2,634 |
|
103,575 |
- (1)
- Includes
24,375 and 2,604 Expedia shares acquired by Messrs. Ethier and Warner, respectively, upon the exercise of Expedia stock options received in connection with the Expedia
Spin-Off.
Potential Payments Upon Termination or Change in Control
Pursuant
to the terms of IAC's (and, following the spin-off, HSNi's) equity compensation plans and the award agreements thereunder, upon a change of control the named
executive officers are generally entitled to accelerated vesting of (i) equity awards made prior to 2006 and (ii) equity awards made thereafter if, following such change in control,
their employment is terminated by the company for any reason other than death, disability or cause (as defined in the relevant employment agreement), or by the executive for good reason (as defined in
the relevant employment agreement) (a "Qualifying Termination"). Additionally, under the New Grossman Employment Agreement, Ms. Grossman will be entitled to full acceleration of all her equity
awards that were granted prior to, or in connection with, the spin-off.
Cash. Upon
a Qualifying Termination, HSNi's executive officers are generally entitled to salary continuation for the remainder of their agreements, except for
Ms. Grossman, who will receive twenty-four months of salary continuation. The expiration dates of the employment agreements for Mr. Lynch, Ms. Schmeling,
Mr. Ethier and Mr. Warner are November 19, 2010, March 31, 2009, February 28, 2010 and March 12, 2009, respectively. Additionally, under the New Grossman
Employment Agreement, Ms. Grossman will also be entitled to pro rated portions of the bonus she would otherwise earn during the year in which the Qualifying Termination occurs, payable at the
time such bonus would otherwise be payable. Ms. Grossman's rights under her long-term cash incentive plan continue following a Qualifying Termination.
Equity. Upon a Qualifying Termination, Ms. Grossman will receive full acceleration of her equity awards outstanding immediately following the spin-off.
Obligations. The amounts payable upon a Qualifying Termination are all subject to the execution of a general release and to compliance with confidentiality,
non-compete, non-solicitation of employees and non-solicitation of customer covenants set forth in the relevant employment agreements. Salary continuation payments
will be offset by the amount of any compensation earned by an executive from other employment during the severance payment period.
The amounts shown in the table assume that the termination or change in control was effective as of December 31, 2007 and that the price of IAC common stock on which certain
calculations are based was the closing price of $26.92 on The Nasdaq Stock Market on that date. These amounts are
94
estimates of the incremental amounts that would have been paid out to the executive upon such terminations/change in control, and do not take into account equity grants made, and contractual
obligations entered into, after December 31, 2007. The actual amounts to be paid out can only be determined at the time the event actually occurs.
Name and Benefit
|
|
Termination without cause
|
|
Resignation for good reason
|
|
Death or Disability
|
|
Change in Control
|
|
Termination
w/o cause or for good reason in connection with Change in Control
|
Mindy Grossman |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
1,333,333 |
|
1,333,333 |
|
0 |
|
0 |
|
1,333,333 |
RSUs (vesting accelerated) |
|
1,618,969 |
|
1,618,969 |
|
179,879 |
|
337,765 |
|
1,956,734 |
Health Benefits |
|
19,363 |
|
19,363 |
|
0 |
|
0 |
|
19,363 |
|
|
|
|
|
|
|
|
|
|
|
Total estimated value |
|
2,971,665 |
|
2,971,665 |
|
179,879 |
|
337,765 |
|
3,309,430 |
|
|
|
|
|
|
|
|
|
|
|
Mark Ethier |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
866,667 |
|
0 |
|
0 |
|
0 |
|
866,667 |
RSUs (vesting accelerated) |
|
60,291 |
|
0 |
|
52,521 |
|
1,287,368 |
|
2,849,859 |
|
|
|
|
|
|
|
|
|
|
|
Total estimated value |
|
927,291 |
|
0 |
|
52,521 |
|
1,287,368 |
|
3,716,526 |
|
|
|
|
|
|
|
|
|
|
|
William Lynch |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
1,299,999 |
|
1,299,999 |
|
0 |
|
0 |
|
1,299,999 |
RSUs (vesting accelerated) |
|
0 |
|
0 |
|
0 |
|
0 |
|
253,452 |
|
|
|
|
|
|
|
|
|
|
|
Total estimated value |
|
1,299,999 |
|
1,299,999 |
|
0 |
|
0 |
|
1,553,451 |
|
|
|
|
|
|
|
|
|
|
|
Judy Schmeling |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
500,000 |
|
0 |
|
0 |
|
0 |
|
500,000 |
RSUs (vesting accelerated) |
|
66,546 |
|
0 |
|
54,428 |
|
1,444,850 |
|
2,184,666 |
|
|
|
|
|
|
|
|
|
|
|
Total estimated value |
|
566,546 |
|
0 |
|
54,428 |
|
1,444,850 |
|
2,684,666 |
|
|
|
|
|
|
|
|
|
|
|
James Warner |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
380,625 |
|
0 |
|
0 |
|
0 |
|
380,625 |
RSUs (vesting accelerated) |
|
7,268 |
|
0 |
|
12,599 |
|
121,598 |
|
419,952 |
|
|
|
|
|
|
|
|
|
|
|
Total estimated value |
|
387,893 |
|
0 |
|
12,599 |
|
121,598 |
|
800,577 |
|
|
|
|
|
|
|
|
|
|
|
95
HSNi Security Ownership of Certain Beneficial Owners and Management
As of the date hereof, all of HSNi's outstanding shares of common stock are owned by IAC. After the distribution, IAC will no longer own any shares of HSNi common
stock. The following table presents information relating to the expected beneficial ownership of shares of HSNi common stock, assuming completion of the distribution as if it occurred on
[ ], 2008, by (i) each individual or entity expected to own beneficially more than 5% of the outstanding shares of HSNi common stock,
assuming that there
are 278,735,546 shares of common stock and Class B common stock of IAC outstanding immediately prior to the spin-offs and a distribution ratio of one-fifth of a share of HSNi common
stock for every share of IAC common stock and/or Class B common stock, (ii) each director of HSNi, (iii) the Chief Executive Officer, the Chief Financial Officer and the other
three named executive officers in the HSNi summary compensation table (see "HSNi Executive Compensation") and (iv) all of HSNi's executive officers and directors as a group.
Unless otherwise indicated, beneficial owners listed here may be contacted at HSNi's corporate headquarters at 1 HSN Drive, St. Petersburg, Florida 33729. For each listed person,
the number of shares of HSNi common stock and percent of such class listed assumes the conversion or exercise of any HSNi equity securities owned by such person that are or will become convertible or
exercisable, and the exercise of stock options and the vesting of restricted stock units, if any, that will vest, within 60 days of April 30, 2008, but does not assume the conversion,
exercise or vesting of any such equity securities owned by any other person.
The share amounts for each beneficial owner listed here are based on each such individual's beneficial ownership of shares of IAC common stock and/or Class B common stock as of
April 30, 2008, and assuming a distribution ratio of one-fifth of a share of HSNi common stock for every share of IAC common stock and/or Class B common stock. To the extent that HSNi
directors and executive officers own shares of IAC common stock at the time of the distribution, they will participate in the distribution on the same terms as other holders of IAC common stock. In
addition, following the distribution, HSNi expects that all IAC stock-based awards held by these individuals will be adjusted to become awards relating to common stock of all five companies resulting
from the spin-offs. Those awards that will relate to HSNi common stock are reflected in the table below based upon the expected adjustment formula described under the caption "The
SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
The actual number of shares of HSNi capital stock outstanding as of the date of the distribution may differ due, among other things, to the exercise of stock options or the vesting of
restricted stock
96
units, in each case, between April 30, 2008 and the date of the distribution and to the extent the other assumptions set forth above differ from actual developments.
|
|
HSNi Common Stock
|
Name and Address of Beneficial Owner
|
|
Shares
|
|
%
|
Clearbridge Advisors, LLC, et al(1)(2)
399 Park Avenue
New York, NY 10022 |
|
2,651,312 |
|
4.75 |
Lord Abbett & Co. LLC(1)(2)
90 Hudson Street, 11th Floor
Jersey City, N7 07302 |
|
7,839,768 |
|
14.06 |
Liberty Media Corporation(3)(4)
12300 Liberty Boulevard
Englewood, CO 80112 |
|
16,643,961 |
|
29.86 |
Mark Ethier |
|
|
|
|
Mindy Grossman |
|
|
|
|
William Lynch |
|
|
|
|
Judy Schmeling |
|
|
|
|
James Warner |
|
|
|
|
All executive officers and directors as a group ( persons) |
|
|
|
|
- (1)
- We
have not been able to determine the person or persons controlling the fund through publicly available information.
- (2)
- Based
upon information regarding IAC holdings reported on a Schedule 13G, as amended, which was filed with the SEC on February 14, 2008 and a distribution ratio of
one-fifth of a share of HSNi common stock for every share of IAC common stock and/or Class B common stock.
- (3)
- Liberty
Media Corporation is a publicly traded corporation. According to Liberty Media Corporation's Schedule 14A, filed April 24, 2008, Liberty's chairman, John C.
Malone, controls 33% of the voting power of Liberty Media Corporation.
- (4)
- Based
on 58,796,381 shares of IAC common stock held by Liberty and 4,000,000, 15,618,230, 4,005,190 and 800,006 shares of IAC Class B common stock held by each of
BDTV Inc., BDTV II Inc., BDTV III Inc. and BDTV IV Inc., respectively and a distribution ratio of one-fifth of a share of HSNi common stock for every share of
IAC common stock and/or Class B common stock.
97
CERTAIN INFORMATION WITH RESPECT TO ILG
BUSINESS OF ILG
When used with respect to any periods following the spin-offs and unless otherwise indicated, the term (i) "ILG" refers to Interval Leisure
Group, Inc., a Delaware corporation, which was incorporated in connection with the spin-offs in May 2008 to hold the businesses and subsidiaries of Interval Acquisition Corp., the
results of which were reported in the Interval reporting segment of IAC's Memberships & Subscriptions reporting sector immediately prior to the completion of the spin-offs,
(ii) "Interval" refers to that group of companies operating ILG's vacation
ownership membership business and (iii) "RQH" refers to that group of companies operating ILG's vacation rental and property management business, including, without limitation, ResortQuest
Hawaii, LLC and ResortQuest Real Estate of Hawaii, LLC. The businesses to be operated by ILG following the spin-offs are referred to herein as the "ILG businesses." The
following disclosure regarding ILG's businesses assumes completion of the spin-offs.
For information regarding the results of operations of ILG and its segments on a historical basis, see the Consolidated Financial Statements of ILG and the disclosure set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results of Operations of ILG." For information regarding the results of operations of ILG on a pro forma basis to
give effect to the completion of the spin-offs, see the Unaudited Pro Forma Condensed Consolidated Financial Statements for ILG.
Who We Are
ILG is a leading provider of membership services to the vacation ownership industry. ILG's principal business, Interval, makes available vacation ownership
membership services to the individual members of its exchange networks, as well as related services to developers of the resorts participating in its exchange networks worldwide. As of
December 31, 2007, more than 2,400 resorts located in more than 75 countries participated in Interval's primary exchange network, the Interval Network, and nearly two million owners of
vacation interests were enrolled as members of the Interval Network. For the fiscal year ending December 31, 2007, Interval represented approximately 88% of ILG's consolidated revenues.
ILG's other principal business, RQH, was acquired in May 2007 and is a provider of vacation rental and property management services to vacationers and vacation property owners
across Hawaii. As of December 31, 2007, RQH provided property management services to 26 resorts and hotels, as well as other more limited management services to an additional 23 properties. For
the fiscal year ending December 31, 2007, RQH represented approximately 12% of ILG's consolidated revenues for the seven month period following RQH's acquisition on May 31, 2007.
History
Although ILG was incorporated in Delaware in May 2008 in connection with the spin-offs, the ILG businesses have rich operating histories. Founded in
1976, Interval has undergone multiple ownership structures. RQH dates its history back to 1968 through its predecessors, Hotel Corporation of the Pacific and Aston Hotels and Resorts.
98
What We Do
Membership Programs. Interval operates membership programs for owners of vacation interests at resorts that participate in
its exchange networks. Interval does not own, operate or manage any resorts. Participation in one of Interval's membership programs provide members with the right to exchange their occupancy rights in
their vacation interest (generally, for periods of one week) for comparable, alternative accommodations on a worldwide basis at the same or another resort participating in Interval's exchange
networks, as well as benefit from a comprehensive package of value-added products and services. Generally, individuals are enrolled in one of Interval's membership programs by resort developers in
connection with their purchase of vacation interests from such developers, with initial annual membership fees being paid on behalf of members by the developers.
Following their period of initial enrollment, Interval Network members have the option of renewing their memberships for terms ranging from one to five years and paying their own
membership fees directly to Interval, which option generally remains available regardless of whether the affiliation agreement for the resort at which members own their vacation interests is not
renewed or otherwise terminated. Alternatively, some developers incorporate the Interval Network membership fee into certain annual fees they charge to owners of vacation interests at their resorts
after the initial enrollment period, which results in these owners having their membership in the Interval Network and, where applicable, the Interval Gold program (as described below), automatically
renewed throughout the period of their resort's participation in the Interval Network. Membership in the Preferred
Residences Program, Interval's newly-launched hospitality-branded membership program for luxury shared ownership resorts and condo hotels, is also renewed annually throughout the period of each
resort's participation in the Preferred Residences Program's exchange network.
The
resorts participating in Interval's exchange networks primarily includes resorts (including, in certain cases, resorts under construction) with which Interval has an effective
affiliation agreement in place, as well as resorts at which Interval continues to provide exchange services following the non-renewal or termination of the applicable affiliation agreement. In
addition to providing membership services to the vacation ownership industry, ILG provides membership services to certain markets within the larger travel industry, such as the membership-based
campground industry.
Exchanges. Interval provides members with two primary methods of exchange, "Deposit First" and "Request First." With Deposit
First, members immediately transfer the use and occupancy of vacation interests at their home resort in return for the right to request an exchange at a different or the same resort at an alternative
period of occupancy. Under this method, members are not required to select a location or travel date at the time of deposit, but can request an exchange at any time during the period of the deposit's
availability for exchange. All deposits expire two years after the occupancy date of the week deposited, unless extended by members through the purchase of a deposit extension. With Request First,
members request an exchange prior to relinquishing the occupancy right in the vacation interest to Interval's exchange networks. Using this method, the use and occupancy of vacation interest is
relinquished when a confirmation actually occurs. This method requires member to be confirmed to an exchange and travel prior to the occupancy period of the vacation interest.
All
vacation ownership accommodations relinquished to Interval's exchange networks are assigned a trading value at the time of deposit (under the Deposit First method) or at the time of
request (under the Request First method) based on multiple factors, including location, quality, seasonality, unit attributes and time of relinquishment to determine the relinquished accommodations'
relative exchange value to Interval's exchange networks. Members are offered an exchange to accommodations which are generally of comparable value to those relinquished.
99
Some
members also exchange their vacation interests with Interval on a points basis. In these circumstances, points are relinquished to Interval's exchange networks by the member and
Interval receives accommodations from the operator of the points program on behalf of the member.
Getaway Program. Interval also offers additional vacation rental opportunities to members at attractive rates through its
Getaway Program. This program allows members to rent resort accommodations for a fee, plus applicable taxes, without relinquishing the use and occupancy of their vacation interests. Resort
accommodations available through the Getaway Program consist of seasonal oversupply of
vacation ownership accommodations within Interval's exchange networks, as well as resort accommodations sourced by Interval specifically for use in the Getaway Program.
Interval Gold. Interval also offers Interval Gold, an enhanced membership program, to Interval Network members to provide
them with year-round access to value-added benefits and services for an additional annual fee. These benefits and services vary by country of residence, but generally consist of discounts
on Interval's Getaway Program, a concierge service, a hotel discount program and Interval Options, a service that allows members to relinquish annual occupancy rights in their vacation interests for
credits towards the purchase of various travel products, including cruises and spa vacations. Members are enrolled in the Interval Gold program by resort developers in connection with the initial
purchase of their vacation interests or by Interval directly. Renewal membership terms and procedures and responsibility for fees are generally the same as those for basic membership in the Interval
Network.
Revenue. Interval revenue is derived principally from membership fees and transactional fees paid for exchange and Getaway
Program transactions, which are collectively referred to as "vacations," as well as fees from other value-added member services, such as reservation servicing fees, which are generally paid by the
developer for the purpose of affording its owners access to internal reservation services. Revenue is also derived from fees for certain products and services sold to developers (as described below).
Resort Affiliations. Interval has established multi-year relationships with numerous developers under exclusive
affiliation agreements. Interval does not consider its overall business to be dependent on any one of these developers, provided, that the loss of a significant number of developers could materially
impact Interval's business. See "Risk Factors Relating to the Business of ILG Following the Spin-OffsThird Party Relationships". Pursuant to these agreements, developers are
obligated to enroll all purchasers of vacation interests at their resorts in the applicable exchange membership program and, in some circumstances, are obligated to renew these memberships annually
for the term of their affiliation agreement. Most affiliation agreements contain automatic renewal provisions, pursuant to which arrangements will be renewed on the same terms and conditions (subject
to agreed upon pricing modifications), unless either party provides the other with written notice of its intent not to renew prior to expiration (typically anywhere from 90 to 270 days prior to
expiration).
Products and Services. A primary basis on which developers choose Interval as a partner is the comprehensive array of
products and services that it offers developers, such as sales and marketing support, operational and custom vacation program design services.
-
- Sales and Marketing Support. Interval offers its developers a selection of sales and marketing materials, all
designed to reinforce the value of owning a vacation interest. These materials, which are available in approximately 30 languages, include brochures, publications, sales-office displays, videos and
resort directories. Developers also promote membership in Interval's exchange programs and related value-added services as an important benefit of owning a vacation interest. In addition, Interval
offers the Leisure Time Passport program, which is
100
primarily
used by developers as an exit or trial membership program for potential purchasers of vacation interests. The Leisure Time Passport program provides participants with many of the benefits of
the Interval Gold program, as well as the opportunity to experience vacationing in condominium-style accommodations prior to making a commitment to purchase a vacation interest.
Interval
has also established certain service and quality recognition awards and programs in an effort to encourage resorts to provide quality accommodations, amenities and services. In 2008, Interval
introduced a new resort recognition program through which eligible Interval Network resorts will be recognized as either a "Select Resort" or a "Premier Resort," based upon the satisfaction of
qualifying criteria. Interval either inspected these resorts or relied on quality rating and consumer satisfaction indexes to initially determine if a resort met the qualifying criteria. Recognized
resorts are then subject to periodic inspection and customer evaluations and must comply with the program's service and quality criteria to retain their status. Approximately 40% of Interval Network
resorts have been recognized as either a Select or Premier Resort for 2008.
-
- Operational Support. Interval also makes available a comprehensive array of back-office servicing
solutions to developers and resorts. For example, for an additional fee, Interval provides internal reservation services, pursuant to which Interval acts as the facilitator of both internal club and
resort reservations, and billing and loan servicing services, pursuant to which Interval collects property maintenance fees and other amounts due to developers or homeowner's associations.
In
addition, through consulting arrangements, Interval assists developers in the design of vacation programs for owners of vacation interests. Such programs, which may include a wide range of
flexible-use plans, as well as point-based programs and vacation clubs, are tailored to the specific needs of the relevant developer and/or resort. In connection with the design of these
programs, Interval undertakes a comprehensive analysis of the existing operations and intended growth plan of the relevant developer or resort, and then works closely with the developer or resort to
design and implement a tailored program.
Vacation Rental and Property Management Services
ILG operates a Hawaiian-based vacation rental and property management business through RQH. RQH provides vacation property rental, real estate brokerage and
related services (including common area management services for condominium projects), as well as property management services to resorts and hotels in Hawaii.
RQH provides vacation property rental services for condominium owners. These rental properties are generally investment properties, and, to a lesser extent,
second homes, owned by individuals who contract with RQH directly to manage, market and rent their properties, generally pursuant to short-term agreements. RQH also offers such owners a
comprehensive package of marketing, management and rental services designed to enhance rental income and profitability.
RQH
secures guests for its vacation rentals primarily through long-standing relationships with travel partners, including wholesalers, retail travel agents and online travel
intermediaries. RQH also conducts direct online marketing initiatives to reach consumers directly through its websites, www.resortquesthawaii.com and www.mauicondo.com. As an additional distribution channel, RQH also makes units available to Interval for use in its Getaway Program.
101
RQH also provides property management services for owners of condominium and hotel management services to owners of traditional hotels. Condominium hotels
generally offer the same type of services offered by hotels and resorts, plus certain comforts of home, such as kitchens or kitchenettes, separate seating or living room areas and in suite, private
bedrooms, with actual services and features varying by property. Generally, property management services are provided pursuant to exclusive agreements with terms ranging from one to five years, many
of which are automatically renewable.
RQH revenues are derived principally from management fees for vacation property rental services and property management services. Property management fees consist of a base management
fee and, in some instances, an incentive fee based on a percentage of gross operating profits, net operating income or other similar metric. Property management agreements may provide that owners
receive a specified portion of the revenues generated while the relevant properties are under RQH management. In these cases, RQH pays the operating expenses for the rental operation from its share of
the revenues and retains the balance (if any) as its management fee. Revenues are also derived from fees for hotel management services.
Marketing and Technology
The success of the Interval business depends, in significant part, on the continued growth of the vacation ownership industry. As a result, Interval markets its
products and services to developers and other parties in the vacation ownership industry through a series of business development initiatives. For nearly ten years, Interval has organized and
co-sponsored a proprietary, multi-day informational seminar, currently known as the Vacation Ownership Investment Conference ("VOIC"), where real estate developers, hospitality
companies and others contemplating entry into the vacation ownership industry can meet and network with industry leaders, as well as participate in educational panels on various vacation ownership
issues, such as property and program planning, financing and regulatory requirements. This seminar is offered annually at locations in regions that Interval views as potential market opportunities for
vacation ownership development. Through these programs, Interval works to strengthen and expand the vacation ownership industry through the education and support of viable new entrants. Interval has
also maintained leadership roles in various industry trade organizations throughout the world since their inception, through which it has been a driving force in the promotion of constructive
legislation, both in the U.S. and abroad, principally aimed at creating or enhancing consumer protection in the vacation ownership industry.
Given
that the success of Interval is dependent, in significant part, on its ability to secure vacation ownership accommodations and attract new members to its exchange programs,
Interval also targets its sales and marketing efforts more directly at developers and prospective owners of vacation interests. In doing so, Interval not only promotes the benefits of the Interval
Network and its value-added services, but also markets itself to developers as a provider of operational and sales and marketing support services. Interval's sales and services personnel proactively
seek to establish strong relationships with developers during the early stages of the development of a particular resort by providing input on consumer preferences based upon years of experience. In
addition, given its long-standing relationships with others within the vacation ownership industry, Interval is often able to refer developers to quality providers of a wide range of
planning and operational resources. Interval believes that it has established a strong reputation within the vacation ownership industry as being highly responsive to the needs of developers and
owners of vacation interests.
Interval
maintains developer and consumer marketing departments, both of which are based in ILG's global headquarters in Miami, Florida. International marketing expertise is provided
primarily by London-based employees, with input and local expertise being provided by employees in local and
102
regional
offices worldwide. These departments are responsible for implementing Interval's overall marketing strategy and developing the materials that are necessary to secure new relationships with
developers and resorts and obtain new members, as well as promote membership renewals, exchange opportunities and other value-added services to existing members.
Important
to the success and continued growth of the RQH business is its ability to source vacationers interested in booking vacation properties made available through its vacation
rental and property management services. RQH markets vacation rental opportunities through online travel intermediaries and other distribution channels, as well as through dedicated property sales,
field sales personnel and Interval.
Interval's success also depends, in part, on its ability to provide prompt, accurate and complete service to its members through voice and data networks and proprietary and third party
information systems. The technology platform for the Interval Network is a proprietary, custom developed enterprise application and database that manages all aspects of membership, exchange and
Getaway Program transaction processing and inventory management. Interval also uses advanced telecommunications systems and technologies to promptly respond and efficiently route member calls.
Interval also operates consumer websites for its members, such as www.IntervalWorld.com and www.PreferredResidences.com, while RQH offers vacation rentals
to non-member vacationers through www.ResortQuestHawaii.com.
Industry Overview and Trends
The hospitality industry is a major component of the travel industry, which is affected by the performance of the U.S. economy. The hospitality industry includes
the segments in which ILG businesses operate. In 2007, domestic and international travelers spent an estimated $740 billion in the U.S. for business and leisure travel of 50 miles or more, as
compared to $699 billion in 2006 and $654 billion in 2005.
Travel expenditures are sensitive to business and personal discretionary spending levels and tend to decline during general economic downturns as factors, including the increased costs
of transportation due to increased fuel prices and the overall financial instability of the airline industry and associated air carrier bankruptcies, adversely impact consumers' decisions to use and
consume travel services. See "Risk Factors Relating to the Business of ILG Following the Spin-OffsAdverse Events and Trends."
Vacation ownership is the segment of the hospitality industry that encompasses the development, operation and sale of vacation interests in traditional timeshare regimes, fractional
products, private residence clubs, condo hotels and other forms of shared ownership, including, in some instances, whole ownership. Vacation ownership sales (excluding sales of fractional, private
residence club, destination club and whole ownership products) in the U.S. for 2007 are approximately $10.6 billion, as compared to $10.0 billion in 2006 and $8.6 billion in 2005,
although much of this growth was driven by higher sales prices. U.S. sales of fractional products, private residences and destination club products were approximately $2.3 billion in 2007, as
compared to $2.1 billion in 2006 and $1.97 billion in 2005.
The tightening of credit available to both vacation property developers and purchasers could result in the development of fewer vacation ownership and vacation rental properties (and in
the case of existing vacation ownership and vacation rental properties, fewer potential purchasers). This factor, plus the potential for increased default rates among current vacation interest owners,
could have a negative impact on the number of Interval members and could have a material adverse effect on the vacation ownership and vacation rental industries. See "Risk Factors Relating to the
Business of ILG Following the Spin-OffsAdverse Events and Trends."
103
The vacation ownership membership services industry provides owners of vacation interests with flexibility and choice by providing them access to alternative
accommodations through exchange networks encompassing a wide variety of resorts. There are two principal providers of vacation ownership membership services in the global vacation membership services
industry, Interval and RCI LLC, a subsidiary of Wyndham Worldwide Corp. According to a study published in 2008 by ARDA International Foundation, 99% of all U.S.-based vacation ownership resorts
were participants in an exchange network offered by Interval or RCI or both.
Growth in the vacation ownership membership services industry is driven primarily by the number of vacation interests sold to new purchasers. In 2008, the number of U.S.-based households
that owned vacation interests increased to approximately 4.7 million, an increase of approximately 300,000 households, from the number reported for 2007. Continued growth is expected to be
driven by:
-
- increased
consumer awareness and acceptance of the value and benefits of the ownership of vacation interests;
-
- adoption
of constructive legislation and regulations internationally that improve consumer protection and allow businesses to operate profitably, including a recent
announcement by the Government of Dubai that it will shortly issue its first set of vacation ownership regulations and strong consumer protection regulations in Australia and South Africa that provide
for (i) a cooling off period during which the consumer can cancel the contract for any reason and any amounts are held in escrow and (ii) extensive disclosures prior to execution of any
documents;
-
- the
entry of additional independent developers and brand-name hospitality companies into the vacation ownership industry, which will increase the number of
vacation interests available for sale; and
-
- reported
demand for vacation ownership products in the U.S. Industry sources estimate that approximately 5% of all adult leisure travelers familiar with the concept of
vacation ownership have expressed an interest in acquiring a vacation interest at some point before February 2010, which equates to an estimated potential market consisting of approximately
6.0 million potential purchasers.
The
vacation ownership membership services industry growth is driven by the continued development and offering of new vacation ownership accommodations and alternative vacation ownership
related products. For example, industry studies suggest that developers are selling more biennial products, whereby owners of vacation interests have access to their accommodations during alternating
years. While these trends may have a positive impact on the average number of potential new members of exchange programs, the alternating annual ownership associated with these products could
adversely impact average revenue per member across the industry.
ILG believes that the overall supply of vacation rental properties has been increasing as a result of the growth in second/vacation home ownership and the
increasing desire among many owners to rent their properties for additional income. An increasing percentage of second/vacation home (including condominiums and shared ownership properties) purchasers
have cited the ability to generate rental income as a motivating factor for their purchase decision. Property management and vacation rental companies facilitate the rental process by handling most,
if not all, aspects of interaction with vacationers. Growth in the marketplace is due, in some part, to the numbers of resorts entering the condo space as a means to capitalize on overall property
construction through the upfront sales of vacation condos. Additionally, consumer reasoning with regard to the usage of vacation property as an investment to rent, for supplemental income, may be a
stimulus for market growth.
104
Vacation
rental properties are also growing in number due to the increasing popularity of renting non-hotel accommodations among consumers. Condominium accommodations
typically provide substantial value to consumers seeking more than a nightly stay, as they offer families greater space and convenience than a traditional hotel room by offering separate living,
sleeping and eating quarters. Continued growth in leisure travel, as well as improved product awareness and consumer convenience through direct and indirect online distribution channels, is also
expected to drive this growth.
Currently,
ILG offers vacation rental and property management services in Hawaii through RQH. According to the Hawaii Department of Business, Economic Development & Tourism,
approximately 7.5 million visitors traveled to Hawaii in 2006, with the same number estimated to have visited in 2007. ILG believes that Hawaii's lodging industry fundamentals continue to
remain strong and Hawaii has consistently posted one of the highest growths in revenue per average daily room rate of any market.
Competition
The two principal companies in the global vacation ownership membership services industry, Interval and RCI, aggressively compete for developer and consumer
market share. Other third parties operate in this industry, but generally outside of the context of value-added membership programs offered at point-of-sale. While the
operations of these third parties are generally smaller and more regional in nature, at least one operates on a global basis. Interval also faces increasing competition from points-based vacation
clubs and large resort developers, which may elect to operate their own internal exchange systems to facilitate exchanges for owners of vacation interests at their resorts as they increase in size and
scope. In addition, increasingly, vacation clubs and large resort developers are forging direct relationships with other developers.
Interval
believes that developers generally choose to affiliate with an exchange network based on:
-
- the
perceived quality of resorts participating in the network, which is characterized by the desirability of numerous locations, quality of accommodations and the amenities
and services available;
-
- the
level of service provided to members;
-
- the
range and level of support services provided to developers;
-
- the
flexibility of the exchange program; and
-
- the
costs for annual membership and exchanges.
Developers affiliated with Interval and/or RCI collectively represent approximately 99% of the vacation ownership resorts in the U.S. Based on the annual disclosure statements filed by
RCI and Interval for the year ended December 31, 2007, on a global basis, Interval held approximately 36.3% of the resorts and 42.2% of the members participating in exchange networks operated
by these companies and RCI held the remainder. Accordingly, RCI is the larger provider of vacation ownership member services with a larger exchange network. Through the resources of its corporate
affiliates, particularly Wyndham Vacation Ownership, Inc., itself engaged in vacation ownership sales, RCI may have greater access to a significant segment of new purchasers of vacation
interests.
While
overall Interval's primary competitor has a greater number of resorts in its exchange network and reports a larger number of owners of vacation interests participating in its
vacation ownership membership programs, Interval believes that it has distinguished itself as the vacation ownership membership service provider of choice with developers of high quality vacation
properties and their owners, based primarily on the quality of the resorts in the Interval Network and related services provided by these resorts, coupled with its continued commitment to attract
quality resorts to its exchange networks and foster quality vacation experiences for its members. For example, in 2008,
105
Interval
launched the Preferred Residences Program, a hospitality-branded membership program for luxury shared ownership resorts and condo hotels.
RQH's
vacation rental business faces competition from other suppliers of travel products and services, hotel operators and local rental agents and its property management business is
also highly competitive in that there are low barriers to entry.
Employees
As of December 31, 2007, ILG had approximately 2,800 employees worldwide. With the exception of a limited number of housekeeping employees at one property
in Hawaii and a few member services employees in Italy and Spain, employees are not represented by unions or collective bargaining agreements. ILG believes that relationships with its employees are
generally good.
Properties
ILG conducts operations through 29 offices in 17 countries, of which 8 locations are within the U.S. and 21 locations are outside of ILG's global headquarters
which is located in Miami, Florida and occupies approximately 100,000 square feet of office space under a long-term lease expiring in July 2016. Interval also operates a call center in
Miami that is approximately 60,000 square feet under a long-term lease expiring in December 2020. Interval's European headquarters is located in London, England and occupies approximately
24,400 square feet of office space under a long-term lease which expires in May 2016, while its Asian headquarters are located in Singapore and occupies approximately 3,000 square
feet of office space, the current term of which expires in September 2009, subject to automatic renewal.
RQH's
property management headquarters is located in Honolulu, Hawaii and occupies approximately 25,000 square feet of office space under a lease expiring in October 2009.
Activities have commenced to source and secure alternative premises upon the termination of the existing lease.
106
RISK FACTORS RELATING TO THE BUSINESS OF ILG FOLLOWING THE SPIN-OFFS
ILG's business, financial condition and results of operations are subject to certain risks that are described below and in the section "Risk factors" beginning on page
[ ]. You should carefully consider these risks and uncertainties. While ILG believes that the risks and
uncertainties described below and elsewhere in this information statement include the most significant risk factors that should be considered by ILG's investors, these risks and uncertainties are not
the only ones facing ILG and its businesses.
Adverse Event and TrendsAdverse events and trends in the vacation ownership, vacation rental and travel industries could adversely affect
ILG's business, financial condition and results of operations.
The success of ILG and its businesses depends, in substantial part, upon the health of the worldwide vacation ownership, vacation rental and travel industries.
Travel expenditures are sensitive to business and personal discretionary spending levels and tend to decline during general economic downturns. Also, inclement weather and/or natural disasters, such
as earthquakes, hurricanes, fires, floods and tsunamis may result in the inability of consumers to travel to and vacation in certain destinations and regions in which participating resorts operate
and/or vacation rental properties are located. Similarly, significant damage to resorts and/or vacation rental properties could result in a decrease in the number of resort accommodations or vacation
rentals available for use in ILG's vacation ownership membership programs or as vacation rentals. ILG's businesses are also sensitive to travel health concerns, such as SARS, bird flu and other
pandemics, as well as concerns related to terrorism, enhanced travel security measures and/or geopolitical conflicts. Accordingly, downturns or weaknesses in the travel industry or price increases for
travel related services, including economic factors adversely impacting consumers' decisions to use and consume travel services, the overall financial instability of the airline industry and
associated air carrier bankruptcies, decreased airlift to relevant markets, job actions and strikes, and increased costs of transportation based on increased fuel prices, could adversely affect ILG's
business, financial condition and results of operations, as could inclement weather, natural disasters, health concerns, terrorism, enhanced travel security measures and/or geopolitical conflicts. In
addition, the tightening of credit available to both vacation property developers and purchasers could result in the development of fewer vacation ownership and vacation rental properties (and in the
case of existing vacation ownership and vacation rental properties, fewer potential purchasers). This factor, plus the potential for increased default rates among current vacation interest owners,
could result in a decrease in the number of Interval's exchange network members and could have a material adverse effect on the vacation ownership and vacation rental industries, which in turn could
have a material adverse effect on ILG's business, financial condition and results operations.
CompetitionThe industries in which ILG's businesses operate are highly competitive and these businesses are subject to risks relating to
competition that may adversely affect ILG's performance.
ILG's businesses will be adversely impacted if they cannot compete effectively in their respective industries, each of which is highly competitive. ILG's
continued success depends upon its ability to compete effectively in markets that contain numerous competitors, some of which may have significantly greater financial, marketing and other resources
than ILG. In particular, in the case of the Interval business, its primary competitor, RCI is larger and, through the resources of its corporate affiliates, particularly, Wyndham Vacation
Ownership, Inc., itself engaged in vacation ownership sales, may have greater access to a significant segment of new vacation ownership purchasers. New competition or existing competition that
does not operate on a value-added, membership basis may
cause Interval to reduce its fee structure or potentially modify its business model, which would adversely affect ILG's business, financial condition and results of operations.
107
Third Party RelationshipsILG depends on relationships with developers, members and other vacation property owners and any adverse changes
in these relationships could adversely affect its business, financial condition and results of operations.
The
Interval business is dependent upon vacation ownership developers for new members and resort accommodations for use in its exchange and vacation rental programs, as well as upon
members to renew their existing memberships and otherwise engage in transactions. The RQH business is dependent upon vacation property owners and hotels for vacation properties to manage and rent to
vacationers.
Interval has established multi-year relationships with numerous developers pursuant to exclusive affiliation agreements and ILG believes that relationships with these
entities are generally strong, but these historical relationships may not continue in the future. The ability of Interval to maintain existing or negotiate new affiliation agreements is adversely
impacted by the continued creation and operation of internal reservation and exchange systems by developers, as well as by consolidation in the vacation ownership industry. The non-renewal
or termination of an affiliation agreement with a major developer or multiple affiliation agreements with a combination of smaller developers could have a material adverse effect on ILG's business,
financial condition and results of operations. Several affiliation agreements with Interval's largest developers, as determined based on new member contribution for the calendar year 2007, do not
include auto-renewal provisions. During 2008, the affiliation agreements for several of Interval's largest new member producing developers are scheduled to renew. Negotiations aimed at the extension
of these affiliation relationships are ongoing or are anticipated to commence shortly. The failure to renew some or all these agreements will impact Interval's new member enrollment and could have a
material adverse impact on our business, financial condition and results of operation.
ILG
believes that developers will continue to create and operate internal reservation and exchange systems, which decreases their reliance on vacation ownership membership programs,
including those offered by Interval, and could adversely impact the supply of resort accommodations available through Interval's exchange networks. The vacation ownership industry continues to
experience consolidation through the acquisition of vacation ownership developers by other developers, which may result in the diversion of exchange membership and other business. While the
non-renewal of an affiliation agreement, in most cases, does not result in a significant loss of existing members, it does
adversely affect the ability of Interval to secure new members for its programs from the non-renewing resort and, to the extent that Interval does not secure renewals with existing members
that own vacation interests at the non-renewing resort, existing members in its programs would decrease.
Interval may be unable to maintain existing or negotiate new affiliation agreements with developers or secure renewals with existing members in its programs, and its failure to do so
would result in decreases in the number of new and/or existing members, the supply of resort accommodations available through its exchange networks and related revenues, which would have a material
adverse effect on ILG's business, financial condition and results of operations.
Similarly,
the failure of RQH to maintain existing or negotiate new property management and/or rental services arrangements with vacation property owners, as a result of the sale of
property to third parties or otherwise, or the failure of vacationers to book vacation rentals through, RQH would result in a decrease in related revenues, which would have an adverse effect on ILG's
business, financial condition and results of operations.
Adverse Events and Trends in Key Vacation DestinationsAdverse events and trends in key vacation destinations could adversely affect ILG's
business, financial condition and results of operations.
A substantial percentage of the vacation ownership resorts currently participating in Interval's exchange networks are located in Florida, Hawaii, Las Vegas,
Mexico and Southern California, and all
108
of the vacation properties for which RQH provides vacation rental and property management services are located in Hawaii. Approximately $110 million in revenue was generated from properties
located in all of these locations in 2007. As a result, the ongoing ability to successfully confirm exchange requests for members, as well as its ability to find a market for accommodations sourced
through RQH, is largely dependent on the continued desirability of these areas as key vacation destinations. While travel demand for these destinations has been historically high on a consistent
basis, this may not continue to be the case. Any significant shift in travel demand for one or more of these key destinations or any adverse impact on transportation to them, such as decreased airlift
or increased travel costs, could have a material adverse effect on ILG's business, financial condition and results of operations.
In
addition, hurricanes, earthquakes or other adverse events impacting one or more of these key destinations could significantly reduce the number of accommodations available for
exchange confirmation or rental to members and vacationers, as well as the need for vacation rental and property management services generally. Accordingly, any such event could have a material
adverse effect on ILG's business, financial condition and results of operations, the impact of which could be prolonged.
International OperationsInterval operates in a number of international markets, which exposes ILG to additional risks that could adversely
affect its business, financial condition and results of operations.
Revenues from international operations represented approximately 16%, 18% and 18% of ILG's consolidated revenues in 2007, 2006 and 2005, respectively. ILG
currently expects to continue to seek to expand and invest in its vacation ownership membership business in various international markets, especially in the Middle East and Asia.
In
order to achieve widespread acceptance in international markets, Interval must continue to successfully tailor its services to the unique customs and cultures of relevant countries
and markets. Learning the customs and cultures of various countries and markets can be difficult and costly, and the failure to do so could slow international growth. Operating in international
markets also exposes ILG to additional risks, including, among others, changes in regulatory requirements, including taxation, limits on the ability to sell products and services and enforce
intellectual property rights and difficulties in managing operations due to distance, language and cultural differences, including issues associated with establishing management systems and
infrastructures and staffing and managing foreign operations. Also, in particular, significant fluctuations in the value of the U.S. dollar relative to certain foreign currencies could have an adverse
effect on the results of ILG businesses operating in jurisdictions where the pricing for products and services is established in U.S. dollars and adjusted to local currency based on
then-current exchange rates. ILG does not currently engage in hedging transactions designed to reduce its exposure to foreign currency risk.
ILG is also exposed to risks associated with the repatriation of cash generated by certain of its foreign operations to the United States. Currently, ILG conducts vacation ownership
exchange operations in one Latin American country from which it cannot repatriate cash generated by its operations in full. As of December 31, 2007 and 2006, the repatriation of approximately
$5.1 million and $4.0 million in cash remained pending, subject to the approval of such country's government. While ILG continues to pursue the repatriation of this cash through all
lawful means, these efforts may be unsuccessful. Furthermore, other countries in which ILG maintains operations may impose limitations on the repatriation of cash generated by operations in such
countries now or in the future. Any limitation on ILG to repatriate significant cash generated by its international operations would have a material adverse effect on its business, financial condition
and results of operations.
109
Acquisitions and Strategic ArrangementsILG may experience financial and operational risks in connection with acquisitions and strategic
arrangements. In addition, businesses acquired by ILG may incur significant losses from operations or experience impairment of carrying value.
ILG acquired RQH in May 2007 and intends to selectively pursue other acquisitions. ILG, however, may be unable to identify attractive acquisition candidates or
complete transactions on favorable terms. In addition, in the case of acquired businesses, ILG will need to:
-
- successfully
integrate the operations, as well as the accounting, financial controls, management information, technology, human resources and other administrative systems,
of acquired businesses with existing operations and systems;
-
- maintain
third party relationships previously established by acquired companies;
-
- retain
senior management and other key personnel at acquired businesses; and
-
- successfully
manage acquisition-related strain on the management, operations and financial resources of ILG and/or acquired businesses.
ILG
may not be successful in addressing these challenges or any others encountered in connection with historical and future acquisitions. In addition, the anticipated benefits of one or
more acquisitions may not be realized and future acquisitions could result in potentially dilutive issuances of equity securities and/or the assumption of contingent liabilities. Also, the value of
goodwill and other intangible assets acquired could be impacted by one or more unfavorable events or trends, which could result in impairment charges. The occurrence of any these events could
adversely affect ILG's business, financial condition and results of operations.
ILG also intends to selectively enter into joint ventures and other strategic arrangements to provide new products and services complimentary to those currently offered by its
businesses. However, ILG may be unable to successfully enter into these arrangements on favorable terms or launch related products and services or such products and services may not gain market
acceptance or be profitable. The failure to develop and execute any such initiatives on a cost-effective basis could have an adverse effect on ILG's business, financial condition and
results of operations.
Property RenovationsA significant decrease in the supply of available vacation rental accommodations due to ongoing property renovations
could adversely affect ILG's business, financial condition and results of operations.
Several of the vacation rental properties in Hawaii for which RQH provides vacation rental and property management services are expected to undergo significant
renovations over the next few years. While these renovations are not under the control of ILG (and ultimately are not funded by ILG), they will result in a decrease in the supply of vacation rental
accommodations available to vacationers, as well as the need for vacation rental services, during the applicable renovation periods. Furthermore, ongoing renovations at a particular property may
negatively impact the desirability of the property as a vacation destination. A significant decrease in the supply of available vacation rental accommodations and the need for vacation rental services
during renovation periods, coupled with the inability to attract vacationers to properties undergoing renovations, could have a material adverse effect on ILG's business, financial condition and
results of operations.
Compliance and Changing Laws, Rules and RegulationsThe failure of ILG's businesses to comply with extensive regulatory requirements, or to
obtain and maintain required licenses and rights, could adversely affect ILG's business, financial condition and results of operations.
ILG's businesses are subject to various laws, rules and regulations on a global basis, including those specific to the vacation ownership industry, as well as
those applicable to businesses generally,
110
such as consumer protection and sales, use, value-added and other tax laws, rules and regulations. While ILG believes that the operations and practices of its businesses have been structured in a
manner to ensure material compliance with applicable laws, rules and regulations, the relevant regulatory authorities may take a contrary position. The failure of its businesses to comply with
applicable laws, rules and regulations, or to obtain required licenses or rights, could have a material adverse effect on ILG's business, financial condition and results of operations. In addition,
unfavorable changes in the laws, rules and regulations applicable to ILG's businesses, including those related to the imposition of taxes, could decrease demand for the services offered by ILG's
businesses, increase costs and/or subject ILG to additional liabilities, which could have an adverse effect on ILG's business, financial condition and results of operations.
The
vacation ownership industry is subject to extensive regulation in the United States and elsewhere, which generally requires vacation ownership resort developers to follow certain
procedures in connection with the sale and marketing of vacation interests, including the filing of offering statements describing proposed developments with relevant governmental authorities for
approval and the delivery to prospective purchasers of certain information relating to the terms of the purchase and use, including recission rights. Although ILG and its businesses are not subject to
these regulations, such regulations directly affect the members and developers that participate in Interval's exchange networks
and, therefore, indirectly affect ILG. As a result, any negative change in the regulatory environment within the vacation ownership industry could have a material adverse effect ILG's business,
financial condition and results of operations.
ILG's
vacation rental operations are directly subject to a number of licensing requirements, as well as certain laws and regulations relating to consumer protection, particularly, those
associated with the property management, including those relating to the preparation and sale of food and beverages, liquor service and health and safety of managed premises. The failure of RQH
businesses to comply with applicable laws, rules and regulations, or to obtain required licenses or rights, could have a material adverse effect on ILG's business, financial condition and results of
operations.
Increasing Vacation Rental RevenuesILG's future growth is dependent, in part, on the ability of its businesses to increase revenues from
vacation rentals, and their failure to do so could adversely affect its business, financial condition and results of operations.
ILG is actively seeking to increase revenues from vacation rentals. In furtherance of these efforts, ILG acquired RQH in May 2007. Through RQH, ILG consistently
seeks opportunities to solidify and expand upon its existing base of managed property owners through the critical evaluation and improvement of the property management services made available to
managed property owners. In addition, in an effort to better identify and secure (and ultimately rent more) available vacation rental properties, RQH actively seeks to own or lease the front desks of
its managed properties and to manage each property's homeowners' association. However, these efforts may not increase the number of available vacation rentals or related revenues or the property
management services provided by RQH may not continue to be attractive to vacation property owners. Interval is also actively seeking to provide vacation rental services to resorts participating in its
exchange networks. See "Business of ILGWhat We DoVacation Ownership Membership ServicesMember ServicesGetaway Program." ILG businesses, however, may
be unable to secure accommodations from developers on favorable terms, or it may be unable to rent such accommodations to its members. The failure of ILG to increase revenues from vacation rentals
could have a material adverse effect on its business, financial condition and results of operations.
111
CAPITALIZATION
The following table presents ILG's cash and cash equivalents and capitalization as of March 31, 2008 on an historical basis and on an unaudited pro forma
basis for the separation and the financing. Pro forma for the separation and the financing includes the $450 million in indebtedness that ILG expects to hold at separation. In connection with
the separation, ILG is expected to distribute the net proceeds of the financing to IAC except for $50 million which it will retain. ILG will also retain its international cash which is
approximately $69.0 million as of March 31, 2008. The separation of ILG and the related financing transactions are described in the notes to the Unaudited Pro Forma Condensed
Consolidated Balance Sheet under the Unaudited Pro Forma Condensed Consolidated Financial Statements as if the separation and the related transactions and events had been consummated on
March 31, 2008.
The
assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and ILG believes such assumptions are reasonable under the
circumstances. Such adjustments are subject to change based upon the finalization of the terms of the separation and financing.
This
table should be read in conjunction with "Selected Historical Financial Data," "Transfers to IAC and Financing," "Description of Capital Stock of the Spincos," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of ILG," the consolidated financial statements of ILG and the "Unaudited Pro Forma Condensed Consolidated Financial Statements"
and accompanying notes included in this information statement.
The
table below is not necessarily indicative of ILG's cash and cash equivalents and capitalization had the separation and the related financing transactions been completed on the date
assumed. The capitalization table below may not reflect the capitalization or financial condition which would have resulted had ILG been operating as an independent, publicly-traded company at that
date and is not necessarily indicative of ILG's future capitalization or financial condition.
|
|
As of March 31, 2008
|
|
|
Historical
|
|
Unaudited
Pro Forma
for the Separation
and Financing
|
|
|
(In millions)
|
Cash and cash equivalents |
|
$ |
69 |
|
$ |
119 |
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
Bank credit facility and notes |
|
$ |
|
|
$ |
450 |
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
450 |
|
|
|
|
|
Shareholders' equity |
|
|
508 |
|
|
117 |
|
|
|
|
|
Total capitalization |
|
$ |
508 |
|
$ |
567 |
|
|
|
|
|
112
SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical consolidated financial information for Interval Leisure Group, Inc. ("ILG"). This data was
derived, in part, from the historical consolidated financial statements of ILG included elsewhere in this document and reflects the operations and financial position of ILG at the dates and for the
periods indicated. The information in this table should be read in conjunction with the consolidated financial statements and accompanying notes and other financial data pertaining to ILG included
herein. However, this financial information does not necessarily reflect what the historical financial position and results of operations of ILG would have been had ILG been a stand-alone company
during the periods presented.
|
|
Year Ended December 31,
|
|
Three Months Ended March 31,
|
|
|
2007(1)
|
|
2006
|
|
2005
|
|
2004
(unaudited)
|
|
2003
(unaudited)
|
|
2008
(unaudited)
|
|
2007
(unaudited)
|
|
|
(In thousands)
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
360,407 |
|
$ |
288,646 |
|
$ |
260,843 |
|
$ |
242,101 |
|
$ |
206,453 |
|
$ |
115,937 |
|
$ |
86,433 |
Operating income |
|
|
106,566 |
|
|
86,128 |
|
|
72,824 |
|
|
49,624 |
|
|
24,507 |
|
|
38,964 |
|
|
31,829 |
Net income |
|
|
71,056 |
|
|
58,043 |
|
|
49,243 |
|
|
31,730 |
|
|
14,918 |
|
|
24,808 |
|
|
21,149 |
|
|
December 31,
|
|
March 31,
|
|
|
|
2007(1)
|
|
2006
|
|
2005
|
|
2004
(unaudited)
|
|
2003
(unaudited)
|
|
2008
(unaudited)
|
|
|
|
(In thousands)
|
|
Balance Sheet Data (end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit) |
|
$ |
(12,712 |
) |
$ |
(43,204 |
) |
$ |
(37,578 |
) |
$ |
(29,161 |
) |
$ |
(23,981 |
) |
$ |
(7,778 |
) |
Total assets |
|
|
922,617 |
|
|
767,677 |
|
|
783,032 |
|
|
789,383 |
|
|
799,847 |
|
|
933,905 |
|
Minority interest |
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
520 |
|
Shareholders' equity |
|
|
513,367 |
|
|
408,887 |
|
|
439,947 |
|
|
467,746 |
|
|
522,577 |
|
|
507,549 |
|
- (1)
- Includes
the results of ResortQuest Hawaii and ResortQuest Real Estate of Hawaii, (collectively referred to herein as "RQH"), since its acquisition on May 31, 2007.
113
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidated Financial Statements of Interval Leisure Group, Inc. and subsidiaries ("ILG") reflect adjustments
to the historical consolidated financial statements of ILG to give effect to the separation and related financing transactions described in the notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements as of March 31, 2008 for the Unaudited Pro Forma Condensed Consolidated Balance Sheet and as of January 1, 2007 and January 1, 2008 for the Unaudited Pro
Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2007 and the three months ended March 31, 2008, respectively.
The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and ILG believes such assumptions are reasonable under the
circumstances. While at this time ILG does not expect material changes to the terms of the separation, the finalization of the financing described in the notes hereto is still subject to credit market
conditions at the time that the financing actually occurs. Given the volatility in the credit markets, it is possible that material changes may occur with respect to the financing.
The following Unaudited Pro Forma Condensed Consolidated Financial Statements should be read in conjunction with the historical consolidated financial statements of ILG and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of ILG included in this information statement.
These Unaudited Pro Forma Condensed Consolidated Financial Statements are not necessarily indicative of ILG's results of operations or financial condition had the separation and related
transactions been completed on the dates assumed. Also, they may not reflect the results of operations or financial condition which would have resulted had ILG been operating as an independent
publicly traded company during such periods. In addition, they are not necessarily indicative of ILG's future results of operations or financial condition.
These Unaudited Pro Forma Condensed Consolidated Financial Statements are forward looking information within the meaning of "Forward-Looking Statements" as described on
pages 2-3 of this Information Statement.
114
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2008
|
|
Historical
|
|
Pro Forma
Adjustments
|
|
Notes
|
|
Pro Forma
|
|
|
(In thousands, except share data)
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
69,242 |
|
$ |
440,000 |
|
(a) |
|
$ |
119,000 |
|
|
|
|
|
|
(390,242 |
) |
(b) |
|
|
|
Other current assets |
|
|
95,918 |
|
|
|
|
(a) |
|
|
95,918 |
|
|
|
|
|
|
|
|
|
|
Total current asset |
|
|
165,160 |
|
|
49,758 |
|
|
|
|
214,918 |
Non-current assets |
|
|
768,745 |
|
|
10,000 |
|
(a) |
|
|
778,745 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
933,905 |
|
$ |
59,758 |
|
|
|
$ |
993,663 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
172,938 |
|
$ |
|
|
(a) |
|
$ |
172,938 |
Long-term debt |
|
|
|
|
|
450,000 |
|
(a) |
|
|
450,000 |
Other long-term liabilities |
|
|
252,898 |
|
|
|
|
|
|
|
252,898 |
Minority interest |
|
|
520 |
|
|
|
|
|
|
|
520 |
SHAREHOLDERS' EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
Common shares, $0.01 par value,authorized; 55,747,109 issued and outstanding on a pro forma basis |
|
|
|
|
|
557 |
|
(b) |
|
|
557 |
Additional paid-in capital |
|
|
|
|
|
115,589 |
|
(b) |
|
|
115,589 |
Invested capital |
|
|
726,760 |
|
|
(726,760 |
) |
(b) |
|
|
|
Receivables from IAC and subsidiaries |
|
|
(467,664 |
) |
|
467,664 |
|
(b) |
|
|
|
Retained earnings |
|
|
247,292 |
|
|
(247,292 |
) |
(b) |
|
|
|
Accumulated other comprehensive income |
|
|
1,161 |
|
|
|
|
|
|
|
1,161 |
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity |
|
|
507,549 |
|
|
(390,242 |
) |
|
|
|
117,307 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
|
$ |
933,905 |
|
$ |
59,758 |
|
|
|
$ |
993,663 |
|
|
|
|
|
|
|
|
|
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are an integral part of these statements.
115
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
MARCH 31, 2008
|
|
Historical
|
|
Pro Forma
Separation
Adjustments
|
|
Notes
|
|
Pro Forma
for the
Separation
|
|
Pro Forma
Financing
Adjustments
|
|
Notes
|
|
Final
Pro Forma
for the
Separation
and
Financing
|
|
|
(In thousands, except per share data)
|
Revenue |
|
$ |
115,937 |
|
$ |
|
|
|
|
$ |
115,937 |
|
$ |
|
|
|
|
$ |
|
Operating expenses |
|
|
76,973 |
|
|
1,635 |
|
(c) |
|
|
79,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
719 |
|
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
38,964 |
|
|
(2,354 |
) |
|
|
|
36,610 |
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2,016 |
|
|
(1,276 |
) |
(e) |
|
|
740 |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(60 |
) |
|
|
|
|
|
|
(60 |
) |
|
|
|
(f) |
|
|
|
|
Other expense |
|
|
(500 |
) |
|
|
|
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
1,456 |
|
|
(1,276 |
) |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
40,420 |
|
|
(3,630 |
) |
|
|
|
36,790 |
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(15,604 |
) |
|
1,406 |
|
(g) |
|
|
(14,198 |
) |
|
|
|
(g) |
|
|
|
Minority interest in income of consolidated subsidiaries |
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,808 |
|
$ |
(2,224 |
) |
|
|
$ |
22,584 |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:(h) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
|
|
Diluted earnings per share |
|
$ |
|
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are an integral part of these statements.
116
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007
|
|
Historical
|
|
Pro Forma
Separation
Adjustments
|
|
Notes
|
|
Pro Forma
for the
Separation
|
|
Pro Forma
Financing
Adjustments
|
|
Notes
|
|
Final
Pro Forma
for the
Separation
and
Financing
|
|
|
(In thousands, except per share data)
|
Revenue |
|
$ |
360,407 |
|
$ |
|
|
|
|
$ |
360,407 |
|
$ |
|
|
|
|
$ |
|
Operating expenses |
|
|
253,841 |
|
|
6,940 |
|
(c) |
|
|
263,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,875 |
|
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
106,566 |
|
|
(9,815 |
) |
|
|
|
96,751 |
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
10,345 |
|
|
(7,718 |
) |
(e) |
|
|
2,627 |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(205 |
) |
|
|
|
|
|
|
(205 |
) |
|
|
|
(f) |
|
|
|
|
Other expense |
|
|
(606 |
) |
|
|
|
|
|
|
(606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
9,534 |
|
|
(7,718 |
) |
|
|
|
1,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
116,100 |
|
|
(17,533 |
) |
|
|
|
98,567 |
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(45,032 |
) |
|
6,790 |
|
(g) |
|
|
(38,242 |
) |
|
|
|
(g) |
|
|
|
Minority interest in income of consolidated subsidiaries |
|
|
(12 |
) |
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
71,056 |
|
$ |
(10,743 |
) |
|
|
$ |
60,313 |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:(h) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
|
|
Diluted earnings per share |
|
$ |
|
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are an integral part of these statements.
117
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- (a)
- In
connection with the separation, ILG expects to raise $450 million through a combination of privately issued debt securities (the "Bonds") and secured credit facilities (the
"Term Loan"). In addition, ILG expects to negotiate a $ million revolving credit facility (the "RCF"). The total costs expected to be incurred in connection with the issuance of
the Bonds and borrowings under the Term Loan and establishing the RCF are $10.0 million. The net proceeds are expected to be approximately $440 million. The Bonds are expected to have a
maturity of years from the date of issuance and the Term Loan is expected to have a term of five years. The RCF is expected to have a term of years. The
interest rate on the Bonds is estimated to be % and LIBOR plus % for the Term Loan. The RCF is expected to have a fee of % for the unused
portion.
-
(b)
- To
effect the terms of the separation as follows:
- (i)
- The
transfer of approximately $390.2 million in cash to IAC prior to ILG's separation from IAC, which includes $390 million from the financing referred to in
note (a) above. ILG will retain $50 million in proceeds from the financings as well as its international cash, which is approximately $69.0 million as of March 31, 2008;
- (ii)
- The
extinguishment of the receivable from IAC and subsidiaries; and
- (iii)
- The
issuance of 55.7 million shares to effect the transfer of the ownership of ILG from IAC to IAC's shareholders based upon an expected exchange ratio of
1/5th of a share of ILG for each share of IAC and the number of IAC common shares outstanding as of March 31, 2008 before giving effect to the 1 for 2
reverse stock split of IAC shares that is expected to be effected in connection with the separation.
To
the extent that the net proceeds from the Bonds and Term Loan are less than $440 million, as described in note (a) above, there would be a corresponding reduction in the transfer of
cash to IAC.
-
(c)
- ILG
expects to incur additional cost related to being a stand-alone, public company. These costs have been estimated to be $8.0 million on an annual basis. These costs relate
to the following:
-
- additional
personnel including accounting, tax, treasury, internal audit and legal personnel;
-
- professional
fees associated with audits, tax and other services;
-
- increased
insurance premiums;
-
- increased
health and welfare benefit costs;
-
- costs
associated with a board of directors;
-
- increased
franchise taxes, stock exchange listing fees, fees for preparing and distributing periodic filings with the Securities and Exchange Commission; and
-
- other
administrative costs and fees.
118
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
total costs referred to above were compared to the corporate allocations from IAC for the three months ended March 31, 2008 and for the year ended December 31, 2007 in order to
determine the incremental costs expected to be incurred for each period as follows:
|
|
Three Months Ended
March 31, 2008
|
|
Year Ended
December 31, 2007
|
|
|
|
(In thousands)
|
|
Estimated stand-alone, public company costs |
|
$ |
1,950 |
|
$ |
7,973 |
|
Less: corporate allocations |
|
|
(315 |
) |
|
(1,033 |
) |
|
|
|
|
|
|
Incremental costs of being a stand-alone, public company |
|
$ |
1,635 |
|
$ |
6,940 |
|
|
|
|
|
|
|
The significant assumptions involved in arriving at these estimates include:
-
- the
number of additional personnel required to operate as a public company and the compensation level with respect to each position;
-
- the
level of additional assistance ILG will require from professional service providers;
-
- the
increase in insurance premiums as a stand-alone public company;
-
- the
increase in health and welfare costs as a stand-alone entity; and
-
- the
type and level of other costs expected to be incurred in connection with being a stand-alone, public company.
This
amount excludes the $1.1 million of estimated one-time recruiting fees; professional fees for legal and tax services (e.g. initial benefit plan design); and other costs
(e.g. initial stock exchange listing fees) expected to be incurred in initially establishing ILG as a stand-alone, public company. These costs are therefore not expected to recur.
- (d)
- To
reflect the additional compensation expense associated with equity-based awards that will be granted only upon consummation of the separation.
The
awards related to the consummation of the separation are expected to be granted to certain members of executive management of ILG in the form of restricted stock units ("RSUs"). The issuance of
these awards is contingent upon the consummation of the separation. The expense related to these awards is included as a pro forma adjustment because they will vest over four years and will therefore
have an impact on the ongoing operations of ILG. The aggregate estimated value of the awards is being amortized to expense on a straight-line basis over the four year vesting period of the
awards. This does not reflect non-recurring compensation expense related to modifications of existing IAC RSUs that will be made in connection with the separation described below.
The modification related to IAC issued RSUs relates to the accelerated vesting, upon the consummation of the separation, of all RSUs granted prior to August 8, 2005 and all awards that were
scheduled to vest prior to February 28, 2009. The estimated expense of $3.3 million is the previously unrecognized expense associated with these awards. The expense is treated as
non-recurring because after the separation no future service is required with respect to these awards.
119
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There may be additional stock-based awards granted in connection with the separation but the amount of such awards, if any, has not yet been determined and no expense with respect thereto has been
reflected herein.
- (e)
- To
reflect the elimination of intercompany interest income allocated by IAC to ILG.
- (f)
- This
reflects the incremental interest expense related to the financing referred to in note (a) above. It includes interest expense at an assumed rate of % on the
Bonds and LIBOR plus % on the Term Loan, LIBOR is assumed to be %, the aggregate assumed rate is therefore %. It also reflects expense
at % on
the RCF which is assumed to be unused. The interest expense calculation includes the amortization of debt issuance costs over the applicable term of each portion of the financing. An assumed 25 basis
point change in the interest rate would result in an increase or decrease to interest expense of $ million for the Bonds and $ million for the Term Loan.
- (g)
- To
reflect the tax effect of the pro forma adjustments at an assumed effective tax rate of 38.7% which represents a federal statutory tax rate of 35% and a state effective statutory
tax rate of 3.7%.
- (h)
- Earnings
per share and weighted average shares outstanding reflect the historical number of common shares used to calculate IAC's earnings per share, adjusted based on an expected
exchange ratio of 1/5th of a share of ILG for each share of IAC before giving effect to the 1 for 2 reverse stock split for IAC shares that is expected to be effected in connection with
the separation. These amounts reflect the outstanding equity-based awards that were included in IAC's dilutive earnings per share calculation. Pro forma earnings per share is calculated using the
following:
|
|
Three Months Ended
March 31, 2008
|
|
Year Ended
December 31, 2007
|
|
|
(In thousands)
|
Net income |
|
$ |
|
|
$ |
|
|
|
|
|
|
Basic shares outstandingweighted average shares |
|
|
55,753 |
|
|
57,137 |
Other dilutive securities including stock options, warrants and restricted stock and share units |
|
|
1,496 |
|
|
2,729 |
|
|
|
|
|
Diluted shares outstandingweighted average shares |
|
|
57,249 |
|
|
59,866 |
|
|
|
|
|
120
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ILG
The following discussion describes the financial condition and results of operations of Interval Leisure Group, Inc. ("ILG") as
though ILG were a separate company as of the dates and for the periods presented and includes the businesses, assets and liabilities that will comprise ILG following the
spin-off.
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying ILG as one of those five companies. We refer to the separation transaction herein as the "spin-off". In connection with the spin-off, ILG was incorporated as a
Delaware corporation in May 2008. ILG currently does not have any material assets or liabilities, nor does it engage in any business or other activities and, other than in connection with the
spin-off, will not acquire or incur any material assets or liabilities, nor will it engage in any business or other activities. Upon completion of the spin-off, ILG will
consist of Interval and ResortQuest Hawaii and ResortQuest Real Estate of Hawaii, collectively referred to herein as "RQH", which was acquired on May 31, 2007, the businesses that formerly
comprised IAC's Interval segment. The businesses to be operated by ILG following the spin-off are referred to herein as the "ILG Businesses".
Basis of Presentation
The historical consolidated financial statements of ILG and its subsidiaries and the disclosure set forth in this Management's Discussion and Analysis of
Financial Condition and Results of Operations of ILG reflect the contribution or other transfer to ILG of all of the subsidiaries and assets and the assumption by ILG of all of the liabilities
relating to the ILG Businesses in connection with the spin-off, and the allocation to ILG of certain IAC corporate expenses relating to the ILG Businesses. Accordingly, the historical
consolidated financial statements of ILG reflect the historical financial position, results of operations and cash flows of the ILG Businesses since their
respective dates of acquisition by IAC, based on the historical consolidated financial statements and accounting records of IAC and using the historical results of operations and historical bases of
the assets and liabilities of the ILG Businesses with the exception of accounting for income taxes. For purposes of these financial statements, income taxes have been computed for ILG on an as if
stand-alone, separate tax return basis. Intercompany transactions and accounts have been eliminated.
In
the opinion of ILG's management, the assumptions underlying the historical consolidated financial statements of ILG are reasonable. However, this financial information does not
necessarily reflect what the historical financial position, results of operations and cash flows of ILG would have been had ILG been a stand-alone company during the periods presented.
121
MANAGEMENT OVERVIEW
ILG is a leading provider of membership services, primarily to the vacation ownership industry, through Interval. With the acquisition of RQH in May 2007, ILG
also entered the vacation rental and property management services industry.
Sources of Revenue
Vacation ownership membership services revenue is generated primarily from membership fees and transactional fees paid for exchange and Getaway transactions
(i.e., vacations). Interval typically enters into multi-year contracts with developers of vacation ownership resorts, pursuant to which the developers agree to enroll all purchasers of
vacation interests at the applicable resort as members of Interval's exchange programs. In return, Interval provides enrolled purchasers with the ability to exchange the use and occupancy of their
vacation interest at the home resort (generally for periods of one week) for the right to occupy accommodations at a different resort participating in Interval's network or at the same resort during a
different period of occupancy. Members are also generally eligible to participate in the program's other value-added member services. Developers generally remit Interval's initial basic membership fee
and, where applicable, upgraded membership fees, on behalf of their respective owners for membership periods ranging from one to three years at the time the vacation interests are sold. In most cases,
vacation interest owners are responsible for renewing their memberships and paying related fees. However, some developers have incorporated Interval's membership fees into their annual assessments and
these owners' memberships are renewed annually by the developer during the period of the resort's participation in the Interval network. In connection with its vacation ownership membership services
business, Interval also provides travel-related services for members as well as support, consulting and back-office services for developers participating in the Interval exchange programs.
Through Interval's Getaway program, members may rent resort accommodations for a fee, plus applicable taxes, without relinquishing the use of their vacation interests. For the year ended
December 31, 2007, ILG's vacation ownership membership services business represented 88% of its revenue.
ILG, through RQH, also provides vacation rental and property management services for owners of condominium hotels and hotel management services to owners of traditional hotels. Revenue
from RQH is derived principally from management fees for vacation rental services and property management services. Property management fees consist of a base management fee and, in some
instances, an incentive fee. Property management agreements may provide that owners receive a specified portion of the revenue generated while the relevant properties are under RQH management. In
these cases, the operating expenses for the rental operation are paid from the revenue generated by the accommodations rentals. The owners are then paid their contractual percentages, and RQH either
retains the balance (if any) as its management fee or is required to make up the deficit. Revenue is also derived from fees for hotel management services. For the year ended December 31, 2007,
ILG's vacation rental and property management services business represented 12% of its revenue.
Channels of Distribution; Marketing Costs
ILG markets and offers services directly to customers through call centers and branded websites allowing customers to transact directly with ILG in a convenient
manner. ILG also markets its value-added, operational and sales and marketing support services directly to developers and the benefits of membership directly to prospective owners of vacation
interests. ILG also markets and distributes its services through its various customer and industry publications and through third party distribution channels, including, without limitation, online
travel intermediaries and, to a limited degree, via internet search engines.
122
Access to Supply
ILG's vacation ownership membership services business is dependent upon vacation ownership developers for new members and resort accommodations for use in its
exchange and Getaway programs, as well as upon members to renew their existing memberships. Its vacation rental and property management business is dependent upon vacation property owners and hotels
for vacation properties to manage and rent to vacationers. ILG's businesses have established strong relationships with developers, members and managed property owners pursuant to contractual
arrangements, although there are no assurances that these historical relationships will continue beyond their contractual term in the future.
International Operations
ILG continues to seek to expand its vacation ownership membership services business abroad, especially in the Middle East and Asia. International revenue grew
approximately 15% in 2007 from
2006. However, as a percentage of total ILG revenue, international revenue was approximately 16% in 2007 and approximately 18% in both 2006 and 2005. This decrease is due to domestic revenue growing
at a faster rate during this time period primarily due to the acquisition of RQH in 2007.
Economic and Other Trends and Events; Industry Specific Factors
Growth in the vacation ownership membership services industry is driven primarily by the number of vacation interests sold to new purchasers. In 2007, the number
of U.S.-based households owning vacation interests increased to approximately 4.4 million, an increase of approximately 300,000 households, from the number reported for 2006. Continued growth
is expected to be driven by: (i) increased consumer awareness and acceptance of the value and benefits of the ownership of vacation interests (ii) adoption of constructive legislation
and regulations internationally that improve consumer protection and allow businesses to operate profitably; (iii) the entry of additional independent developers and brand-name
hospitality companies into the vacation ownership industry, which will increase the number of vacation interests available for sale; and (iv) reported demand for vacation ownership products in
the U.S., whereby an estimated 5% of all adult leisure travelers familiar with the concept of vacation ownership have expressed an interest in acquiring a vacation interest at some point before
February 2010 which equates to an estimated potential market consisting of approximately 6.0 million potential purchasers. The vacation ownership membership services industry growth is
also driven by the continued development and offering of new vacation ownership accommodations and alternative vacation ownership related products.
ILG believes that the overall supply of vacation rental properties has been increasing as a result of the growth in second/vacation home ownership and the increasing desire among many
owners to rent their properties for additional income. An increasing percentage of second/vacation home (including condominiums and shared ownership properties) purchasers have cited the ability to
generate rental income as a motivating factor for their purchase decision. Property management and vacation rental companies facilitate the rental process by handling most, if not all, aspects of
interaction with vacationers. Growth in the marketplace is due, in some part, to the numbers of resorts entering the condo space as a means to capitalize on overall property construction through the
upfront sales of vacation condos. Additionally, consumer reasoning with regard to the usage of vacation property as an investment to rent, for supplemental income, may be a stimulus for market growth.
Condominium accommodations typically provide substantial value to the consumer seeking more than a nightly stay, as they offer families greater space and convenience than a traditional hotel room by
offering separate living, sleeping and eating quarters. Continued growth in leisure travel, as well as improved product awareness and customer convenience through direct and indirect online
distribution channels, is also expected to drive this growth.
123
Results of Operations for the Years Ended December 31, 2007, 2006 and 2005
Revenue
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Interval |
|
$ |
318,370 |
|
10% |
|
$ |
288,646 |
|
11% |
|
$ |
260,843 |
RQH |
|
|
42,037 |
|
N/A |
|
|
N/A |
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
360,407 |
|
25% |
|
$ |
288,646 |
|
11% |
|
$ |
260,843 |
|
|
|
|
|
|
|
|
|
|
|
Revenue in 2007 increased $71.8 million, or 25%, from 2006 primarily due to the acquisition of RQH on May 31, 2007, which contributed $42.0 million to ILG's revenue
in 2007. Excluding RQH, revenue grew 10%. This was driven by a 13% growth in revenue from confirmed vacations and a 10% increase in membership revenue. Confirmed vacations revenue, which includes
transactional fees paid for exchange and Getaway transactions (i.e. vacations), increased due to a 6% increase in volume, as well as a higher average fee compared to the prior year. Membership revenue
grew due to a 6% increase in active members reflecting strong new member growth combined with a sustained retention rate. Total active members increased by 0.1 million from 2006 to
approximately 2.0 million.
Revenue
in 2006 increased $27.8 million, or 11%, from 2005 primarily due to a 5% increase in confirmed vacations and higher average fees in the vacation ownership membership
services business. Total active members increased 4% to nearly 1.9 million.
ILG cannot say with certainty how an additional increase in fees for vacations in 2008 would impact growth of vacation ownership interests. Historically, when ILG has increased fees its
active members and confirmed vacations have continued to increase.
Cost of Sales
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Cost of sales |
|
$100,799 |
|
52% |
|
$66,293 |
|
9% |
|
$60,794 |
As a percentage of total revenue |
|
28% |
|
500 bp |
|
23% |
|
(34) bp |
|
23% |
Gross margins |
|
72% |
|
(500) bp |
|
77% |
|
34 bp |
|
77% |
Cost
of sales consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in servicing Interval's members as well as
the cost of rental inventory for confirmed vacations. In 2007, due to the acquisition of RQH, cost of sales also includes compensation and other employee-related costs for personnel engaged in
providing services to property owners and/or guests.
Cost
of sales in 2007 increased $34.5 million from 2006, primarily due to the acquisition of RQH, which contributed $29.6 million to ILG's cost of sales. Gross margins
decreased 6% principally due to the inclusion of RQH. Excluding the impact of RQH, cost of sales increased $4.9 million in 2007 primarily due to an increase of $4.6 million in the cost
of rental inventory in order to fulfill confirmed vacations.
Cost
of sales in 2006 increased $5.5 million from 2005, primarily due to an increase of $2.3 million in the cost of rental inventory for confirmed vacations and an increase
of $1.9 million in compensation and other employee-related costs associated, in part, with an increase in contract labor related to outsourced home-based call center agents.
124
Selling and marketing expense
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Selling and marketing expense |
|
$45,835 |
|
10% |
|
$41,635 |
|
8% |
|
$38,424 |
As a percentage of total revenue |
|
13% |
|
(171) bp |
|
14% |
|
(31) bp |
|
15% |
Selling
and marketing expense consists primarily of commission expense, advertising and promotional expenditures and compensation and other employee-related costs (including stock-based
compensation) for personnel engaged in sales and sales support functions. Advertising and promotional expenditures primarily include printing and postage costs of directories and magazines,
promotions, tradeshows and agency fees.
Selling
and marketing expense in 2007 increased $4.2 million from 2006, primarily due to the acquisition of RQH, which contributed $2.0 million to ILG's selling and
marketing expense. Excluding the impact of RQH, selling and marketing expense increased $2.2 million in 2007 primarily due to an increase in compensation and other employee-related costs,
partially offset by lower advertising and promotional expenditures.
Selling
and marketing expense in 2006 increased $3.2 million from 2005, primarily due to increases of $2.1 million in commission expense and $0.9 million in
compensation and other employee-related costs. The increase in commission expense is principally driven by the increase in revenue described above.
General and administrative expense
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
General and administrative expense |
|
$71,913 |
|
17% |
|
$61,538 |
|
9% |
|
$56,213 |
As a percentage of total revenue |
|
20% |
|
(137) bp |
|
21% |
|
(23) bp |
|
22% |
General
and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax,
human resources, information technology and executive management functions, facilities costs and fees for professional services.
General
and administrative expense in 2007 increased $10.4 million from 2006, primarily due to an increase in compensation and other employee-related costs, as well as the impact
of the RQH acquisition in 2007, which contributed $2.9 million to ILG's general and administrative expense. Excluding the impact of RQH, general and administrative expense increased
$7.5 million in 2007 primarily due to an increase of $6.2 million in compensation and other employee-related costs associated, in part, with an 8% increase in headcount. ILG expects to
incur increased costs related to
the additional financial and legal requirements associated with being a separate public company, as well as increased non-cash compensation associated with the modification of existing stock-based
compensation awards in connection with the spin-off and the grant of new awards post spin-off.
General
and administrative expense in 2006 increased $5.3 million from 2005, primarily due to increases of $2.9 million in compensation and other employee-related costs,
$0.5 million in facility costs and $0.5 million in professional fees. The increase in compensation and other employee-related costs is primarily due to an increase of $1.7 million
in non-cash compensation expense. This non-cash compensation expense is related to equity awards granted by IAC to employees of ILG and is recorded over the vesting period of
the awards.
125
Effective
January 1, 2006, ILG adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the
modified prospective transition method. There was no impact to the amount of stock-based compensation recorded in the consolidated statements of operations as ILG had previously adopted the expense
recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The majority of stock-based compensation expense is reflected in general and
administrative expense. As of December 31, 2007, there was approximately $14.0 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based
awards, which is expected to be recognized over a weighted average period of approximately 3.0 years.
Depreciation
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Depreciation |
|
$8,415 |
|
7% |
|
$7,832 |
|
6% |
|
$7,368 |
As a percentage of total revenue |
|
2% |
|
(38) bp |
|
3% |
|
(11) bp |
|
3% |
Depreciation
in 2007 increased $0.6 million from 2006, primarily due to the acquisition of RQH. Excluding the impact of RQH, depreciation in 2007 was relatively flat.
Depreciation
in 2006 increased $0.5 million from 2005, primarily due to the incremental depreciation associated with certain information technology projects that were placed in
service during late 2005 and 2006.
Operating Income Before Amortization
Operating Income Before Amortization is a Non-GAAP measure and is defined in "ILG's Principles of Financial Reporting".
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Operating Income Before Amortization |
|
$137,074 |
|
20% |
|
$114,634 |
|
15% |
|
$99,303 |
As a percentage of total revenue |
|
38% |
|
(168) bp |
|
40% |
|
164 bp |
|
38% |
Operating
Income Before Amortization in 2007 increased $22.4 million from 2006, growing at a slower rate than revenue due primarily to the inclusion of the results of RQH in 2007.
Excluding the impact of RQH, Operating Income Before Amortization grew to $129.9 million. This increase is due to the higher revenue noted above and lower advertising and promotional
expenditures, partially offset by increases of $7.5 million in general and administrative expense and $4.9 million in cost of sales.
For
full-year 2007 compared to 2006, RQH's Operating Income Before Amortization was $12.8 million in 2007 compared to $12.4 million in 2006, relatively unchanged as
expenses increased in line with revenue.
Operating
Income Before Amortization in 2006 increased $15.3 million from 2005, primarily due to the higher revenue noted above and, to a lesser extent, improved operating
efficiencies. Vacations confirmed online were 24% during 2006 compared with 21% in 2005. Operating Income Before Amortization was also impacted by increases of $5.3 million in general and
administrative expense and $2.3 million in advertising and promotional expenditures.
126
Operating income
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Operating income |
|
$106,566 |
|
24% |
|
$86,128 |
|
18% |
|
$72,824 |
As a percentage of total revenue |
|
30% |
|
(27) bp |
|
30% |
|
192 bp |
|
28% |
Operating
income in 2007 increased $20.4 million from 2006, primarily due to the increase in Operating Income Before Amortization described above, partially offset by an increase
of $1.7 million in amortization of intangibles and an increase in non-cash compensation expense. RQH contributed $4.1 million to ILG's operating income in 2007. The increase
in amortization of intangibles results from the acquisition of RQH, partially offset by certain intangible assets being fully amortized in 2007.
Operating
income in 2006 increased $13.3 million from 2005, primarily due to the increase in Operating Income Before Amortization described above, partially offset by an increase
of $2.0 million in non-cash compensation expense.
Other income (expense)
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
10,345 |
|
16 |
% |
$ |
8,914 |
|
37 |
% |
$ |
6,518 |
|
|
Interest expense |
|
|
(205 |
) |
43 |
% |
|
(357 |
) |
43 |
% |
|
(623 |
) |
|
Other expense |
|
|
(606 |
) |
22 |
% |
|
(774 |
) |
(185 |
)% |
|
(272 |
) |
Interest
income in 2007 increased $1.4 million from 2006, primarily due to higher receivable balances due from IAC and subsidiaries, as well as increased interest earned on higher
average cash balances in 2007. Interest income in 2006 increased $2.4 million from 2005 primarily due to higher receivable balances due from IAC and subsidiaries. The increase in the receivable
balance is principally due to cash transfers to IAC in connection with IAC's centrally managed U.S. treasury function.
Income tax provision
ILG recorded income tax provisions of $45.0 million, $35.9 million and $29.2 million, for the years ended December 31, 2007, 2006 and
2005, respectively, which represents effective tax rates of 39%, 38% and 37%, respectively. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income
taxes partially offset by foreign income taxed at lower rates.
ILG
adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109"
("FIN 48") effective January 1, 2007. The cumulative effect of the adoption resulted in an increase of $0.2 million to retained earnings. As of January 1, 2007 and
December 31, 2007, ILG had unrecognized tax benefits of approximately $4.0 million and $7.3 million, respectively, which included accrued interest of $1.0 million and
$1.6 million, respectively.
By
virtue of previously filed separate company and consolidated tax returns with IAC, ILG is routinely under audit by federal, state, local and foreign authorities in the area of income
tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient
to pay assessments that may result from examination of prior year returns; however, the amount paid upon
127
resolution
of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by ILG are recorded in the period they become known.
The
Internal Revenue Service ("IRS") is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of
Interval from September 24, 2002, its date of acquisition by IAC. The statute of limitations for these years has been extended to December 31, 2008. Tax filings in various state, local
and foreign jurisdictions are currently under examination, the most significant of which are Florida, New York state and New York City, for various tax years after December 31, 2001. These
examinations are expected to be completed by late 2008. ILG believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $2.9 million within twelve
months of the current reporting date due primarily to the reversal of deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of
other changes in unrecognized benefits cannot be made, but are not expected to be significant.
Under
the terms of the tax sharing agreement, which will be executed in connection with the spin-off, IAC will generally retain the liability related to federal and state tax returns
filed on a consolidated or unitary basis for all periods prior to the spin-off.
128
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2007, ILG had $72.9 million of cash and cash equivalents and restricted cash and cash equivalents, $64.8 million of which
is held in foreign jurisdictions, principally the United Kingdom, and is subject to changes in foreign exchange rates. The majority of ILG's cash is in the United Kingdom due to its participation in
IAC's centrally managed treasury function in the U.S., its European businesses operating through licensing arrangements with its United Kingdom entity and the reinvestment of the related earnings in
the United Kingdom. ILG conducts business in one foreign country where a currency restriction exists. At December 31, 2007 ILG had $5.1 million of cash which can only be repatriated upon
the approval of that country's government. ILG has requested approval for a portion of the cash to be repatriated. This request is currently pending.
Net
cash provided by operating activities was $125.6 million and $106.4 million in 2007 and 2006, respectively. The increase of $19.2 million in net cash provided by
operating activities is principally due to higher net income and increased deferred revenue. These items were partially offset by increases in accounts receivable and prepaid expenses and other
current assets.
Net
cash used in investing activities in 2007 of $208.9 million primarily resulted from acquisitions, net of cash acquired, of $114.1 million, cash transfers to IAC of
$84.5 million and capital expenditures of $10.3 million. The cash transfers to IAC relate to IAC's centrally managed U.S. treasury function. Net cash used in investing activities in 2006
of $110.2 was primarily related to cash transfers to IAC of $103.6 million and capital expenditures of $6.7 million.
Net cash provided by financing activities in 2007 of $112.2 million was primarily due to capital contributions of $114.1 million from IAC to fund ILG's 2007 acquisitions.
Cash used in financing activities in 2006 of $0.5 million was primarily due to excess tax benefits from stock-based awards.
129
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
|
|
(In thousands)
|
Purchase obligations(a) |
|
$ |
10,587 |
|
$ |
4,177 |
|
$ |
3,150 |
|
$ |
2,173 |
|
$ |
1,087 |
Operating leases |
|
|
74,943 |
|
|
9,333 |
|
|
14,592 |
|
|
12,429 |
|
|
38,589 |
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
85,530 |
|
$ |
13,510 |
|
$ |
17,742 |
|
$ |
14,602 |
|
$ |
39,676 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- The
purchase obligations primarily relate to future space purchases.
|
|
Amount of Commitment Expiration Per Period
|
Other Commercial Commitments*
|
|
Total Amounts
Committed
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
|
|
(In thousands)
|
Guarantees, surety bonds and letters of credit |
|
$ |
32,612 |
|
$ |
25,040 |
|
$ |
3,722 |
|
$ |
1,806 |
|
$ |
2,044 |
|
|
|
|
|
|
|
|
|
|
|
- *
- Commercial
commitments are funding commitments that could potentially require performance in the event of demands by third parties or contingent events, such as under lines of credit
extended or under guarantees.
Off-Balance Sheet Arrangements
Other than the items described above, ILG does not have any off-balance sheet arrangements as of December 31, 2007.
130
Results of Operations for the Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007
Revenue
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Interval |
|
$ |
96,834 |
|
12% |
|
$ |
86,433 |
RQH |
|
|
19,103 |
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
Total revenue |
|
$ |
115,937 |
|
34% |
|
$ |
86,433 |
|
|
|
|
|
|
|
Revenue in 2008 increased $29.5 million, or 34%, from 2007 primarily due to the acquisition of RQH on May 31, 2007, which contributed $19.1 million to ILG's revenue
in 2008. Excluding RQH, revenue grew 12%. This was driven by a 13% growth in revenue from confirmed vacations and a 9% increase in membership revenue. Confirmed vacations revenue, which includes
transactional fees paid for exchange and Getaway transactions (i.e. vacations), increased due to a 6% increase in volume as well as a higher average fee compared to the prior year period. Membership
revenue grew due to a 4% increase in active members in addition to an increase in average fee. Total active members increased by 0.1 million from 2007 to approximately 2.0 million.
Cost of sales
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Cost of sales |
|
$36,033 |
|
90% |
|
$18,944 |
As a percentage of total revenue |
|
31% |
|
916 bp |
|
22% |
Gross margins |
|
69% |
|
(916) bp |
|
78% |
Cost of sales consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in servicing Interval's members as well as
the cost of rental inventory for confirmed vacations. Beginning in the second quarter of 2007, due to the acquisition of
RQH, cost of sales also includes compensation and other employee-related costs for personnel engaged in providing services to property owners and/or guests.
Cost of sales in 2008 increased $17.1 million from 2007, primarily due to the acquisition of RQH, which contributed $12.7 million to ILG's cost of sales. Gross margins
decreased 7% principally due to the inclusion of RQH. Excluding the impact of RQH, cost of sales increased $4.4 million in 2008 primarily due to increases of $1.9 million in compensation
and other employee-related costs and $1.3 million in the cost of rental inventory in order to fulfill confirmed vacations. The increase in compensation and other employee-related costs is due
in part to an increase in contract labor related to both in-house and outsourced home-based call center agents.
Selling and marketing expense
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Selling and marketing expense |
|
$12,263 |
|
5% |
|
$11,662 |
As a percentage of total revenue |
|
11% |
|
(292) bp |
|
13% |
131
Selling and marketing expense consists primarily of commission expense, advertising and promotional expenditures and compensation and other employee-related costs (including stock-based
compensation) for personnel engaged in sales and sales support functions. Advertising and promotional expenditures primarily include printing and postage costs of directories and magazines,
promotions, tradeshows and agency fees.
Selling and marketing expense in 2008 increased $0.6 million from 2007, due to the acquisition of RQH, which contributed $1.0 million to ILG's selling and marketing
expense. Excluding the impact of RQH, selling and marketing expense decreased $0.4 million in 2008 primarily due to decreased advertising and promotional expenditures, partially offset by an
increase in compensation and other employee-related costs. The decrease in advertising and promotional expenditures is due in part to the timing of an industry tradeshow.
General and administrative expense
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
General and administrative expense |
|
$19,965 |
|
26% |
|
$15,805 |
As a percentage of total revenue |
|
17% |
|
(106) bp |
|
18% |
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax,
human
resources, information technology and executive management functions, facilities costs and fees for professional services.
General and administrative expense in 2008 increased $4.2 million from 2007, primarily due to an increase in compensation and other employee-related costs, as well as the impact
of the RQH acquisition in 2007, which contributed $1.4 million to ILG's general and administrative expense. Excluding the impact of RQH, general and administrative expense increased
$2.8 million in 2008 primarily due to an increase of $2.1 million in compensation and other employee-related costs associated, in part, with a 6% increase in headcount. ILG expects to
incur increased costs related to the additional financial and legal requirements associated with being a separate public company, as well as increased non-cash compensation associated with
the modification of existing stock-based compensation awards in connection with the spin-off and the grant of new awards in connection with and subsequent to the spin-off.
General and administrative expense includes non-cash compensation expense of $1.2 million in 2008 compared with $0.3 million in 2007. The increase in
non-cash compensation expense is primarily due to equity grants issued subsequent to the first quarter of 2007. As of March 31, 2008, there was approximately $16.4 million of
unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is currently expected to be recognized over a weighted average period of approximately
3.3 years (exclusive of the impact of the modification related to the spin-off, which consists of the accelerated vesting of certain unvested restricted stock units).
Depreciation
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Depreciation |
|
$2,235 |
|
18% |
|
$1,888 |
As a percentage of total revenue |
|
2% |
|
(26) bp |
|
2% |
132
Depreciation in 2008 increased $0.3 million from 2007, primarily due to the incremental depreciation associated with capital expenditures made after the first quarter 2007 and the
acquisition of RQH. Excluding the impact of RQH, depreciation increased $0.2 million in 2008.
Operating Income Before Amortization
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Operating Income Before Amortization |
|
$46,836 |
|
22% |
|
$38,499 |
As a percentage of total revenue |
|
40% |
|
(414) bp |
|
45% |
Operating Income Before Amortization in 2008 increased $8.3 million from 2007, growing at a slower rate than revenue due primarily to the inclusion of the results of RQH in 2008.
Excluding the impact of RQH, Operating Income Before Amortization grew to $42.9 million. This increase is due to the higher revenue noted above and lower advertising and promotional
expenditures, partially offset by increases of $4.4 million in cost of sales and $2.8 million in general and administrative expense.
Operating income
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Operating Income |
|
$38,964 |
|
22% |
|
$31,829 |
As a percentage of total revenue |
|
34% |
|
(322) bp |
|
37% |
Operating income in 2008 increased $7.1 million from 2007, primarily due to the increase in Operating Income Before Amortization described above, partially offset by an increase
of $1.0 million in non-cash compensation expense and an increase of $0.2 million in amortization of intangibles. RQH contributed $2.6 million to ILG's operating income
in 2008.
Income tax provision
For the three months ended March 31, 2008 and 2007, ILG recorded tax provisions of $15.6 million and $13.2 million, respectively, which
represent effective tax rates of 39% and 38%, respectively. The tax rates for the three months ended March 31, 2008 and 2007 are higher than the federal statutory rate of 35% due principally to
state and local income taxes partially offset by foreign income taxed at lower rates.
As of December 31, 2007 and March 31, 2008, ILG had unrecognized tax benefits of approximately $5.7 million. Included in unrecognized tax benefits at
March 31, 2008 is approximately $4.9 million for tax positions included in IAC's consolidated tax return filings that will remain a liability of IAC after the spin-off. ILG
recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There were no material accruals for interest for 2008. At March 31, 2008, ILG has
accrued $1.7 million for the payment of interest. There are no material accruals for penalties.
By virtue of previously filed separate ILG and consolidated tax returns with IAC, ILG is routinely under audit by federal, state, local and foreign authorities in the area of income tax.
These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay
assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for
tax contingencies and the amounts owed by ILG are recorded in the period they become known. ILG believes that it is reasonably possible that its unrecognized tax benefits could decrease by
approximately $2.9 million within twelve months of the current reporting date due primarily to the reversal of deductible temporary differences which will result in a corresponding increase in
net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits cannot be made, but are not expected to be significant.
Under the terms of the tax sharing agreement, which will be executed in connection with the spin-off, IAC will generally retain the liability related to federal and state
returns filed on a consolidated or unitary basis for all periods prior to the spin-off.
133
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2008, ILG had $77.6 million of cash and cash equivalents and restricted cash and cash equivalents, $69.0 million of which is
held in foreign jurisdictions, principally the United Kingdom, and is subject to changes in foreign exchange rates. ILG conducts business in a foreign country where currency restriction exists. At
March 31, 2008 ILG had $5.5 million of cash which can only be repatriated upon the approval of that country's government. ILG has requested approval for a portion of the cash to be
repatriated. This request is currently pending.
Net cash provided by operating activities declined from $39.0 million in 2007 to $36.5 million in 2008. This decline was due principally to a greater increase in accounts
receivable related to various renegotiated contracts in 2008, an increase in prepaid membership costs and a smaller contribution from deferred revenue, partially offset by higher net income.
Net cash used in investing activities in 2008 of $35.0 million primarily resulted from cash transfers to IAC of $32.6 million and capital expenditures of
$2.4 million. The cash transfers to IAC relate to IAC's centrally managed U.S. treasury function. Net cash used in investing activities in 2007 of $34.6 million was primarily related to
cash transfers to IAC of $33.0 million and capital expenditures of $1.6 million.
ILG anticipates that it will need to make capital and other expenditures in connection with the development and expansion of it operations.
In connection with the separation, ILG expects to raise $450 million through a combination of privately issued debt securities (the "Bonds") and secured credit facilities (the
"Term Loan"). In addition, ILG expects to negotiate a revolving credit facility (the "RCF"). The total costs expected to be incurred in connection with the issuance of the Bonds and borrowings under
the Term Loan and establishing the RCF are $10.0 million. The net proceeds are expected to be approximately $440.0 million. In connection with the separation, ILG is expected to
distribute the net proceeds of the financing to IAC except for $50 million which it will retain. ILG will also retain its international cash which is approximately $69.0 million as of
March 31, 2008. To the extent that the net proceeds from the Bonds and Term Loans are less than $440.0 million there would be a corresponding reduction in the transfer of cash to IAC.
ILG will describe the terms of these new credit facilities and other indebtedness once ILG has negotiated such terms. Upon completion of the spin-off, intercompany receivable balances will be
extinguished.
ILG's ability to fund its cash and capital needs will be affected by its ongoing ability to generate cash from operations, the overall capacity and terms of its financing arrangements as
discussed above, and access to the equity markets. Given the volatility in the financial markets, IAC and ILG continue to monitor the markets closely and will take steps to maintain financial
flexibility and an appropriate capital structure.
134
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
|
|
(In thousands)
|
Purchase obligations(a) |
|
$ |
10,165 |
|
$ |
3,925 |
|
$ |
2,979 |
|
$ |
2,174 |
|
$ |
1,087 |
Operating leases |
|
|
73,957 |
|
|
9,194 |
|
|
15,184 |
|
|
12,522 |
|
|
37,057 |
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
84,122 |
|
$ |
13,119 |
|
$ |
18,163 |
|
$ |
14,696 |
|
$ |
38,144 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- The
purchase obligations primarily relate to future space purchases.
135
ILG'S PRINCIPLES OF FINANCIAL REPORTING
ILG reports Operating Income Before Amortization as a supplemental measure to generally accepted accounting principles ("GAAP"). This measure is one of the
primary metrics by which ILG evaluates the performance of its businesses, on which its internal budgets are based and by which management is compensated. ILG believes that investors should have access
to the same set of tools that it uses in analyzing its results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be
considered a substitute for or superior to GAAP results. ILG provides and encourages investors to examine the reconciling adjustments between the GAAP and non-GAAP measure which are
discussed below.
Definition of ILG's Non-GAAP Measure
Operating Income Before Amortization is defined as operating income excluding, if applicable:
(1) non-cash compensation expense, (2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions, and
(4) one-time items. ILG believes this measure is useful to investors because it represents the operating results from the ILG Businesses, taking into account depreciation, which ILG
believes is an ongoing cost of doing business, but excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not
take into account the impact to ILG's statement of operations of certain expenses, including non-cash compensation, and acquisition-related accounting. ILG endeavors to compensate for the
limitations of the non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including
quantifying such items, to derive the non-GAAP measure.
Pro Forma Results
ILG will only present Operating Income Before Amortization on a pro forma basis if it views a particular transaction as significant in size or transformational in
nature. For the periods presented in this report, there are no transactions that ILG has included on a pro forma basis.
One-Time Items
Operating Income Before Amortization is presented before one-time items, if applicable. These items are truly one-time in nature and
non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods
presented in this report, there are no one-time items.
Non-Cash Expenses That Are Excluded From ILG's Non-GAAP Measure
Non-cash compensation expense consists principally of expense associated with the grants, including
unvested grants assumed in acquisitions, of restricted stock, restricted stock units and stock options. These expenses are not paid in cash, and ILG will include the related shares in its future
calculations of fully diluted shares outstanding. Upon vesting of restricted stock and restricted stock units and the exercise of certain stock options, the awards will be settled, at ILG's
discretion, on a net basis, with ILG remitting the required tax withholding amount from its current funds.
Amortization of intangibles is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the
intangible assets of the acquired company, such as customer relationships, purchase agreements and property management agreements are valued and amortized over their estimated lives. ILG believes that
since intangibles represent costs incurred by the acquired company to build value prior to acquisition, they were part of transaction costs.
136
RECONCILIATION OF OPERATING INCOME BEFORE AMORTIZATION
For a reconciliation of Operating Income Before Amortization to operating income for ILG's operating segments and to net income in total for the years ended
December 31, 2007, 2006 and 2005, see Note 8 to the consolidated financial statements.
Critical Accounting Policies and Estimates
The following disclosure is provided to supplement the descriptions of ILG's accounting policies contained in Note 2 to the consolidated financial
statements in regard to significant areas of judgment. ILG's management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements in
accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated
financial statements. They also impact the reported amount of net income during any period. Actual results could differ from those estimates. Because of the size of the financial statement elements to
which they relate, some of ILG's accounting policies and estimates have a more significant impact on its consolidated financial statements than others. What follows is a discussion of some of ILG's
more significant accounting policies and estimates.
In accordance with SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), ILG reviews the carrying value of goodwill and indefinite-lived
intangible assets on an annual basis as of October 1 or earlier upon the occurrence of certain events or substantive changes in circumstances. ILG determines the fair value of its reporting
units and indefinite-lived intangible assets based upon an evaluation of expected discounted cash flows. This discounted cash flow analysis utilizes an evaluation of historical and forecasted
operating results. The determination of discounted cash flows is based upon forecasted operating results that may not occur. The annual assessment for 2007 did not identify any impairment charges. The
value of goodwill and indefinite-lived intangible assets that is subject to assessment for impairment in accordance with SFAS 142 is $514.3 million and $33.3 million,
respectively, at December 31, 2007.
ILG reviews the carrying value of all long-lived assets, primarily property and equipment and definite-lived intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), impairment is considered to have occurred whenever the carrying value of a long-lived asset exceeds the sum of the undiscounted cash
flows that is expected to result from the use and eventual disposition of the asset. The determination of cash flows is based upon assumptions that may not occur. The value of long-lived
assets that is subject to assessment for impairment in accordance with SFAS 144 is $190.6 million at December 31, 2007.
Estimates of deferred income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 7, and reflect
management's assessment of actual future taxes to be paid on items reflected in the consolidated financial statements, giving consideration to both timing and the probability of realization. As of
December 31, 2007, the balance of deferred tax liabilities, net, is $66.5 million. Actual income taxes could vary from these estimates due to future changes in income tax law, state
income tax apportionment or the outcome of any review of IAC's tax returns by the IRS, as well as actual operating results of ILG that vary significantly from anticipated results. Effective
January 1, 2007, ILG adopted the provisions of FIN 48. As a result of the adoption of FIN 48, ILG
137
recognizes
liabilities for uncertain tax positions based on the two-step process prescribed by the interpretation. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently difficult and
requires subjective estimations of such amounts to determine the probability of various possible outcomes. ILG considers many factors when evaluating and estimating our tax positions and tax benefits,
which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Seasonality
Revenue at ILG is influenced by the seasonal nature of planned family travel with the first quarter generally experiencing the strongest bookings and the fourth
quarter generally experiencing weaker bookings.
138
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
ILG conducts business in certain foreign markets, primarily in the United Kingdom and the European Union. ILG's primary exposure to foreign currency risk relates
to its investments in foreign subsidiaries that transact business in a functional currency other than the U.S. Dollar, primarily the British Pound Sterling and Euro. However, the exposure is mitigated
as ILG has generally reinvested profits from its international operations. ILG is also exposed to foreign currency risk related to its assets and liabilities denominated in a currency other than the
functional currency.
As currency exchange rates change, translation of the income statements of ILG's international businesses into U.S. dollars affects year-over-year comparability
of operating results. Historically, ILG has not hedged translation risks because cash flows from international operations were generally reinvested locally. Foreign exchange net losses for the years
ended December 31, 2007, 2006 and 2005 were $0.6 million, $0.5 million and $0.2 million, respectively. Foreign exchange net losses for the three months ended
March 31, 2008 and 2007 were $0.5 million and $0.1 million, respectively.
As
ILG increases its operations in international markets it becomes increasingly exposed to potentially volatile movements in currency exchange rates. The economic impact of currency
exchange rate movements on ILG is often linked to variability in real growth, inflation, interest rates, governmental
actions and other factors. These changes, if material, could cause ILG to adjust its financing, operating and hedging strategies.
139
Management of ILG
ILG Board of Directors and Executive Officers
The following table sets forth information as to persons who are expected to serve as ILG directors and executive officers following the spin-offs.
The ILG Board of Directors, the composition of which will comply with the independence requirements under the current standards imposed by the Marketplace Rules, is currently expected to consist of
directors.
Name
|
|
Age
|
|
Position(s)
|
Craig Nash |
|
54 |
|
Chairman, President, Chief Executive Officer
and Director of ILG |
John Galea |
|
52 |
|
Chief Financial Officer of ILG |
Jeanette Marbert |
|
51 |
|
Chief Operating Officer of ILG |
Marie Lee |
|
52 |
|
Chief Information Officer of ILG |
Victoria Kincke |
|
52 |
|
General Counsel of ILG |
Directors
Background information about those individuals who are expected to serve as directors of ILG appears below.
Craig M. Nash, age 54, will serve as Chairman, President, Chief Executive Officer and director of ILG upon completion of the
spin-offs and has served as President and Chief Executive Officer of Interval since June 1999. Prior to assuming this role, Mr. Nash served in a series of increasingly significant
roles with Interval, including as General Counsel and Vice President of Regulatory Affairs. Mr. Nash joined Interval in 1982. Mr. Nash also provides management oversight to the RQH
businesses. Mr. Nash serves on the Board of Directors of the American Resort Development Association and is also a member of its Executive Committee.
Executive Officers
Background about ILG's executive officers who are not expected to serve as directors appears below.
John A. Galea, age 52, will serve as Chief Financial Officer of ILG upon completion of the spin-offs and has served in such
capacity for Interval since October 2006. Prior to his tenure as Chief Financial Officer, Mr. Galea served as Interval's Vice President of Accounting and Corporate Controller since 2000.
Mr. Galea also provides management oversight to the RQH businesses.
Jeanette E. Marbert, age 51, will serve as Chief Operating Officer of ILG upon completion of the spin-offs and has served in
such capacity for Interval since June 1999. Prior to her tenure as Chief Operating Officer, Ms. Marbert served as General Counsel of Interval from 1994 to 1999. Ms. Marbert joined
Interval in 1984.
Marie A. Lee, age 52, will serve as Chief Information Officer of ILG upon completion of the spin-offs and since May 2005 has
served as Chief Information Officer and Senior Vice President, U.S. Operations of Interval. Prior to this time, Ms. Lee served as Chief Information Officer of Interval from January 2004 and
Senior Vice President, Information Technology of Interval from May 2000 to December 2003.
Victoria J. Kincke, age 52, will serve as General Counsel of ILG upon completion of the spin-offs and has served as Senior
Vice President and General Counsel of Interval since May 2005. Prior to this time, Ms. Kincke served as General Counsel of Interval from July 1999. Ms. Kincke joined Interval in 1997.
Ms. Kincke also provides management oversight to the RQH businesses.
140
Committees of the Board of Directors
Concurrent with the completion of the spin-offs, the ILG Board of Directors will establish the following committees, with committee membership to be
determined: the Audit Committee, the Compensation and Human Resources Committee, the Nominating Committee and the Executive Committee.
Audit Committee. The Audit Committee of the ILG Board of Directors will consist of three persons and
the composition of the committee will satisfy the independence requirements under the current standards imposed by the rules of the SEC and the Marketplace Rules. The ILG Board of Directors will
determine which member of the Audit Committee is an "audit committee financial expert," as such term is defined in applicable SEC rules.
The
Audit Committee will function pursuant to a written charter adopted by the ILG Board of Directors, pursuant to which it will be granted the responsibilities and authority necessary
to comply with Rule 10A-3 of the Securities Exchange Act of 1934, as amended. The Audit Committee will be appointed by the ILG Board of Directors to assist the ILG Board with a
variety of matters, including monitoring (1) the integrity of ILG's financial statements, (2) the effectiveness of ILG's internal control over financial reporting, (3) the
qualifications and independence of ILG's independent registered public accounting firm, (4) the performance of ILG's internal audit function and independent registered public accounting firm
and (5) the compliance by ILG with legal and regulatory requirements.
Compensation and Human Resources Committee. The Compensation and Human Resources Committee will be
authorized to exercise all of the powers of the ILG Board of Directors with respect to matters pertaining to compensation and benefits, including, but not limited to, salary matters, incentive/bonus
plans, stock compensation plans, retirement programs and insurance plans. The composition of this committee will satisfy the independence requirements under the current standards imposed by the
Marketplace Rules, as well as applicable SEC and Internal Revenue Service rules.
Nominating Committee. The Nominating Committee will be responsible for identifying individuals
qualified to become members of ILG's Board of Directors, recommending to the Board director nominees for the annual meeting of shareholders and otherwise on an as needed basis. The composition of this
committee will satisfy the independence requirements under the current standards imposed by the Marketplace Rules.
Executive Committee. The Executive Committee will have all the power and authority of the ILG Board
of Directors, except those powers specifically reserved to the ILG Board of Directors by Delaware law or ILG's organizational documents.
Other Committees. In addition to the foregoing committees, the ILG Board of Directors, by resolution,
may from time to time establish other committees of the ILG Board of Directors, consisting of one or more of its directors.
Director Compensation
Non-Employee Director Arrangements. Each member of the ILG Board of Directors will
receive an annual retainer in the amount of $50,000. Each member of the Audit and Compensation and Human Resources Committees (including their respective chairs) will receive an additional annual
retainer in the amount of $10,000. Each member of the Nominating Committee will receive an additional annual retainer in the amount of $5,000. Lastly, the chair of each of the Audit and Compensation
and Human Resources Committees will receive an additional annual chairperson retainer in the amount of $15,000.
In addition, each non-employee director will receive a grant of restricted stock units with a dollar value of $100,000 upon his or her initial election to the ILG Board of
Directors and annually thereafter upon re-election on the date of ILG's annual meeting of stockholders. The terms of these restricted
141
stock units provide for (i) vesting in two equal annual installments commencing on the first anniversary of the grant date, (ii) cancellation and forfeiture of unvested units in their
entirety upon termination of service with the ILG Board of Directors and (iii) full acceleration of vesting upon a change in control of ILG. Non-employee directors are also
reimbursed for all reasonable expenses incurred in connection with attendance at ILG Board and Committee meetings.
The Compensation and Human Resources Committee will have primary responsibility for establishing non-employee director compensation arrangements, which are designed to
provide competitive compensation necessary to attract and retain high quality non-employee directors and to encourage ownership of ILG stock to further align directors' interests with
those of ILG's stockholders. When considering non-employee director compensation arrangements, ILG management will provide the Compensation and Human Resources Committee with information
regarding various types of non-employee director compensation arrangements and practices of select peer companies.
Deferred Compensation Plan for Non-Employee Directors. Under ILG's Deferred Compensation
Plan for Non-Employee Directors, non-employee directors will be able to defer all or a portion of their Board and Board Committee fees. Eligible directors who defer all or any
portion of these fees can elect to have such fees applied to the purchase of share units, representing the number of shares of ILG common stock that could have been purchased on the relevant date, or
credited to a cash fund. If any dividends are paid on ILG common stock, dividend equivalents will be credited on the share units. The cash fund will be credited with deemed interest at an annual rate
equal to the weighted average prime lending rate of JPMorgan Chase Bank. After a director ceases to be a member of the ILG Board of Directors, he or she will receive (i) with respect to share
units, such number of shares of ILG common stock as the share units represent and (ii) with respect to the cash fund, a cash payment in an amount equal to deferred amounts, plus accrued
interest. These payments will be made in either one lump sum or up to five installments, as previously elected by the eligible director at the time of the related deferral election.
Director Independence
Under the Marketplace Rules, ILG's Board will have a responsibility to make an affirmative determination that those members of its Board that serve as independent
directors do not have any relationships with the ILG and its businesses that would impair their independence. In connection with these determinations, ILG's Board will review information regarding
transactions, relationships and arrangements involving ILG and its businesses and each director that it deems relevant to independence, including those required by the Marketplace Rules. This
information is obtained from
director responses to a questionnaire circulated by ILG management, ILG records and publicly available information. Following these determinations, ILG management will monitor those transactions,
relationships and arrangements that are relevant to such determinations, as well as solicit updated information potentially relevant to independence from internal personnel and directors, to determine
whether there have been any developments that could potentially have an adverse impact on ILG's prior independence determinations.
Compensation Committee Interlocks and Insider Participation
ILG's Board of Directors will have a Compensation and Human Resources Committee. It is expected that none of the members of this Committee will be or will have
been in the past an officer or employee of ILG or any of its businesses at the time of their respective service on the Committee.
142
ILG Executive Compensation
Compensation Discussion and Analysis
To date, the compensation of ILG's executive officers has been predominantly determined by IAC, acting in effect as ILG's compensation committee. IAC's
compensation process is principally driven by IAC's General Counsel, who has primary responsibility for administering compensation and making compensation recommendations, with all specific decisions
approved by IAC's Chairman and Chief Executive Officer and, where appropriate, the Compensation Committee of IAC's Board of Directors (specifically with respect to all awards of IAC equity).
This Compensation Discussion and Analysis deals exclusively with historical information while ILG has been a part of IAC. Following the spin-off, ILG will have an independent
board of directors, which will in turn have a compensation committee with responsibility for establishing ILG's compensation philosophy and programs and determining appropriate payments and awards to
its executive officers. Because ILG's compensation committee has not yet been established, ILG cannot predict what compensation philosophies and programs will be adopted following the
spin-off, and therefore this historical report is not necessarily indicative of the practices it will follow when it is an independent public company.
In general, IAC has been responsible for establishing bonus pools and equity pools for ILG, and then such pools are allocated throughout ILG, with IAC directly establishing all
compensation elements for ILG's CEO, while the CEO makes the determinations for ILG's other executive officers, though subject to IAC's review and approval.
Neither ILG nor IAC has an ongoing relationship with any particular compensation consulting firm, though IAC has from time to time retained the services of consultants on specific
occasions regarding broad-based IAC compensation programs. At no time has a consultant been engaged with respect to compensation of any ILG executive officers.
ILG's executive officer compensation program is designed to increase long-term stockholder value by attracting, retaining, motivating and rewarding
leaders with the competence, character, experience and ambition necessary to enable ILG to meet its growth objectives.
When establishing compensation packages for a given executive, ILG has followed a flexible approach, and has made decisions based on a host of factors particular to a given executive
situation, including ILG's firsthand experience with the competition for recruiting and retaining executives, negotiation and discussion with the relevant individual, competitive survey data, internal
equity considerations and other factors deemed relevant at the time. ILG's primary approach has been to pay base salaries at or around market levels while rewarding annual profit growth through an
annual bonus program and long-term value creation through equity participation.
ILG's compensation packages for executive officers have primarily consisted of salary, annual bonuses, long term incentives (typically equity awards), perquisites
and other benefits. Prior to making specific decisions related to any particular element of compensation, ILG typically reviews the total compensation of each executive, evaluating the executive's
total near and long-term compensation in the aggregate. ILG determines which element or combinations of compensation elements (salary, bonus or equity) can be used most effectively to
further our compensation objectives. However, all such
143
decisions are subjective, and made on a facts and circumstances basis without any prescribed relationship between the various elements of the total compensation package.
General. ILG typically negotiates a new executive officer's starting salary upon arrival, based on the executive's prior
compensation history, prior compensation levels for the particular position within ILG, ILG's location, salary levels of other executives within ILG, salary levels available to the individual in
alternative opportunities, reference to certain survey information and the extent to which we desire to secure the executive's services. Mr. Nash's salary has been established through
negotiations with IAC.
Once established, salaries can increase based on a number of factors, including the assumption of additional responsibilities, internal equity, periodic market checks and other factors
which demonstrate an executive's increased value to ILG.
ILG utilizes various salary surveys depending upon the position to determine a market relevant range of salaries for each position. At least two surveys are used in each analysis. ILG
uses the following surveys: Towers Perrin Executive Compensation Data Bank, Radford Executive Survey, and the Mercer Premium Executive Remuneration Survey.
2007. Mr. Nash entered into a new employment agreement with IAC under which his salary was increased from $568,788 to
$650,000 through negotiation. Ms. Marbert received a salary increase from
$300,000 to $350,000 based on discussions between Ms. Marbert and Mr. Nash, and Mr. Nash's views of internal equity. Mr. Galea also received a salary increase from $200,000
to $250,000 based on reviews of market data and internal equity considerations. Ms. Lee and Ms. Kincke both received ordinary course salary increases of approximately 5% effective
January 1, 2007.
2008. Mr. Nash and Ms. Marbert each entered into new employment agreements which will become effective upon the
spin-off (the "New Nash Employment Agreement" and the "New Marbert Employment Agreement", respectively). Under these agreements, Mr. Nash receives a base salary of $750,000, arrived
at by negotiation with Mr. Nash and a recognition by the Company of his increased responsibilities as the Chairman and Chief Executive Officer of a public company. Ms. Marbert will
receive a base salary of $400,000, negotiated by Mr. Nash, which again reflects increased public company responsibilities. Additionally, Ms. Kincke received a raise to $250,000 to reflect her
increased responsibilities as General Counsel of a public company.
General. ILG's bonus program is designed to reward performance on an annual basis. Because of the variable nature of the
bonus program, and because in any given year bonuses have the potential to make up a significant amount of an executive's total compensation, it provides an important incentive tool to achieve ILG's
annual objectives.
IAC establishes the bonus of the CEO based on its view of corporate performance, based on a target level of 100% of salary. In large part, corporate performance has been measured based
on ILG's growth in year over year profitability, generally as measured by Operating Income Before Amortization ("OIBA"), although achievement of strategic objectives is also taken into account.
Mr. Nash's employment agreement also provides for a minimum bonus of $350,000 in the event certain modest OIBA targets are achieved, but these targets are expected to be met, and a subjective
determination of corporate performance is the true driver of Mr. Nash's bonus.
After consultation with ILG management, IAC establishes the annual bonus pool for ILG based on its assessment of ILG's performance for the applicable year.
144
Mr. Nash then allocates the pool to the rest of the company, including to the other executive officers based on individual and corporate success.
ILG generally pays bonuses shortly after year-end following finalization of financial results for the prior year.
2007. In 2007, ILG experienced another solid year of profit growth. IAC paid Mr. Nash a bonus of $800,000, based both
on the OIBA growth of ILG and ILG's successful acquisition of the Resort Quest business. While in 2007 Ms. Marbert's employment agreement expired, ILG paid her bonus based primarily on the
formula that had been set forth in that employment agreement, which provided for a target bonus of 100% of salary, with incremental bonus paid to the extent OIBA exceeded the Company's plan.
Ms. Marbert was paid a bonus of $360,000, slightly more than target. Mr. Galea, Ms. Kincke and Ms. Lee received bonuses based on Mr. Nash's view of corporate
performance and individual contributions, including, in the case of Mr. Galea and Ms. Kincke, in connection with the Resort Quest acquisition.
2008. ILG has agreed to guarantee the 2008 bonuses for Mr. Nash, Ms. Marbert, Ms. Kincke and
Mr. Galea at 100%, 100%, 40% and 40% of salary, respectively, presuming continued employment. This decision was made in light of the strong performance of ILG through May and the significant
effort expended by these individuals in connection with the spin-off transaction.
General. IAC believes that ownership shapes behavior, and that by providing a meaningful portion of an executive officer's
compensation in stock, his or her incentives are aligned with our stockholders' interests in a manner that drives better performance over time. As part of IAC, that led to each ILG executive officer
receiving IAC equity awards on a regular basis.
In setting particular award levels, the predominant objectives are providing the person with effective retention incentives, appropriate reward for past performance and incentives for
strong future performance. Appropriate levels to meet these goals may vary from year to year, and from individual to individual, based on a variety of factors.
The
annual corporate performance factors relevant to setting bonus amounts that were discussed above, while taken into account, are generally less relevant in setting annual equity
awards, as the awards tend to be more forward looking, and are a longer-term retention and reward instrument than our annual bonuses.
Awards to the CEO are made by IAC. Additionally, IAC establishes a pool for annual equity awards which the CEO allocates to the Company's employees, including the executive officers,
subject to IAC's approval. In establishing the equity pool for ILG, IAC has taken into account historical practices, its view of market compensation generally, the dilutive impact of equity grants
across IAC, and other relevant factors. Additionally, IAC approves any equity grants recommended to be made to ILG executives outside of the annual process. Executive officers receive grants that are
subjectively determined based on the CEO's view of how best to allocate the equity pool for retention, reward and motivation based on a host of subjective factors (including past contribution,
retention risk, contribution potential, and market data), with grants equal to annual salary being a basic guideline.
Except where otherwise noted, equity awards are made following year-end after financial results for the prior year have been finalized. The meeting of the Compensation and
Human Resources Committee of the IAC Board at which the awards are made is generally scheduled months in advance and without regard to the timing of the release of earnings or other material
information.
145
Restricted Stock Units. IAC has used restricted stock units, or RSUs, as its exclusive equity compensation tool for ILG
executive officers. Through 2006, these awards generally vested in equal annual installments over five years (annual-vesting RSUs), or cliff vested at the end of five years (cliff-vesting
RSUs). Annual awards were intended to provide frequent rewards and near-term retention incentives, while cliff-vesting RSUs provided more of a long-term retention mechanism.
In February 2007, IAC implemented a new equity instrument, Growth Shares, which were RSU grants that cliff vest at the end of three years in varying amounts depending upon growth in
IAC's publicly reported metric, Adjusted Earnings Per Share, with certain modifications.
These awards were introduced throughout IAC to more closely link long-term reward with IAC's overall performance and to provide greater retentive effect by providing the
opportunity to earn greater amounts through increased IAC performance. However, in connection with the spin-off, these awards will be converted into three-year cliff-vesting
awards at the "target" value (or 50% of the shares actually granted), without variability based on
performance. For information regarding the reasons behind this conversion, see "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
2007. In February of 2007, our executive officers generally received a mix of Growth Shares and annual-vesting RSUs. Ms. Marbert
received grants twice the size of ILG's other executive officers due to her senior position as COO of the company.
Mr. Nash received an award of Growth Shares and annual-vesting RSUs as part of the annual grant process, and then in connection with his entering into a new employment agreement
in July, Mr. Nash received two additional RSU grants, each cliff vesting at the end of four years. One award was for 100,000 RSUs and the other was for up to 75,000 RSUs, with the actual amount
to vest dependent on growth in ILG over the period, however, this performance-based award will be cancelled at the time of the spin-off pursuant to the New Nash Employment Agreement. These
awards were determined by negotiation with Mr. Nash.
2008. In February 2008, Ms. Marbert received 20,000 RSUs, Ms. Kincke and Mr. Galea each received 6,000
RSUs and Ms. Lee received 4,800 RSUs. These grants were larger than those of prior years principally because the overall ILG equity pool was larger than in the past. The larger pool resulted
from IAC's determination that key ILG employees had smaller equity holdings than did comparable individuals at other IAC companies.
Additionally, under the New Nash Employment Agreement and the New Marbert Employment Agreement, Mr. Nash and Ms. Marbert will receive RSU grants at the time of the
spin-off worth $8 million and $2 million, respectively, with 75% of the award vesting annually over four years and 25% of the award vesting at the end of four years. These
amounts were negotiated between IAC and Mr. Nash, and were given in contemplation of, and become effective upon, the spin-off.
Spin-Off Adjustments. In the spin-off, equity awards denominated in IAC stock will be adjusted as
described in "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
146
Presuming
the spin-off transactions occur prior to February 2009, the following table reflects the effect of these adjustments on all equity awards held by ILG's executive
officers:
Name
|
|
RSUs that will
vest upon
completion
of spin-off
transactions (#)
|
|
RSUs that will
be converted
exclusively into
RSUs of ILG
and vest
on regular
schedule (#)
|
|
RSUs that will
be split among the
post-transaction
companies
and vest after
February 2009
on regular
schedule (#)
|
|
Options
outstanding at
December 31,
2007all of
which will be
split among the
post-transaction
companies (#)
|
Craig Nash(1) |
|
40,649 |
|
103,007 |
(1) |
53,715 |
|
|
Jeanette Marbert(2) |
|
17,971 |
|
28,565 |
|
8,362 |
|
|
John Galea(3) |
|
3,852 |
|
11,081 |
|
3,344 |
|
|
Marie Lee(4) |
|
11,802 |
|
13,333 |
|
2,508 |
|
|
Victoria Kincke(5) |
|
2,921 |
|
9,446 |
|
2,508 |
|
|
- *
- Excludes
9,727, 4,962, 2,502, 3,129, and 2,167 RSUs that vested since December 31, 2007 or will vest prior to August 1, 2008 for Mr. Nash, Ms. Marbert,
Mr. Galea, Ms. Lee and Ms. Kincke, respectively.
- (1)
- Excludes
75,000 performance based RSUs that will be cancelled at the time of the spin-offs pursuant to the New Nash Employment Agreement.
ILG believes that providing executives with severance and change of control protection is critical to allowing executives to fully value the forward looking
elements of their compensation packages, and therefore limit retention risk during uncertain times. Accordingly, ILG employment arrangements and equity awards generally provide for salary continuation
in the event of certain employment terminations beyond the control of the executive, as well as varying degrees of accelerated vesting in the event of a change of control of the company.
Under other limited circumstances, ILG executive officers have received non-cash and non-equity compensatory benefits. The values of these
benefits are reported under the heading "Other Annual Compensation" in this filing pursuant to applicable rules. The executive officers do not participate in any deferred compensation or retirement
program other than IAC's 401(k) plan.
IAC's practice has been to structure ILG's compensation program in such a manner so that the compensation is deductible by IAC for federal income tax purposes.
However, because ILG executive officers will now be subject to the limitations on deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended, and were not previously,
certain compensatory arrangements established prior to the spin-off but that will be paid following the spin-off may not result in deductible compensation for ILG.
147
Summary Compensation Table
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock Awards
($)(1)
|
|
All Other Compensation
($)(2)
|
|
Total
($)
|
Craig Nash
Chairman, President and CEO |
|
2007 |
|
593,063 |
|
800,000 |
|
1,416,685 |
|
38,384 |
|
2,848,132 |
Jeanette Marbert
Chief Operating Officer |
|
2007 |
|
308,077 |
|
360,000 |
|
352,269 |
|
6,750 |
|
1,027,096 |
Marie Lee
Chief Information Officer |
|
2007 |
|
220,000 |
|
80,000 |
|
176,147 |
|
3,388 |
|
479,735 |
Victoria Kincke
General Counsel |
|
2007 |
|
215,000 |
|
86,000 |
|
107,148 |
|
3,116 |
|
411,264 |
John Galea
Chief Financial Officer |
|
2007 |
|
208,079 |
|
85,000 |
|
146,643 |
|
4,258 |
|
443,980 |
- (1)
- Reflects
the dollar amount recognized by IAC for financial statement reporting purposes for the fiscal year ended December 31, 2007, in accordance with SFAS 123R, for
IAC restricted stock units ("RSUs") awarded in and prior to 2007 under IAC's stock and annual incentive plans. These amounts do not, therefore, represent the value of IAC equity compensation awarded
or realized in 2007. For further discussion of IAC's accounting for its equity compensation plans, see Note 4 of IAC's audited financial statements for the fiscal year ended December 31,
2007 included in its Annual Report on Form 10-K filed with the SEC on February 29, 2008. For information on awards made and realized in 2007, see the Grants of
Plan-Based Awards and Option Exercises and Stock Vested tables.
- (2)
- See
the table below for additional information on amounts for 2007. Pursuant to SEC rules, perquisites and personal benefits are not reported for any named executive for whom such
amounts were less than $10,000 in aggregate for the fiscal year.
|
|
Craig
Nash
|
|
Jeanette
Marbert
|
|
Marie
Lee
|
|
Victoria
Kincke
|
|
John
Galea
|
Supplemental disability insurance |
|
$ |
19,484 |
|
|
|
|
|
|
|
|
|
|
|
|
Automobile allowance |
|
|
14,400 |
|
|
|
|
|
|
|
|
|
|
|
|
401(k) plan company match |
|
|
4,500 |
|
$ |
6,750 |
|
$ |
3,388 |
|
$ |
3,116 |
|
$ |
4,258 |
|
|
|
|
|
|
|
|
|
|
|
Total All Other Compensation |
|
$ |
38,384 |
|
$ |
6,750 |
|
$ |
3,388 |
|
$ |
3,116 |
|
$ |
4,258 |
|
|
|
|
|
|
|
|
|
|
|
148
Grants of Plan-Based Awards
The table below provides information regarding IAC equity awards granted to our named executives in 2007.
|
|
|
|
Estimated Future Payouts Under
Equity Incentive Plan Awards(1)(2)(3)
|
|
|
|
|
Name
|
|
Grant Date
|
|
Threshold
(#)
|
|
Target
(#)
|
|
Maximum
(#)
|
|
All other stock awards: Number of shares of stock or units
(#)(3)
|
|
Grant Date Fair Value of Stock and Option Awards
($)(4)
|
Craig Nash |
|
2/16/07
9/12/07 |
|
1,046
1 |
|
18,820
75,000 |
|
37,640
N/A |
|
6,274
100,000 |
|
999,996
4,840,500 |
Jeanette Marbert |
|
2/16/07 |
|
697 |
|
12,546 |
|
25,092 |
|
2,509 |
|
599,942 |
Marie Lee |
|
2/16/07 |
|
209 |
|
3,763 |
|
7,526 |
|
1,255 |
|
199,968 |
Victoria Kincke |
|
2/16/07 |
|
209 |
|
3,763 |
|
7,526 |
|
1,255 |
|
199,968 |
John Galea |
|
2/16/07 |
|
279 |
|
5,018 |
|
10,036 |
|
1,255 |
|
249,979 |
- (1)
- Equity
incentive plan awards with a grant date of 2/16/07 reflect performance based RSU awards which cliff vest at the end of three years in varying amounts depending upon growth in
IAC's publicly reported metric, Adjusted Earnings Per Share, with certain modifications. The threshold amount represents 5.56% of the target payout, which amount would vest upon achieving the minimum
growth threshold. These awards will be converted into three year cliff-vesting awards in the spin-offs as described under "The SeparationTreatment of Outstanding IAC
Compensatory Equity-Based Awards."
- (2)
- The
equity incentive plan award to Mr. Nash with a grant date of 9/12/07 reflects a performance award which cliff vests in four years in varying amounts depending on the
compounded annual growth rate in the value of ILG (as agreed between the executive and IAC) during the valuation period. If the minimum growth rate is not achieved, the RSUs are forfeited, while
increasing numbers of shares vest depending on higher levels in the growth rate. In all, the number of shares vesting can range from 0% to 100% of the initial "target" award, with one share vesting
upon achieving the minimum growth rate threshold. This award will be cancelled in the spin-off.
- (3)
- RSU
award recipients would be credited with amounts for cash dividends paid on IAC common stock, with such additional amounts vesting concurrently with the related RSU award. For
information on the treatment of RSU awards granted to ILG's named executives upon a termination of employment or a change in control, see the discussion under Potential Payments Upon Termination or
Change in Control.
- (4)
- The
fair value of equity incentive plan awards is based on the target amount.
149
Outstanding Equity Awards at Fiscal Year-End
The table below provides information regarding various IAC equity awards held by ILG's named executives as of December 31, 2007. The market value of these
awards is based on the closing price of IAC common stock as of December 31, 2007 ($26.92), the last trading day of 2007.
|
|
Stock Awards(1)(2)(3)
|
Name
|
|
Number of
shares or units
of stock that
have not vested (#)
|
|
Market value of
shares or units of
stock that have not
vested ($)
|
|
Equity incentive plan
awards: Number of
unearned shares, units
or other rights that
have not vested (#)
|
|
Equity incentive plan
awards: Market or payout
value of unearned shares,
units or other rights that
have not vested ($)
|
Craig Nash |
|
188,277 |
|
5,068,417 |
|
1,047 |
|
28,185 |
Jeanette Marbert |
|
27,314 |
|
735,293 |
|
697 |
|
18,763 |
Marie Lee |
|
16,278 |
|
438,204 |
|
209 |
|
5,626 |
Victoria Kincke |
|
7,279 |
|
195,951 |
|
209 |
|
5,626 |
John Galea |
|
9,761 |
|
262,766 |
|
279 |
|
7,511 |
- (1)
- For
a discussion regarding how these IAC equity awards will be treated in the spin-offs, see "The SeparationTreatment of Outstanding IAC Compensatory
Equity-Based Awards."
- (2)
- Amounts
shown for equity incentive plan awards are based on achieving the minimum threshold growth level of the relevant performance criteria in accordance with SEC rules.
- (3)
- The
table below provides the following information regarding RSU awards held by ILG's named executives as of December 31, 2007: (i) the grant date of each award,
(ii) the number of RSUs outstanding (on an aggregate and grant-by-grant basis), (iii) the market value of RSUs outstanding as of December 31, 2007,
(iv) the vesting schedule for each award and (v) the total number of RSUs that vested or are scheduled to vest in each of the fiscal years ending December 31, 2008, 2009, 2010,
2011 and 2012.
|
|
Number of Unvested RSUs as of 12/31/07
|
|
Market Value of Unvested RSUs as of 12/31/07
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting Schedule (#)
|
Grant Date
|
|
(#)
|
|
($)
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
Craig Nash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
4,484 |
|
120,709 |
|
2,241 |
|
2,243 |
|
|
|
|
|
|
|
2/10/05(a) |
|
7,919 |
|
213,179 |
|
2,639 |
|
2,639 |
|
2,641 |
|
|
|
|
|
2/10/05(b) |
|
28,278 |
|
761,244 |
|
|
|
|
|
28,278 |
|
|
|
|
|
2/6/06(a) |
|
14,373 |
|
386,921 |
|
3,593 |
|
3,593 |
|
3,593 |
|
3,594 |
|
|
|
2/6/06(b) |
|
26,949 |
|
725,467 |
|
|
|
|
|
|
|
26,949 |
|
|
|
2/16/07(a) |
|
6,274 |
|
168,896 |
|
1,254 |
|
1,255 |
|
1,255 |
|
1,255 |
|
1,255 |
|
2/16/07(c) |
|
18,820 |
|
506,634 |
|
|
|
|
|
18,820 |
|
|
|
|
|
9/12/07(d) |
|
100,000 |
|
2,692,000 |
|
|
|
|
|
|
|
100,000 |
|
|
|
9/12/07(e) |
|
75,000 |
|
2,019,000 |
|
|
|
|
|
|
|
75,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
282,097 |
|
7,594,051 |
|
9,727 |
|
9,730 |
|
54,587 |
|
206,798 |
|
1,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150
Jeanette Marbert |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
2,655 |
|
71,473 |
|
1,327 |
|
1,328 |
|
|
|
|
|
|
|
2/10/05(a) |
|
5,091 |
|
137,050 |
|
1,697 |
|
1,696 |
|
1,698 |
|
|
|
|
|
2/10/05(b) |
|
11,310 |
|
304,465 |
|
|
|
|
|
11,310 |
|
|
|
|
|
2/6/06(a) |
|
5,749 |
|
154,763 |
|
1,437 |
|
1,437 |
|
1,437 |
|
1,438 |
|
|
|
2/16/07(a) |
|
2,509 |
|
67,542 |
|
501 |
|
502 |
|
502 |
|
502 |
|
502 |
|
2/16/07(c) |
|
12,546 |
|
337,738 |
|
|
|
|
|
12,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
39,860 |
|
1,073,031 |
|
4,962 |
|
4,963 |
|
27,493 |
|
1,940 |
|
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marie Lee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
1,770 |
|
47,648 |
|
885 |
|
885 |
|
|
|
|
|
|
|
2/10/05(a) |
|
2,263 |
|
60,920 |
|
1,131 |
|
1,131 |
|
1,132 |
|
|
|
|
|
2/10/05(b) |
|
7,541 |
|
203,004 |
|
|
|
|
|
7,541 |
|
|
|
|
|
2/6/06(a) |
|
3,449 |
|
92,847 |
|
862 |
|
862 |
|
862 |
|
863 |
|
|
|
2/16/07(a) |
|
1,255 |
|
33,785 |
|
251 |
|
251 |
|
251 |
|
251 |
|
251 |
|
2/16/07(c) |
|
3,763 |
|
101,300 |
|
|
|
|
|
3,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
20,041 |
|
539,504 |
|
3,129 |
|
3,129 |
|
13,549 |
|
1,114 |
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victoria Kincke |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
885 |
|
23,824 |
|
442 |
|
443 |
|
|
|
|
|
|
|
2/10/05(a) |
|
2,264 |
|
60,947 |
|
755 |
|
753 |
|
756 |
|
|
|
|
|
2/6/06(a) |
|
2,875 |
|
77,395 |
|
719 |
|
718 |
|
719 |
|
719 |
|
|
|
2/16/07(a) |
|
1,255 |
|
33,785 |
|
251 |
|
251 |
|
251 |
|
251 |
|
251 |
|
2/16/07(c) |
|
3,763 |
|
101,300 |
|
|
|
|
|
3,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
11,042 |
|
297,251 |
|
2,167 |
|
2,165 |
|
5,489 |
|
970 |
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Galea |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
1,181 |
|
31,793 |
|
590 |
|
591 |
|
|
|
|
|
|
|
2/10/05(a) |
|
2,828 |
|
76,130 |
|
942 |
|
943 |
|
943 |
|
|
|
|
|
2/6/06(a) |
|
2,875 |
|
77,395 |
|
719 |
|
718 |
|
719 |
|
719 |
|
|
|
12/6/06(a) |
|
1,622 |
|
43,664 |
|
405 |
|
406 |
|
405 |
|
406 |
|
|
|
2/16/07(a) |
|
1,255 |
|
33,785 |
|
251 |
|
251 |
|
251 |
|
251 |
|
251 |
|
2/16/07(c) |
|
5,018 |
|
135,085 |
|
|
|
|
|
5,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
14,779 |
|
397,851 |
|
2,907 |
|
2,909 |
|
7,336 |
|
1,376 |
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (a)
- These
awards vest in five equal annual installments on each of the first five anniversaries of the grant date, subject to continued employment.
- (b)
- These
awards vest in one lump sum installment on the fifth anniversary of the grant date, subject to continued employment.
- (c)
- Represents
the initial "target" awards. See the Grants of Plan-Based Awards table and footnote (1) thereto.
- (d)
- This
award vests in one lump sum installment on July 1, 2011, subject to continued employment.
151
- (e)
- Represents
the initial "target" award. See the Grants of Plan-Based Awards table and footnote (2) thereto.
Option Exercises and Stock Vested
The table below provides information regarding the number of shares acquired by ILG's named executives in 2007 upon the vesting of RSU awards and the related
value realized, excluding the effect of any applicable taxes. The dollar value realized upon vesting of RSUs represents the closing price of IAC common stock on the applicable vesting date multiplied
by the number of RSUs so vesting. No named executive officer exercised any stock options during 2007.
|
|
Stock Awards
|
Name
|
|
Number of Shares
Acquired on Vesting
(#)
|
|
Value Realized
on Vesting
($)
|
Craig Nash |
|
8,473 |
|
332,224 |
Jeanette Marbert |
|
4,460 |
|
174,889 |
Marie Lee |
|
2,877 |
|
112,810 |
Victoria Kincke |
|
1,913 |
|
75,104 |
John Galea |
|
2,655 |
|
100,242 |
Potential Payments Upon Termination or Change in Control
Pursuant
to the terms of IAC's (and, following the spin-off, ILG's) equity compensation plans and the award agreements thereunder, upon a change of control the named
executive officers are generally entitled to accelerated vesting of (i) equity awards made prior to 2006 and (ii) equity awards made thereafter if, following such change in control,
their employment is terminated by the Company for any reason other than death, disability or cause (as defined in the relevant employment agreement), or by the executive for good reason (as defined in
the relevant employment agreement or plan document) (a "Qualifying Termination"). Additionally, under the New Nash Employment Agreement and the New Marbert Employment Agreement, Mr. Nash and
Ms. Marbert will be entitled to two-years forward vesting of the RSUs granted under those agreements (including pro ration two years forward on the cliff vesting portions of those
awards).
Cash. Upon
a Qualifying Termination, ILG executive officers are entitled to salary continuation of, with respect to Mr. Nash and Ms. Marbert ,
twenty-four months, with respect to Mr. Galea and Ms. Kincke, 12 months, and with respect to Ms. Lee, 6 months. Additionally, under the New Nash
Employment Agreement and New Marbert Employment Agreement, Mr. Nash and Ms. Marbert are entitled to pro rated portions of the bonus they would otherwise earn during the year in which the
Qualifying Termination occurs, payable at the time such bonus would otherwise be determined.
Equity. Upon a Qualifying Termination, Mr. Nash and Ms. Marbert will receive two-year's forward vesting of their RSUs granted under those
agreements (including pro ration two years forward on the cliff vesting portions of those awards).
Obligations. The amounts payable upon a Qualifying Termination are all subject to the execution of a general release and to compliance with confidentiality,
non-compete, non-solicitation of employees and non-solicitation of customer covenants set forth in the relevant employment agreements. Salary continuation payments
will be offset by the amount of any compensation earned by an executive from other employment during the severance payment period.
152
The amounts shown in the table assume that the termination or change in control was effective as of December 31, 2007 and that the price of IAC common stock on which certain
calculations are based was the closing price of $26.92 on The Nasdaq Stock Market on that date. These amounts are estimates of the incremental amounts that would have been paid out to the executive
upon such terminations/change in control, and do not take into account equity grants made, and contractual obligations entered into, after December 31, 2007. The actual amounts to be paid out
can only be determined at the time the event actually occurs.
Name and Benefit
|
|
Termination without cause
|
|
Resignation for good reason
|
|
Change in Control
|
|
Termination w/o cause or for good reason in connection with Change in Control
|
|
Termination in connection with Sale of Interval
|
|
Craig Nash |
|
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
1,300,000 |
|
1,300,000 |
|
0 |
|
1,300,000 |
|
1,300,000 |
|
RSUs (vesting accelerated) |
|
0 |
|
0 |
|
1,770,663 |
|
5,575,051 |
|
673,000 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated value |
|
1,300,000 |
|
1,300,000 |
|
1,770,663 |
|
6,875,051 |
|
1,973,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeanette Marbert |
|
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
350,000 |
|
|
|
|
|
350,000 |
|
|
|
RSUs (vesting accelerated) |
|
|
|
|
|
512,988 |
|
1,073,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated value |
|
350,000 |
|
|
|
512,988 |
|
1,423,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marie Lee |
|
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
110,100 |
|
|
|
|
|
110,100 |
|
|
|
RSUs (vesting accelerated) |
|
|
|
|
|
311,572 |
|
539,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated value |
|
110,100 |
|
|
|
311,572 |
|
649,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victoria Kincke |
|
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
107,500 |
|
|
|
|
|
107,500 |
|
|
|
RSUs (vesting accelerated) |
|
|
|
|
|
84,771 |
|
297,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated value |
|
107,500 |
|
|
|
84,771 |
|
404,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Galea |
|
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
125,000 |
|
|
|
|
|
125,000 |
|
|
|
RSUs (vesting accelerated) |
|
|
|
|
|
107,922 |
|
397,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated value |
|
125,000 |
|
|
|
107,922 |
|
522,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Represents
the acceleration of 25% of Mr. Nash's Cliff RSUs. The determination of the number of Mr. Nash's Performance RSUs (which will be cancelled in their entirety at
the time of the spin-off) that would have vested would be based on the compounded annual growth rate in the value of Interval (as agreed between the executive and IAC) during the valuation
period, which would have been measured at June 30, 2011. Upon the sale of Interval, the sale price would be deemed the agreed value. The treatment of Mr. Nash's Performance RSUs upon a
sale of Interval in the absence of the spin-off is described above. No value is presented in the table above for accelerated vesting of the Performance RSUs as the value is neither
determinable nor estimable, given that such value would be based on a sale price for Interval, which would be determined by arms' length negotiations between IAC and the acquirer.
153
ILG Security Ownership of Certain Beneficial Owners and Management
As of the date hereof, all of ILG's outstanding shares of common stock are owned by IAC. After the distribution, IAC will no longer own any shares of ILG common
stock. The following table presents information relating to the expected beneficial ownership of shares of ILG common stock, assuming completion of the distribution as if it occurred on
[ ], 2008, by (i) each individual or entity expected to own beneficially more than 5% of the outstanding shares of ILG common
stock, assuming that there
are 278,735,546 shares of common stock and Class B common stock of IAC outstanding immediately prior to the spin-offs and a distribution ratio of one-fifth of a share of ILG common
stock for every share of IAC common stock and/or Class B common stock, (ii) each director of ILG, (iii) the Chief Executive Officer, the Chief Financial Officer and the other
three named executive officers in the ILG summary compensation table (see "ILG Executive Compensation") and (iv) all of ILG's executive officers and directors as a group.
Unless otherwise indicated, beneficial owners listed here may be contacted at ILG's corporate headquarters at 6262 Sunset Drive, Miami, FL 33143. For each listed person, the number of
shares of ILG common stock and percent of such class listed assumes the conversion or exercise of any ILG equity securities owned by such person that are or will become convertible or exercisable, and
the exercise of stock options and the vesting of restricted stock units, if any, that will vest, within 60 days of April 30, 2008, but does not assume the conversion, exercise or vesting
of any such equity securities owned by any other person.
The share amounts for each beneficial owner listed here are based on each such individual's beneficial ownership of shares of IAC common stock and/or Class B common stock as of
April 30, 2008, and assuming a distribution ratio of one fifth of a share of ILG common stock for every share of IAC common stock and/or Class B common stock. To the extent that ILG
directors and executive officers own shares of IAC common stock at the time of the distribution, they will participate in the distribution on the same terms as other holders of IAC common stock. In
addition, following the distribution, ILG expects that all IAC stock-based awards held by these individuals will be adjusted to become awards relating to common stock of all five companies resulting
from the spin-offs. Those awards that will relate to ILG common stock are reflected in the table below based upon the expected adjustment formula described under the caption "The
SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
154
The actual number of shares of ILG capital stock outstanding as of the date of the distribution may differ due, among other things, to the exercise of stock options or warrants or the
vesting of restricted stock units, in each case, between April 30, 2008 and the date of the distribution and to the extent the other assumptions set forth above differ from actual developments.
|
|
ILG
Common Stock
|
Name and Address of Beneficial Owner
|
|
Shares
|
|
%
|
Clearbridge Advisors, LLC, et al(1)(2)
399 Park Avenue
New York, NY 10022 |
|
2,651,312 |
|
4.75 |
Lord Abbett & Co. LLC(1)(2)
90 Hudson Street, 11th Floor
Jersey City, NJ 07302 |
|
7,839,768 |
|
14.06 |
Liberty Media Corporation(3)(4)
12300 Liberty Boulevard
Englewood, CO 80112 |
|
16,643,961 |
|
29.86 |
John Galea |
|
|
|
|
Victoria Kincke |
|
|
|
|
Marie Lee |
|
|
|
|
Jeanette Marbert |
|
|
|
|
Craig Nash |
|
|
|
|
All executive officers and directors as a group (persons) |
|
|
|
|
- (1)
- We
have not been able to determine the person or persons controlling the fund through publicly available information.
- (2)
- Based
upon information regarding IAC holdings reported on a Schedule 13G, as amended, which was filed with the SEC on February 14, 2008, and a distribution ratio of
one-fifth of a share of ILG common stock for every share of IAC common stock and/or Class B common stock.
- (3)
- Liberty
Media Corporation is a publicly traded corporation. According to Liberty Media Corporation's Schedule 14A, filed April 24, 2008, Liberty's chairman, John C.
Malone, controls 33% of the voting power of Liberty Media Corporation.
- (4)
- Based
on 58,796,381 shares of IAC common stock held by Liberty and 4,000,000, 15,618,230, 4,005,190 and 800,006 shares of IAC Class B common stock held by each of
BDTV Inc., BDTV II Inc., BDTV III Inc. and BDTV IV Inc., respectively, and a distribution ratio of one-fifth of a share of ILG common stock for every
share of IAC common stock and/or Class B common stock.
155
CERTAIN INFORMATION WITH RESPECT TO TICKETMASTER
BUSINESS OF TICKETMASTER
When used with respect to any periods prior to the spin-offs, the term "Ticketmaster" refers to IAC's ticketing and ticketing-related businesses,
subsidiaries and investments. When used with respect to any periods following the spin-offs, "Ticketmaster" refers to Ticketmaster, a Delaware corporation, which will hold IAC's ticketing
and ticketing-related businesses, subsidiaries and investments (other than ReserveAmerica and Active.com), together with IAC's investment in Front Line
Management, Inc., following the spin-offs. The following disclosure regarding Ticketmaster's business assumes the completion of the spin-offs.
For
information regarding the results of operations of Ticketmaster on a historical basis, see the Combined Financial Statements of Ticketmaster and the disclosure set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results of Operations of Ticketmaster." For information regarding the results of operations of Ticketmaster on a pro forma
basis to give effect to the completion of the spin-offs, see "Unaudited Pro Forma Condensed Combined Financial Statements" of Ticketmaster.
Who We Are
As the world's leading live entertainment ticketing and marketing company, Ticketmaster connects the world to live entertainment. Ticketmaster currently operates
in 20 countries worldwide, providing ticket sales, ticket resale services, marketing and distribution through www.ticketmaster.com, one of the largest
e-commerce sites on the internet, and related proprietary internet and mobile channels, approximately 6,700 independent sales outlets and 19 call centers worldwide. Established in 1976, in
2007, Ticketmaster sold tickets on behalf of more than 10,000 clients worldwide, including venues, promoters, sports leagues and teams and musuem and cultural institutions, among other clients, across
multiple live event categories, providing exclusive ticketing services for leading arenas, stadiums, amphitheaters, music clubs, concert promoters, professional sports franchises and leagues, college
sports teams, performing arts venues, museums and theaters. In 2007, Ticketmaster brands and businesses sold approximately 141 million tickets valued at over $8.3 billion.
History
Ticketmaster's predecessor companies, Ticketmaster Group, Inc. and its subsidiaries, were organized for the primary purpose of developing stand-alone
automated ticketing systems for license to individual facilities. Since then, Ticketmaster's business has grown through continued improvements in its technology, the continued expansion of its service
and product offerings, as well as its client base, and the acquisition of and investment in ticketing and technology companies, as well as a number of entertainment-related businesses, both in the
United States and abroad. In January 2003, IAC, at that time the majority owner of Ticketmaster, acquired the outstanding shares of Ticketmaster that it did not previously own, after which
Ticketmaster became a wholly-owned subsidiary of IAC.
What We Do
Overview. "Primary" sales of tickets refers to the original sale of tickets to an event by or on behalf of an event
presenter. For the year ended December 31, 2007, the substantial majority of Ticketmaster's revenues were attributable to primary ticket sale services. Ticketmaster provides primary ticket sale
services to the following types of clients:
-
- Venuesmany of the most well-known arenas, stadiums, theaters, universities, colleges, clubs and
festivals in the United States and abroad, ranging in size from 100,000+ seat stadiums to small
156
clubs,
including Madison Square Garden (New York City), Staples Center (Los Angeles), The 02 (London), the University of Michigan and the University of California, Los Angeles;
-
- Promoterspromoters of live events, from worldwide concert tours to single, local events, including AEG Live, Jam
Productions and MCD Productions;
-
- Sports Leagues, Teams and Eventsprofessional sports teams, leagues, franchises and clubs and special sporting
events, including Major League Baseball Advanced Media and many Major League Baseball, National Football League, National Basketball Association, National Hockey League, Rugby Football Union and
Premier League teams, as well as the 2008 Olympic Games; and
-
- Museums, Cultural Institutions and Historic Sitesincluding the Guggenheim Museum (New York City) and the Getty
Museum and Getty Villa (Los Angeles).
When
providing primary ticket sale services to clients in the U.S. and abroad (other than in the United Kingdom), Ticketmaster generally serves as the exclusive ticket sales agent for
primary sales of individual tickets sold to the general public outside of facility box offices. In the United Kingdom, Ticketmaster is typically a non-exclusive ticket sales agent for its
clients and instead is guaranteed a certain minimum allocation of the tickets for each event. For any particular event, Ticketmaster works with clients to identify those tickets that will be made
available for sale through Ticketmaster's various distribution channels (see "Distribution"), as well as facility box offices. To enable most or all tickets for a given event to be
offered for sale simultaneously and sold through these channels, Ticketmaster licenses the Ticketmaster System and related equipment to clients and installs this system at their facility box offices.
The provision of primary ticket sale services to clients is generally governed by individual, multi-year agreements between Ticketmaster and its clients.
Consumers
who purchase tickets through Ticketmaster pay an amount equal to the initial ticket face price, plus a per ticket convenience charge, a per order "order processing" fee and, if
applicable, a premium delivery charge. Ticketmaster remits the entire face value of the ticket to the client, plus, in most cases, royalties in an amount specified in the written agreement between
Ticketmaster and the client.
Client Relationships. Ticketmaster generally enters into written agreements with individual clients to provide primary ticket
sale services for specified multi-year periods, typically ranging from 3 to 5 years. Pursuant to these agreements, clients generally determine what tickets will be available for
sale, when such tickets will go on sale to the public and at what initial ticket face price. Agreements with venue clients generally grant Ticketmaster the right to sell tickets for all events
presented at the relevant venue for which tickets are made available to the general public. Agreements with promoter clients generally grant Ticketmaster the right to sell tickets for all events
presented by a given promoter at any venue, unless that venue is already covered by an existing exclusive agreement with Ticketmaster or another ticketing service provider. Under Ticketmaster's
exclusive contracts, clients may not utilize, authorize or promote the services of third party ticketing companies or technologies while under contract with Ticketmaster. While Ticketmaster generally
has the right to sell a substantial portion of its clients' tickets, venues and promoters often handle group sales and season tickets in-house, as well as allocate certain tickets for
artist use. Ticketmaster also generally allows clients to make a certain limited number of tickets available for sale through fan or other similar clubs, from which Ticketmaster generally derives no
revenues unless selected by the club to facilitate such sales. As a result, Ticketmaster does not sell all of its clients' tickets and the amount of tickets that it sells varies from client to client
and from event to event, and varies as to any single client from year to year.
Convenience
charges, which are heavily negotiated, mutually agreed upon and set forth in written agreements between Ticketmaster and its clients, vary based upon numerous factors,
including: the scope and nature of the services to be rendered, the amount and cost of equipment to be installed
157
at
the client's venue location, the amount of advertising and/or promotional allowances to be provided, the type of event and the distribution channel in which the ticket is to be sold. Client
agreements also provide how and when, and by how much and with what frequency, changes may be made to per ticket convenience charges and per order "order processing" fees during the term. During the
year ended December 31, 2007, per ticket convenience charges generally ranged from $2.50 to $15.00 and average revenue per ticket (which primarily includes per ticket convenience charges and
per order "order processing" fees, as well as certain other revenue sources directly related to the sale of tickets) was $7.63.
Most
written agreements provide for the payment of royalties to clients, which are heavily negotiated, in an amount equal to a mutually agreed upon portion of related per ticket
convenience charges on all tickets sold through all Ticketmaster distribution channels and per order "order processing" fees on all tickets sold online and by telephone. In many cases, written
agreements also require Ticketmaster to advance royalties to clients, which advances are usually recoupable by Ticketmaster out of the future rights of clients to participations. In limited instances,
clients have the right to receive an upfront, non-recoupable payment from Ticketmaster as an incentive to enter into the ticketing service agreement. Written agreements also specify the
additional systems, if any, that may be used and purchased by clients during their relationship with Ticketmaster.
Ticketmaster
generally does not buy tickets from its clients for sale or resale to the public and typically assumes no financial risk for unsold tickets, other than indirect risk
associated with its ability to recoup advances and guarantees made to clients. If an event is canceled, Ticketmaster refunds the per ticket convenience charges (but not per order "order processing"
fees), except in certain European jurisdictions, where Ticketmaster is required by law to do so. Refunds of ticket prices for canceled event are funded by clients, which have historically fulfilled
these obligations on a timely basis with few exceptions. Clients routinely agree by contract to include Ticketmaster's name, logos and the applicable Ticketmaster website address and
charge-by-phone number in advertisements in all forms of media promoting the availability of their tickets. Ticketmaster brand names and logos are also prominently displayed on
printed tickets, ticket envelopes and e-mail alerts about upcoming events that Ticketmaster sends to its customers. Ticketmaster also provides primary ticketing solutions for clients who wish to
perform these functions in-house on a private label or other basis through its Paciolan and Ticketmaster VISTA brands and businesses, which license the requisite software or other rights
to clients for license and per transaction fees in the case of Paciolan and per ticket fees in the case of Ticketmaster VISTA. Ticketmaster also currently licenses its name and technology exclusively
to a third party that provides primary ticketing services to clients in the Washington, D.C./Baltimore area, as well as to third parties and joint ventures in certain jurisdictions abroad.
The "resale" of tickets refers to the sale of tickets by a holder who originally purchased the tickets from a venue, promoter or other entity or a ticketing
services provider selling on behalf of such venue, promoter or other entity. Ticketmaster currently offers ticket resale services through TicketsNow, which Ticketmaster acquired in February 2008, its
TicketExchange service, which Ticketmaster launched in January 2002, and GetMeIn!, which Ticketmaster acquired in February 2008.
TicketsNow
is a leading consumer-facing marketplace for the resale of event tickets in the United States and Canada. TicketsNow enters into listing agreements with licensed ticket
resellers to post ticket inventory for sale through TicketsNow at a purchase price equal to the initial ticket price determined by the relevant ticket resellers, plus an amount equal to a percentage
of the initial ticket price and a service fee. TicketsNow remits the reseller-determined initial ticket price to the ticket resellers and retains the remainder of the purchase price. TicketsNow also
licenses point-of-sale business management software to ticket resellers for a fee, which allows them to manage their ticket
158
inventory
and operate their businesses. While TicketsNow does not generally acquire tickets for sale on its own behalf, it may do so from time to time on a limited basis.
Ticketmaster
also facilitates the resale of tickets through its TicketExchange service, which is accessible to consumers through www.ticketmaster.com. Through TicketExchange, consumers may resell and
purchase tickets online that were initially sold for Ticketmaster clients in the United States, Europe and Canada who elect to participate in the TicketExchange service. Sellers and buyers each pay
Ticketmaster a fee that has been negotiated with the relevant client, a portion of which is shared with such client. Consumers in the United Kingdom, Germany and the Netherlands may buy and sell
tickets to live entertainment events through Get Me In!, which charges sellers a commission and buyers a processing fee.
Marketing, Promotional and Related Services
Ticketmaster is a leading marketer of live entertainment to fans in the markets in which it operates. For example, Ticketmaster informs fans about upcoming live
events for which tickets will be available through Ticketmaster in their area through its TicketAlert email service. Fans can customize TicketAlerts to inform them about upcoming events for particular
performers, teams or venues, as well as events in specified categories (music, sports, theater and family entertainment). Ticketmaster sent approximately 1.3 billion TicketAlert e-mails in
2007, reaching an average of approximately 28 million consumers per week. Ticketmaster also provides rich content on its various websites to promote events that it tickets, including artist
pages that feature video content, biographical material and, through an arrangement with Apple, the ability to link to iTunes to purchase music from the artist's catalogue. Ticketmaster's commercial
arrangement with Apple also allows Ticketmaster to offer consumers purchasing a ticket the opportunity to download songs for free from iTunes.
Ticketmaster
continues to develop and introduce new initiatives, as well as enter into new relationships, in an effort to help its clients sell more tickets in more markets. For example,
Ticketmaster acquired a 25% interest in Evolution Artists (which does business under the brand name "iLike"), a leading, online social music discovery service that facilitates the sharing of
playlists, new music and concerts, and has entered into arrangements with iLike to provide features designed to enhance the overall consumer experience on www.ticketmaster.com. Ticketmaster also offers
a suite of dynamic pricing tools, such as online auctions, pursuant to which consumers bid on tickets
being sold by Ticketmaster and purchases them at a price equal to the highest winning bid. For auction sales, in addition to per order "order processing" fees, Ticketmaster receives fees based on a
percentage of the prices at which tickets are ultimately sold.
Ticketmaster
provides promotional and other related services to artists, such as the sale of tickets to members of artist fan clubs and the sale of artist fan club memberships, through
its Echo business. Ticketmaster is also seeking to secure and strengthen its relationships with promoters and artists through its investment in Front Line Management, Inc., an artist management
company that represents leading artists. Ticketmaster has also established a presence as a promoter in China through its Emma Entertainment business, a ticketing company and significant promoter of
live entertainment events in China.
Distribution
Ticketmaster sells tickets online, through independent sales outlets, call centers and via mobile channels. During the year ended December 31, 2007, 70%,
17%, 13% and less than 1% of primary ticket sales channels were transacted through these channels, respectively.
Online. Ticketmaster owns and operates various branded websites, both in the U.S. and abroad, which are customized to reflect
services offered in each jurisdiction. Ticketmaster's primary online ticketing website, www.ticketmaster.com, together with its other branded ticketing
websites, are designed
159
to
promote ticket sales for live events and disseminate event and related merchandise information online. Consumers can access www.ticketmaster.com
directly, from affiliated websites and through numerous direct links from banners and event profiles hosted by approved third party websites.
Independent Sales Outlets. As of December 31, 2007, Ticketmaster had approximately 6,700 "Ticket Center" independent
sales outlets worldwide, approximately 2,000 of which were in the United States and approximately 4,700 of which were in various jurisdictions abroad. The majority of these independent sales outlets
are located in major department, grocery and music stores, malls and, in Europe, post offices. While Ticketmaster installs and maintains the hardware and software necessary for these independent sales
outlets to sell tickets, the outlets are generally responsible for staffing, daily operations and related costs. Ticketmaster pays independent sales outlets a commission, the amount of which ranges
from approximately 17% to 20% of Ticketmaster's convenience charge.
Call Centers. As of December 31, 2007, Ticketmaster operated 19 call centers worldwide, through which consumers can
generally purchase tickets by telephone or by way of an interactive voice response system, seven days a week, for at least 20 hours per day. Ticketmaster's domestic telephone system can channel
all or a portion of incoming calls from any city to a selected call center in another city or region to accommodate the commencement of sales activity for a major event in a given region, as well as
provide back-up capabilities in the event that a call center experiences operating difficulties.
International Operations
Ticketmaster provides primary ticket sale services in Australia, Canada, Ireland, New Zealand and the United Kingdom, primarily under the Ticketmaster brand name,
and through other brand names in various other jurisdictions abroad, including China (Emma Ticketmaster), Denmark (BILLETNet), Finland (Lippupalvelu), Germany (Kartenhaus), the Netherlands (Ticket
Service), Norway
(billettservice.no), Spain (Tic Tack Ticket), Sweden (Ticnet) and Turkey (Biletix). Ticketmaster also provides resale ticket services in Canada through TicketsNow and in the United Kingdom, Germany
and the Netherlands through GetMeIn!.
In
addition to the businesses listed above, which it owns and operates, Ticketmaster is a party to joint ventures with third parties to provide ticket distribution services in Mexico and
to supply ticketing services for the 2008 Beijing Olympic Games. In the case of the 2008 Beijing Olympic Games joint venture, Ticketmaster licenses the Ticketmaster System to the joint venture and
receives a fee based on the number of tickets the joint venture sells or distributes through the system. Ticketmaster also licenses its technology in Brazil, Argentina and Chile.
Ticket
sales and revenues attributable to international operations represented approximately 41% and 34%, respectively, of total ticket sales and revenues in 2007.
Technology
Ticketmaster's core proprietary operating system and software (the "Ticketmaster System") is designed for scalability, can be customized to satisfy a full range
of client requirements and its capacity can be increased through investment in additional hardware. The entire Ticketmaster distribution network, including the Ticketmaster System, provides a single,
centralized inventory control and management system capable of tracking total ticket inventory for all events, whether sales are made on a season, subscription, group or individual ticket basis.
Ticketmaster believes that the Ticketmaster System enables clients to sell tickets and adapt to emerging and changing trends in the live entertainment industry in a more efficient and
cost-effective manner than they could do on their own.
160
In areas of Europe outside of the United Kingdom and Ireland, Ticketmaster's operating businesses generally use localized versions of Ticketmaster's software or their own software, all
of which are also proprietary to Ticketmaster. In limited cases abroad, Ticketmaster licenses ticketing systems from third parties. Ticketmaster has migrated certain of its international brands and
businesses to the Ticketmaster System and intends to continue to do so over the next several years.
The
Ticketmaster System, which includes both hardware and software, is typically located in one of the multiple data centers managed by Ticketmaster staff, with the hardware and software
required for use being installed at all points of sale. Ticketmaster takes significant measures to prevent outages in the case of the Ticketmaster System and related systems.
Ticketing Industry Overview
The ticketing services industry has experienced significant changes over the past decade due to the advent of online commerce. As consumers increasingly choose to
purchase tickets online and through mobile channels, sales through phone, outlet and box office channels have diminished in relative importance. As online ticket purchases increase, related ticketing
costs generally decrease, which has made it easier for clients to manage and facilitate ticket sales in-house, as well as for technology-based companies to offer primary ticketing services
and stand-alone, automated ticketing systems that enable clients to do their own ticketing or utilize self-ticketing systems. The advent of online commerce has also contributed to the
growth of resale ticketing services and the consolidation of the resale industry, which historically has been more fragmented, consisting of a significant number of local resellers with limited
inventory selling through traditional storefronts. The internet has allowed fans and other ticket resellers to reach a vastly larger audience through the aggregation of inventory on online resale
websites and marketplaces, and has provided consumers with more convenient access to tickets for a larger number and greater variety of events. These changes have significantly altered the competitive
landscape, in that they have resulted in a broader and more differentiated group of industry participants offering increasingly more innovative ticketing products and services.
Competition
Live event content providers (such as owners or operators of live event venues, promoters of concerts and sports teams, among others) generally contract directly
with primary ticketing service providers to sell tickets. Ticketmaster experiences substantial competition from other national, regional and local primary ticketing service providers to secure new and
retain existing clients on a continuous basis. Ticketmaster also faces significant and increasing competition from companies that sell self-ticketing systems, as well as from clients, who
are increasingly choosing to self-ticket through the integration of self-ticketing systems into their existing operations or the acquisition of primary ticket service providers
and by increasing sales through facility box offices and season, subscription or group sales. Ticketmaster also faces competition in the resale of tickets from online auction websites and
marketplaces, as well as other ticket resellers with online distribution capabilities. Ticketmaster believes that it competes on the basis of the breadth and quality of the products and services it
provides, as well as the tickets it makes available for sale, the capabilities of the Ticketmaster System and related systems and its distribution network, reliability and price.
Employees
As of December 31, 2007, Ticketmaster employed approximately 3,600 full-time and 2,600 part-time employees worldwide. Ticketmaster
believes that it generally has good employee relationships, including those with employees represented by unions or other similar organizations.
161
Properties
Ticketmaster's corporate offices are located at 8800 W. Sunset Blvd., West Hollywood, California, where it currently leases approximately 70,000 square feet from
IAC. Ticketmaster also leases office space in various cities throughout the United States and in the various jurisdictions abroad in which it has operations pursuant to short- and
long-term leases of adequate duration. In addition, Ticketmaster owns a small office in Vancouver, Canada and a small plot of land outside of Albuquerque, New Mexico. Ticketmaster believes
that its facilities are adequate in the locations where it currently does business.
Ticketmaster Legal Proceedings
In the ordinary course of business, Ticketmaster and its subsidiaries are parties to litigation involving property, personal injury, contract, intellectual
property and other claims. The amounts that may be recovered in such matters may be subject to insurance coverage. Ticketmaster does not believe that such ordinary course litigation will have a
material effect on its business, financial condition or results of operations. For a discussion of litigation reserves, see "Management OverviewResults of Operations for the Years Ended
December 31, 2007, 2006 and 2005General and Administrative Expense."
Rules
of the Securities and Exchange Commission require the description of material pending legal proceedings, other than ordinary, routine litigation incident to the registrant's
business, and advise that proceedings ordinarily need not be described if they primarily involve damage claims for amounts (exclusive of interest and costs) not exceeding 10% of the current assets of
the registrant and its subsidiaries on a consolidated basis. In the judgment of management, none of the pending litigation matters which Ticketmaster and its subsidiaries are defending, including
those described below, involves or is likely to involve amounts of that magnitude. However, the pending litigation matters described below could involve substantial amounts, which could have an
adverse effect on Ticketmaster's business, financial condition and results of operations.
Curt Schlessinger et al. v. Ticketmaster, No. BC304565 (Superior Court, Los Angeles
County). On October 21, 2003, a purported representative action was filed in California state court, challenging Ticketmaster's charges to online customers for UPS
ticket delivery. The complaint alleged in essence that it is unlawful for Ticketmaster not to disclose on its website that the fee it charges to online customers to have their tickets delivered by UPS
contains a profit component. The complaint asserted a claim for violation of Section 17200 of the California Business and Professions Code and sought restitution or disgorgement of the
difference between (i) the total UPS delivery fees charged by Ticketmaster in connection with online ticket sales during the applicable statute of limitations period, and (ii) the amount
Ticketmaster paid to UPS for that service.
On
December 31, 2004, the court denied Ticketmaster's motion for summary judgment. On April 1, 2005, the court denied the plaintiffs' motion for leave to amend their
complaint to include UPS-delivery fees charged in connection with ticket orders placed by telephone. Citing Proposition 64, a California ballot initiative that outlawed
so-called "representative" actions brought on behalf of the general public, the court ruled that since the named plaintiffs did not order their tickets by telephone, they lacked standing
to assert a claim based on telephone ticket sales. The plaintiffs were granted leave to file an amended complaint that would survive application of Proposition 64.
On
August 31, 2005, the plaintiffs filed an amended class-action and representative-action complaint alleging (i) as before, that Ticketmaster's website disclosures in
respect of its charges for UPS ticket delivery violate Section 17200 of the California Business and Professions Code, and (ii) for the first time, that Ticketmaster's website disclosures
in respect of its ticket order-processing fees
162
constitute
false advertising in violation of Section 17500 of the California Business and Professions Code. On this latter claim, the amended complaint seeks restitution or disgorgement of the
entire amount of order-processing fees charged by Ticketmaster during the applicable statute of limitations period.
On
September 1, 2005, in light of the newly pleaded claim based upon order-processing fees, Ticketmaster removed the case to federal court pursuant to the recently enacted federal
Class Action Fairness Act. See Curt Schlessinger et al. v. Ticketmaster, No. 05-CV-6515 (U.S. District Court, Central
District of California). On October 3, 2005, the plaintiffs filed a motion to remand the case to state court, which Ticketmaster opposed. On March 23, 2006, the federal district court
issued an order granting the plaintiffs' motion to remand the case to state court. On April 4, 2006, Ticketmaster filed a petition for leave to appeal the district court's order to the United
States Court of Appeals for the Ninth Circuit, which the plaintiffs opposed. On May 25, 2006, the federal court of appeals issued an order denying Ticketmaster's petition; as a result, the case
was remanded to state court.
On
August 14, 2006, the plaintiffs filed a motion for class certification, which Ticketmaster opposed. On September 25, 2006, Ticketmaster filed a motion for judgment on
the pleadings, which the plaintiffs opposed. On November 21, 2006, Ticketmaster requested that the court stay the case pending the California Supreme Court's decisions in two cases
(In re Tobacco II Cases, 142 Cal. App. 4th 891, and Pfizer Inc. v. Superior Court
(Galfano), 141 Cal. App. 4th 290) that present issues concerning the interpretation of Proposition 64 that are directly pertinent to both of the pending
motions. The plaintiffs opposed Ticketmaster's request. On November 29, 2006, the court ordered that the case be stayed pending the California Supreme Court's ruling on the two cases referenced
above.
On
July 11, 2007, the court lifted its stay of the action for the limited purpose of allowing the plaintiffs to proceed with their motion for class certification. The parties
thereafter submitted supplemental briefing in support of their respective positions and argued the motion at a September 20 hearing. On December 19, 2007, the court issued an order
denying the plaintiffs' motion for class certification without prejudice. The court also issued an order staying the action for an additional 180 days or until the California Supreme Court
issues a ruling in the Tobacco II and Pfizer appeals.
Ticketmaster believes that the claims in this putative class action lack merit and will continue to defend itself vigorously.
In re Ticketmaster Online-CitySearch, Inc. Initial Public Offering Securities Litigation, Case
No. 01 Civ. 10822 (S.D.N.Y.). On November 30, 2001, a purported securities class action was filed against Ticketmaster and other defendants in the U.S. District
Court for the Southern District of New York. Plaintiff's suit was brought on behalf of purchasers of Ticketmaster common stock during the period from the date of its initial public offering through
December 6, 2000, and alleged violations by Ticketmaster of Section 10(b) of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933. Plaintiff alleged
that Ticketmaster failed to disclose that its underwriters were to receive undisclosed and excessive compensation and had agreed to allocate shares in the IPO to customers in exchange for agreements
to purchase shares in the aftermarket at pre-determined prices. This action was later consolidated with hundreds of similar actions against issuers and underwriters in the U.S. District
Court for the Southern District of New York in In re Initial Public Offering Securities Litigation, No. 21 MC 92 (S.D.N.Y.). On
February 19, 2003, the court granted a motion to dismiss the Section 10(b) claim against Ticketmaster, but denied the motion as to the Section 11 claim against Ticketmaster.
163
On October 13, 2004, the district court granted a motion for class certification in the six so-called class certification "focus" cases in the consolidated litigation.
(Ticketmaster is not a party in any of these focus cases.) On December 5, 2006, the U.S. Court of Appeals for the Second Circuit reversed the trial court's decision. On August 14, 2007,
plaintiffs filed amended complaints containing new class definitions in the six class certification focus cases. On September 27, 2007, plaintiffs moved for certification of the classes in
these cases. On November 13, 2007, the issuer defendants filed a motion to dismiss the amended complaints in the focus cases. On March 26, 2008, the district court granted this motion in
part and denied it in part. Accordingly, this action remains pending against Ticketmaster.
On
June 10, 2004, plaintiffs and the issuer and individual defendants in the consolidated litigation had submitted to the district court for approval a proposed settlement that
had previously been approved by various insurers of the issuer defendants. Approval of the proposed settlement would have resulted in the dismissal of all claims against Ticketmaster with no material
impact on the company. However, in the wake of the appellate reversal of the district court's class-certification order, the proposed settlement was withdrawn on June 25, 2007.
Ticketmaster
believes the claims in this putative class action lack merit and will continue to defend itself vigorously.
Risk Factors Relating to the Business of Ticketmaster Following the Spin-Offs
Ticketmaster's business, financial condition and results of operations are subject to certain risks that are described below and in the section "Risk Factors" beginning on
page [ ]. You should carefully consider these risks and uncertainties. The risks and uncertainties described below and elsewhere in this information
statement are not the only ones facing Ticketmaster and its businesses. While Ticketmaster believes that the risks and uncertainties described below and elsewhere in this information statement include
the most significant risk factors that should be considered by Ticketmaster's investors, these risks and uncertainties are not the only ones facing Ticketmaster and its businesses.
Live Entertainment Industry and General Economic TrendsThe success of Ticketmaster is dependent, in significant part, on entertainment,
sporting and leisure events and factors adversely affecting such events could have a material adverse effect on its business, financial condition and results of operations.
Ticketmaster sells tickets to live entertainment, sporting and leisure events at arenas, stadiums, theaters and other facilities, and accordingly, its business,
financial condition and results of operations are directly affected by the popularity, frequency and location of such events. Ticket sales are sensitive to fluctuations in the number and pricing of
entertainment, sporting and leisure events and activities offered by promoters, teams and facilities, and adverse trends in the entertainment, sporting and leisure event industries could adversely
affect Ticketmaster's business, financial condition and results of operations. Ticketmaster relies on third parties to create and perform live entertainment, sporting and leisure events and to price
tickets to such events. Accordingly, Ticketmaster's success depends, in part, upon the ability of these third parties to correctly anticipate public demand for particular events and the prices that
the public is willing to pay to attend such events, as well as the availability of popular artists, entertainers and teams.
In
addition, general economic conditions, consumer trends, work stoppages, natural disasters and terrorism could have a material adverse effect on Ticketmaster's business, financial
condition and results of operations. Entertainment-related expenditures are particularly sensitive to business and personal discretionary spending levels, which tend to decline during general economic
downturns.
164
Third Party RelationshipsTicketmaster depends on relationships with clients and any adverse changes in these relationships could adversely
affect Ticketmaster's business, financial condition and results of operations.
Ticketmaster's success is dependent, in significant part, on the ability of Ticketmaster businesses to maintain and renew relationships with existing clients and
to establish new client relationships. Ticketmaster anticipates that for the foreseeable future, the substantial majority of its revenues will be derived from online and offline sales of tickets.
Ticketmaster also expects that revenues from primary ticketing services, which consist primarily of per ticket convenience charges and per order "order processing" fees, will continue to comprise the
substantial majority of its consolidated revenues. For the year ended December 31, 2007, Ticketmaster businesses provided primary ticketing services to over 9,000 clients.
Securing the right to sell tickets depends, in substantial part, on the ability of Ticketmaster businesses to enter into, maintain and renew client contracts on favorable terms. Revenue
attributable to Ticketmaster's largest client, Live Nation (including its subsidiary, House of Blues), represented approximately 17% of its total revenue in 2007. This client relationship consists of
four agreements, two with Live Nation (a worldwide agreement (other than England, Scotland and Wales) that expires on December 31, 2008 and an agreement covering England, Scotland and Wales
that expires on December 31, 2009) and two with House of Blues (a U.S. agreement that expires on December 31, 2009 and a Canadian agreement that expires on March 1, 2010). Revenue
attributable to the worldwide agreement and the agreement covering England, Scotland and Wales represented approximately 11% and 3%, respectively, of Ticketmaster's total revenues in 2007. Each party
has the right to terminate the agreement covering England, Scotland and Wales as of December 31, 2008, in which case Live Nation would be obligated to pay Ticketmaster a termination fee in an
amount equal to 1.25 times the average of Ticketmaster's annual net profits under the agreement for 2007 and 2008. Ticketmaster anticipates that none of these agreements will be renewed. In addition,
Live Nation has publicly announced that it will launch its own ticketing business in 2009 and that it intends to ticket Live Nation events and compete with Ticketmaster for third party clients.
Ticketmaster
cannot provide assurances that its businesses will continue to be able to maintain other existing client contracts, or enter into or maintain new client contracts, on
acceptable terms, if at all, and the failure to do so could have a material adverse affect on Ticketmaster's business, financial condition and results of operations. In addition, facilities, promoters
and other potential clients are increasingly electing to self-ticket and/or distribute a growing number of tickets through client direct or other new channels, which could adversely impact
the ability of Ticketmaster businesses to secure renewals and new client contracts. The non-renewal or termination of an agreement with a major client or multiple agreements with a
combination of smaller clients could have a material adverse effect on Ticketmaster's business, financial condition and results of operations.
Another
important component of Ticketmaster's success is the ability of Ticketmaster businesses to maintain existing and build new relationships with third party distribution channels
and service providers, including providers of credit card processing and delivery services, as well as advertisers, among other parties. Any adverse changes in these relationships, including the
inability of these parties to fulfill their obligations to Ticketmaster businesses for any reason, could adversely affect Ticketmaster's business, financial condition and results of operations.
Brand RecognitionFailure to maintain brand recognition and attract and retain customers in a cost-effective manner could
adversely affect Ticketmaster's business, financial condition and results of operations.
Maintaining and promoting the Ticketmaster and ticketmaster.com (and related international) brand names and, to a
lesser extent, the ticketsnow.com, ticketweb.com, museumtix.com and tmvista.com (and related international) brand names, is critical to the ability of
Ticketmaster businesses to attract consumers and business customers to their respective websites and other distribution channels.
165
Ticketmaster
believes that the importance of brand recognition will increase, given the growing number of online ticketing services due to relatively low barriers to entry to providing internet online
content and services. Accordingly, Ticketmaster businesses have spent, and expect to continue to spend, increasing amounts of money on, and devote greater resources to, branding and other marketing
initiatives, including search engine optimization techniques and paid search engine marketing, neither of which may be successful or cost-effective. Ticketmaster believes that rates for
desirable online advertising and marketing are likely to increase in the foreseeable future. The failure of Ticketmaster businesses to maintain the recognition of their respective brands and to
attract and retain consumers in a cost-effective manner could adversely affect Ticketmaster's business, financial condition and results of operations.
AcquisitionsTicketmaster may experience operational and financial risks in connection with acquisitions. In addition, some of the
businesses acquired by Ticketmaster may incur significant losses from operations or experience impairment of carrying value.
Ticketmaster's growth may depend upon future acquisitions and depends, in part, on its ability to successfully integrate historical acquisitions. Ticketmaster may
experience operational and financial risks in connection with acquisitions. To the extent that Ticketmaster continues to grow through acquisitions, it will need to:
-
- successfully
integrate the operations, as well as the accounting, financial controls, management information, technology, human resources and other administrative systems,
of acquired businesses with existing operations and systems;
-
- retain
the clients of the acquired businesses;
-
- retain
senior management and other key personnel at acquired businesses; and
-
- successfully
manage acquisition-related strain on the management, operations and financial resources of Ticketmaster and/or acquired businesses.
Ticketmaster
may not be successful in addressing these challenges or any others encountered in connection with historical and future acquisitions and the failure to do so could adversely
affect its business, financial condition and results of operations. The anticipated benefits of one or more acquisitions may not be realized and future acquisitions could result in potentially
dilutive issuances of equity securities and/or contingent liabilities. Also, the value of goodwill and other intangible assets acquired could be impacted by one or more unfavorable events or trends,
which could result in impairment charges. The occurrence of any of these events could adversely affect Ticketmaster's business, financial condition and results of operations.
Through
certain recent (and potentially future) acquisitions, such as the acquisitions of TicketsNow, Emma Entertainment, Echo and GetMeIn!, Ticketmaster entered (or may enter) into
aspects of the ticketing and/or entertainment industries in which it has not previously participated directly. Acquisitions of this nature could adversely affect relationships with new and potential
clients to the extent that clients view the interests of acquired businesses, or those of Ticketmaster overall following the completion of any such acquisitions, as competing with or diverging from
their own, which could adversely impact Ticketmaster's relationships with its clients and its ability to attract new clients, which would adversely affect its business, financial condition and results
of operations.
International Presence and ExpansionTicketmaster businesses operate in international markets in which they have limited experience.
Ticketmaster businesses may not be able to successfully expand into new, or further into existing, international markets.
Ticketmaster provides services in various jurisdictions abroad through a number of brands and businesses that it owns and operates, as well as through joint
ventures, and expects to continue to
166
expand
its international presence. See "Business of TicketmasterInternational Operations." Ticketmaster faces, and expects to continue to face, additional risks in the case of its
existing and future international operations, including:
-
- political
instability and unfavorable economic conditions in the markets in which it currently has international operations or into which its brands and businesses may
expand;
-
- more
restrictive or otherwise unfavorable government regulation of the live entertainment and ticketing industries, including the regulation of the provision of primary
ticketing and ticket resale services, as well promotional, marketing and other related services, which could result in increased compliance costs and/or otherwise restrict the manner in which
Ticketmaster businesses provide services and the amount of related fees charged for such services;
-
- limitations
on the enforcement of intellectual property rights, which would preclude Ticketmaster from building the brand recognition upon which it has come to rely in many
jurisdictions;
-
- limitations
on the ability of foreign subsidiaries to repatriate profits or otherwise remit earnings to Ticketmaster;
-
- adverse
tax consequences;
-
- limitations
on technology infrastructure, which could limit the ability of Ticketmaster to migrate international operations to the Ticketmaster System, which would result in
increased costs;
-
- lower
levels of internet usage, credit card usage and consumer spending in comparison to those in the United States; and
-
- difficulties
in managing operations and adapting to consumer desires due to distance, language and cultural differences, including issues associated with management and
operational systems and infrastructures, including internal financial control and reporting systems and functions, staffing and managing foreign operations, which Ticketmaster might not be able to do
effectively, or if so, on a cost-effective basis.
Ticketmaster's
ability to expand its international operations into new, or further into existing, jurisdictions, will depend, in significant part, on its ability to identify potential
acquisition candidates, joint venture or other partners, and enter into arrangements with these parties on favorable terms, as well as its ability to make continued investments to maintain and grow
existing international operations. If the revenues generated by international operations are insufficient to offset expenses incurred in connection with the maintenance and growth of these operations,
Ticketmaster's business, financial condition and results of operations could be materially and adversely affected. In addition, in an effort to make international operations in one or more given
jurisdictions profitable over the long term, significant additional investments that are not profitable over the short term could be required over a prolonged period.
In
addition, the ticketing industry in many jurisdictions abroad is more fragmented and local than it is in the United States. Ticketmaster's success in these markets will depend on the
ability of its businesses to create economies of scale by consolidating within each market geographically, which would most likely occur over a prolonged period, during which significant investments
in technology and infrastructure would be required. In the case of expansion through organic growth, Ticketmaster would face substantial barriers to entry in new, and expansion into existing, markets
due primarily to the risks and concerns discussed above, among others.
Lastly,
to the extent that costs and prices for services are established in local currencies and adjusted to U.S. dollars based on then-current exchange rates, Ticketmaster
will be exposed to foreign exchange rate fluctuations. After accounting for such fluctuations, Ticketmaster may be required to record significant gains or losses, the amount of which will vary based
on then current exchange rates, which could cause Ticketmaster's results to differ materially from expectations. As Ticketmaster continues to expand its international presence, its exposure to
exchange rate fluctuations will increase.
167
Changing Customer Requirements and Industry StandardsTicketmaster businesses may not be able to adapt quickly enough to changing customer
requirements and industry standards.
The e-commerce industry is characterized by evolving industry standards, frequent new service and product introductions and enhancements and changing
customer demands. Ticketmaster businesses may not be able to adapt quickly enough and/or in a cost-effective manner to changes in industry standards and customer requirements and
preferences, and their failure to do so could adversely affect the business, financial condition and results of operations of Ticketmaster. In addition, the continued widespread adoption of new
internet or telecommunications technologies and devices or other technological changes could require Ticketmaster businesses to modify or adapt their respective services or infrastructures. The
failure of Ticketmaster businesses to modify or adapt their respective services or infrastructures in response to these trends could render their existing websites, services and proprietary
technologies obsolete, which could adversely affect Ticketmaster's business, financial condition and results of operations.
In
addition, Ticketmaster is currently in the process of migrating its international brands and businesses to the Ticketmaster System in an attempt to provide consistent and
state-of-the-art services across its businesses and to reduce the cost and expense of maintaining multiple systems, which it may not be able to complete in a timely
or cost-effective manner. Delays or difficulties in implementing the Ticketmaster System, as well as any new or enhanced systems, may limit Ticketmaster's ability to achieve the desired
results in a timely manner. Also, Ticketmaster may be unable to devote financial resources to new technologies and systems in the future, which could adversely affect its business financial condition
and results of operations.
Compliance and Changing Laws, Rules and RegulationsTicketmaster's failure to comply with existing laws, rules and regulations as well as
changing laws, rules and regulations and legal uncertainty, could adversely affect Ticketmaster's business, financial condition and results of operations.
Since Ticketmaster businesses sell tickets and provide related services to consumers through a number of different online and offline channels, they are subject
to a wide variety of statutes, rules, regulations, policies and procedures in various jurisdictions in the United States and abroad, which are subject to change at any time. For example, Ticketmaster
businesses conduct marketing activities via the telephone and/or through online marketing channels, which activities are governed by numerous federal
and state regulations, such as the Telemarketing Sales Rule, state telemarketing laws and the CAN-SPAM Act, among others. Ticketmaster businesses are also subject to laws, rules and
regulations applicable to providers of primary ticketing and ticket resale services, which in some cases regulate the amount of transaction and other fees that they may be charged in connection with
primary ticketing sales and/or the ticket prices that may be charged in the case of ticket resale services, and new legislation of this nature is introduced from time to time in various (and is
pending in certain) jurisdictions in which Ticketmaster businesses sell tickets and provide services. For example, several U.S. states and cities, Canadian provinces, the United Kingdom and European
countries prohibit the resale of tickets at prices greater than the original face price (in the case of certain jurisdictions, without the consent of the venue) and/or prohibit the resale of tickets
to certain types of events. The failure of Ticketmaster businesses to comply with these laws and regulations could result in fines and/or proceedings against Ticketmaster by governmental agencies
and/or consumers, which if material, could adversely affect Ticketmaster's business, financial condition and results of operations. In addition, the promulgation of new laws, rules and regulations
that restrict or otherwise unfavorably impact the ability or manner in which Ticketmaster businesses provide primary ticketing and ticket resale services would require Ticketmaster businesses to
change certain aspects of their business, operations and client relationships to ensure compliance, which could decrease demand for services, reduce revenues, increase costs and/or subject
Ticketmaster to additional liabilities.
168
In
addition, the application of various domestic and international sales, use, value-added and other tax laws, rules and regulations to the historical and new products and services of
Ticketmaster is subject to interpretation by applicable taxing authorities. While Ticketmaster believes that it is compliant with current tax provisions, taxing authorities may take a contrary
position and such positions may adversely affect Ticketmaster's business, financial condition and results of operations.
From
time to time, federal, state and local authorities and/or consumers commence investigations, inquiries or litigation with respect to compliance by Ticketmaster and its businesses
with applicable consumer protection, advertising, unfair business practice, antitrust (and similar or related laws) and other laws. Ticketmaster businesses have historically cooperated with
authorities in connection with these investigations and have satisfactorily resolved each such material investigation, inquiry or litigation. Ticketmaster has incurred significant legal expenses in
connection with the defense of governmental investigations and litigation in the past and may be required to incur additional expenses in the future should investigations and litigation be instituted.
In the case of antitrust (and similar or related) matters, any adverse outcome could limit or prevent Ticketmaster businesses from engaging in the ticketing business generally (or in a particular
market thereof) or subject them to potential damage assessments, all of which could have a material adverse effect on Ticketmaster's business, financial condition and results of operations.
169
CAPITALIZATION
The following table presents Ticketmaster's cash and cash equivalents and capitalization as of March 31, 2008 on an historical basis and on an unaudited
pro forma basis for the separation and the financing. Pro forma for the separation and the financing includes the $750 million in indebtedness that Ticketmaster expects to hold at separation.
In connection with the separation, Ticketmaster is expected to distribute the net proceeds of the financing to IAC and will retain its client cash and its international cash which total approximately
$468.1 million as of March 31, 2008. The separation of Ticketmaster and the related financing transactions are described in the notes to the Unaudited Pro Forma Condensed Combined
Balance Sheet under the Unaudited Pro Forma Condensed Combined Financial Statements as if the separation and the related transactions and events had been consummated on March 31, 2008.
The
assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and Ticketmaster believes such assumptions are reasonable under
the circumstances. Such adjustments are subject to change based upon the finalization of the terms of the separation and financing.
This
table should be read in conjunction with "Selected Historical Financial Data," "Transfers to IAC and Financing," "Description of Capital Stock of the Spincos," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of Ticketmaster," the combined financial statements of Ticketmaster and the "Unaudited Pro Forma Condensed Combined Financial
Statements" and accompanying notes included in this information statement.
The
table below is not necessarily indicative of Ticketmaster's cash and cash equivalents and capitalization had the separation and the related financing transactions been completed on
the date assumed. The capitalization table below may not reflect the capitalization or financial condition which would have resulted had Ticketmaster been operating as an independent, publicly-traded
company at that date and is not necessarily indicative of Ticketmaster's future capitalization or financial condition.
|
|
As of March 31, 2008
|
|
|
Historical
|
|
Unaudited
Pro Forma
for the
Separation
and
Financing
|
|
|
(In millions)
|
Cash and cash equivalents |
|
$ |
502 |
|
$ |
468 |
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
Bank credit facility and notes |
|
$ |
|
|
$ |
750 |
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
750 |
|
|
|
|
|
Invested equity |
|
|
2,049 |
|
|
1,284 |
|
|
|
|
|
Total capitalization |
|
$ |
2,049 |
|
$ |
2,034 |
|
|
|
|
|
170
SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical combined financial information for Ticketmaster. This data was derived, in part, from the historical
combined financial statements of Ticketmaster included elsewhere in this document and reflects the operations and financial position of Ticketmaster at the dates and for the periods indicated. The
information in this table should be read in conjunction with the combined financial statements and accompanying notes and other financial data pertaining to Ticketmaster included herein. However, this
financial information does not necessarily reflect what the historical financial position and results of operations of Ticketmaster would have been had Ticketmaster been a stand-alone company during
the periods presented.
|
|
Year Ended December 31,
|
|
Three Months Ended March 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
(unaudited)
|
|
2003
(unaudited)
|
|
2008
(unaudited)
|
|
2007
(unaudited)
|
|
|
(In thousands)
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,240,477 |
|
$ |
1,062,672 |
|
$ |
928,704 |
|
$ |
747,838 |
|
$ |
723,524 |
|
$ |
348,981 |
|
$ |
303,577 |
Operating income |
|
|
216,316 |
|
|
224,891 |
|
|
166,015 |
|
|
112,404 |
|
|
98,804 |
|
|
46,790 |
|
|
61,488 |
Net income |
|
|
169,351 |
|
|
176,701 |
|
|
117,699 |
|
|
69,023 |
|
|
82,221 |
|
|
32,707 |
|
|
42,925 |
|
|
December 31,
|
|
March 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
(unaudited)
|
|
2003
(unaudited)
|
|
2008
(unaudited)
|
|
|
(In thousands)
|
Balance Sheet Data (end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
269,917 |
|
$ |
59,642 |
|
$ |
96,477 |
|
$ |
63,222 |
|
$ |
3,753 |
|
$ |
151,765 |
Total assets |
|
|
2,306,534 |
|
|
1,815,711 |
|
|
1,772,430 |
|
|
1,593,879 |
|
|
1,484,926 |
|
|
2,809,949 |
Minority interest |
|
|
7,812 |
|
|
669 |
|
|
|
|
|
3,485 |
|
|
2,355 |
|
|
7,766 |
Invested equity |
|
|
1,739,177 |
|
|
1,357,837 |
|
|
1,353,045 |
|
|
1,270,899 |
|
|
1,188,671 |
|
|
2,048,618 |
171
TICKETMASTER AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial Statements of Ticketmaster and subsidiaries ("Ticketmaster") reflect adjustments to the historical
combined financial statements of Ticketmaster to give effect to the separation and related transactions described in the notes to the Unaudited Pro Forma Condensed Combined Financial Statements as of
March 31, 2008 for the Unaudited Pro Forma Condensed Combined Balance Sheet and as of January 1, 2007 and January 1, 2008 for the Unaudited Pro Forma Condensed Combined Statement
of Operations for the year ended December 31, 2007 and the three months ended March 31, 2008, respectively.
The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and Ticketmaster believes such assumptions are reasonable under
the circumstances. While at this time Ticketmaster does not expect material changes to the terms of the separation, the finalization of the financing described in the notes hereto is still subject to
credit market conditions at the time that the financing actually occurs. Given the volatility in the credit markets, it is possible that material changes may occur with respect to the financing.
The following Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the historical combined financial statements of Ticketmaster and
"Management's Discussion and Analysis of Financial Condition and Results of Operations" of Ticketmaster included in this information statement.
These Unaudited Pro Forma Condensed Combined Financial Statements are not necessarily indicative of Ticketmaster's results of operations or financial condition had the separation and
related transactions been completed on the dates assumed. Also, they may not reflect the results of operations or financial condition which would have resulted had Ticketmaster been operating as an
independent publicly-traded company during such periods. In addition, they are not necessarily indicative of Ticketmaster's future results of operations or financial condition.
These Unaudited Pro Forma Condensed Combined Financial Statements are forward looking information within the meaning of "Forward-Looking Statements" as described on
pages 2-3 of this Information Statement.
172
TICKETMASTER AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2008
|
|
Historical
|
|
Pro Forma Adjustments
|
|
Notes
|
|
Pro Forma
|
|
|
(In thousands, except per share data)
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
501,752 |
|
$ |
731,468 |
|
(a |
) |
$ |
468,132 |
|
|
|
|
|
|
(765,088 |
) |
(b |
) |
|
|
Other current assets |
|
|
306,684 |
|
|
|
|
|
|
|
306,684 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
808,436 |
|
|
(33,620 |
) |
|
|
|
774,816 |
Non-current assets |
|
|
2,001,513 |
|
|
18,532 |
|
(a |
) |
|
2,020,045 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,809,949 |
|
$ |
(15,088 |
) |
|
|
$ |
2,794,861 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND INVESTED EQUITY |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
656,671 |
|
$ |
|
|
|
|
$ |
656,671 |
Long-term debt |
|
|
|
|
|
750,000 |
|
(a |
) |
|
750,000 |
Other long-term liabilities |
|
|
96,894 |
|
|
|
|
|
|
|
96,894 |
Minority interest |
|
|
7,766 |
|
|
|
|
|
|
|
7,766 |
INVESTED EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
Common shares, $0.01 par value,authorized; 55,747,109 issued and outstanding on a pro forma basis |
|
|
|
|
|
557 |
|
(b |
) |
|
557 |
Additional paid-in capital |
|
|
|
|
|
1,229,899 |
|
(b |
) |
|
1,229,899 |
Invested capital |
|
|
2,599,884 |
|
|
(2,599,884 |
) |
(b |
) |
|
|
Receivables from IAC and subsidiaries |
|
|
(604,340 |
) |
|
604,340 |
|
(b |
) |
|
|
Accumulated other comprehensive income |
|
|
53,074 |
|
|
|
|
|
|
|
53,074 |
|
|
|
|
|
|
|
|
|
|
Total invested equity |
|
|
2,048,618 |
|
|
(765,088 |
) |
|
|
|
1,283,530 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND INVESTED EQUITY |
|
$ |
2,809,949 |
|
$ |
(15,088 |
) |
|
|
$ |
2,794,861 |
|
|
|
|
|
|
|
|
|
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements are an integral part of these statements.
173
TICKETMASTER AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2008
|
|
Historical
|
|
Pro Forma
Separation
Adjustments
|
|
Notes
|
|
Pro Forma
for the
Separation
|
|
Pro Forma
Financing
Adjustments
|
|
Notes
|
|
Final
Pro Forma
for the
Separation
and
Financing
|
|
|
(In thousands, except per share data)
|
Revenue |
|
$ |
348,981 |
|
$ |
|
|
|
|
$ |
348,981 |
|
$ |
|
|
|
|
$ |
|
Operating expenses |
|
|
302,191 |
|
|
1,223 |
|
(c) |
|
|
303,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316 |
|
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
46,790 |
|
|
(1,539 |
) |
|
|
|
45,251 |
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
3,290 |
|
|
(1,699 |
) |
(e) |
|
|
1,591 |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(735 |
) |
|
|
|
|
|
|
(735 |
) |
|
|
|
(f) |
|
|
|
|
Equity in income of uncombined affiliates |
|
|
666 |
|
|
|
|
|
|
|
666 |
|
|
|
|
|
|
|
|
|
Other income |
|
|
944 |
|
|
|
|
|
|
|
944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
4,165 |
|
|
(1,699 |
) |
|
|
|
2,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
50,955 |
|
|
(3,238 |
) |
|
|
|
47,717 |
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(18,821 |
) |
|
1,250 |
|
(g) |
|
|
(17,571 |
) |
|
|
|
(g) |
|
|
|
Minority interest in losses of combined subsidiaries |
|
|
573 |
|
|
|
|
|
|
|
573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,707 |
|
$ |
(1,988 |
) |
|
|
$ |
30,719 |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:(h) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
|
|
Diluted earnings per share |
|
$ |
|
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements are an integral part of these statements.
174
TICKETMASTER AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007
|
|
Historical
|
|
Pro Forma
Separation
Adjustments
|
|
Notes
|
|
Pro Forma
for the
Separation
|
|
Pro Forma
Financing
Adjustments
|
|
Notes
|
|
Final Pro Forma
for the Separation and Financing
|
|
|
(In thousands, except per share data)
|
Revenue |
|
$ |
1,240,477 |
|
$ |
|
|
|
|
$ |
1,240,477 |
|
$ |
|
|
|
|
$ |
|
Operating expenses |
|
|
1,024,161 |
|
|
5,363
1,264 |
|
(c)
(d) |
|
|
1,030,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
216,316 |
|
|
(6,627 |
) |
|
|
|
209,689 |
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
33,065 |
|
|
(27,719 |
) |
(e) |
|
|
5,346 |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,003 |
) |
|
|
|
|
|
|
(1,003 |
) |
|
|
|
(f) |
|
|
|
|
Equity in income of uncombined affiliates |
|
|
6,301 |
|
|
|
|
|
|
|
6,301 |
|
|
|
|
|
|
|
|
|
Other income |
|
|
1,120 |
|
|
|
|
|
|
|
1,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
39,483 |
|
|
(27,719 |
) |
|
|
|
11,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
255,799 |
|
|
(34,346 |
) |
|
|
|
221,453 |
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(89,007 |
) |
|
13,261 |
|
(g) |
|
|
(75,746 |
) |
|
|
|
(g) |
|
|
|
Minority interest in losses of combined subsidiaries |
|
|
2,559 |
|
|
|
|
|
|
|
2,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
169,351 |
|
$ |
(21,085 |
) |
|
|
$ |
148,266 |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:(h) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
|
|
|
Diluted earnings per share |
|
$ |
|
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements are
an integral part of these statements.
175
TICKETMASTER AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
- (a)
- In
connection with the separation, Ticketmaster expects to raise $750 million through a combination of privately issued debt securities (the "Bonds") and raise
$ million through secured credit facilities (the "Term Loans"). In addition, Ticketmaster expects to negotiate a $ million revolving credit facility (the
"RCF"). The total costs expected to be incurred in connection with the issuance of the Bonds and borrowings under the Term Loans and the issuance of the RCF are $18.5 million. The net proceeds
are therefore expected to be approximately $731.5 million. The Bonds are expected to have a maturity of years from the date of issuance and the Term Loans are expected to
have a term of years. The RCF is expected to have a term of years. The interest rate on the Bonds is estimated to be % and LIBOR plus
% for the Term Loans. The RCF is expected to have a fee of % for the unused portion.
-
(b)
- To
effect the terms of the separation as follows:
- (i)
- The
transfer of approximately $765.1 million in cash to IAC prior to Ticketmaster's separation from IAC, which includes $731.5 million from the financing
referred to in note (a) above, Ticketmaster will retain its client cash as well as its international cash, which totals approximately $468.1 million as of March 31, 2008;
- (ii)
- The
extinguishment of the receivable from IAC and subsidiaries; and
- (iii)
- The
issuance of 55.7 million shares to effect the transfer of the ownership of Ticketmaster from IAC to IAC's shareholders based upon an expected exchange ratio
of 1/5th a share of Ticketmaster for each share of IAC and the number of IAC common shares outstanding as of March 31, 2008 before giving effect to the 1
for 2 reverse stock split of IAC shares that is expected to be effected in connection with the separation.
To
the extent that the net proceeds from the Bonds and Term Loan are less than $731.5 million, as described in note (a) above, there would be a corresponding reduction in the transfer of
cash to IAC.
-
(c)
- Ticketmaster
expects to incur additional costs related to being a stand-alone, public company. These costs have been estimated to be $8.9 million on an annual basis. These
costs relate to the following:
-
- additional
personnel including accounting, tax, treasury, internal audit and legal personnel;
-
- professional
fees associated with audits, tax and other services;
-
- increased
insurance premiums;
-
- increased
health and welfare benefit costs;
-
- costs
associated with a board of directors;
-
- increased
franchise taxes, stock exchange listing fees, fees for preparing and distributing periodic filings with the Securities and Exchange Commission; and
-
- other
administrative costs and fees.
176
TICKETMASTER AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
The
total costs referred to above were compared to the corporate allocations from IAC for the three months ended March 31, 2008 and for the year ended December 31, 2007 in order to
determine the incremental costs expected to be incurred for each period as follows:
|
|
Three Months Ended
March 31, 2008
|
|
Year Ended
December 31, 2007
|
|
|
|
(In thousands)
|
|
Estimated stand-alone public company costs |
|
$ |
2,167 |
|
$ |
8,891 |
|
Less: corporate allocations |
|
|
(944 |
) |
|
(3,528 |
) |
|
|
|
|
|
|
Incremental costs of being a stand-alone, public company |
|
$ |
1,223 |
|
$ |
5,363 |
|
|
|
|
|
|
|
The significant assumptions involved in arriving at these estimates include:
-
- the
number of additional personnel required to operate as a public company and the compensation level with respect to each position;
-
- the
level of additional assistance Ticketmaster will require from professional service providers;
-
- the
increase in insurance premiums as a stand-alone public company;
-
- the
increase in health and welfare costs as a stand-alone entity; and
-
- the
type and level of other costs expected to be incurred in connection with being a stand-alone public company.
This
amount excludes the $1.1 million of estimated one-time recruiting fees; professional fees for legal and tax services (e.g. initial benefit plan design); and other costs
(e.g. initial stock exchange listing fees) expected to be incurred in initially establishing Ticketmaster as a stand-alone public company. These costs are therefore not expected to recur.
- (d)
- To
reflect the additional compensation expense associated with equity-based awards that will be granted only upon consummation of the separation.
The
awards related to the consummation of the separation are expected to be granted to the President and Chief Executive Officer of Ticketmaster in the form of stock options and restricted stock units
("RSUs"). The issuance of these awards is contingent upon the consummation of the separation. The
expense related to these awards is included as a pro forma adjustment because they will vest over four years and will therefore have an impact on the ongoing operations of Ticketmaster. The amount was
determined using a Black Scholes calculation for the stock option portion of the award and an assumed value for the RSU portion of the award. The aggregate estimated value of the awards is being
amortized to expense on a straight-line basis over the four year vesting period of the awards. This does not reflect non-recurring compensation expense related to modifications of existing
equity-based awards that will be made in connection with the separation described below.
Vested stock options to purchase shares of IAC common stock will be modified as follows in connection with the separation:
Each
option will convert into an option to purchase shares of common stock of all five companies, with adjustments to the number of shares subject to each option and the option exercise prices based
on the relative values of IAC and the other four companies following the
177
TICKETMASTER AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
separation, with the intent to generally maintain equivalent value immediately pre and post the transaction.
A
calculation of the estimated value of the vested options immediately prior to the separation and immediately after the separation was performed using the Black Scholes model. The incremental charge
of $2 thousand resulted from the higher estimated value of the vested stock options after the separation. This higher value is due to higher estimated weighted average expected volatility of
the stock price of the five companies after the separation than the expected volatility of IAC's stock price. The expense is a one-time charge because the options are fully vested and
there is no future service requirement.
The modification related to IAC issued RSUs relates to the accelerated vesting, upon the consummation of the separation, of all RSUs granted prior to August 8, 2005 and all awards that were
scheduled to vest prior to February 28, 2009. The estimated expense of $6.6 million is the previously unrecognized expense associated with these awards. The expense is treated as
non-recurring because after the separation no future service is required with respect to these awards.
There may be additional stock-based awards granted in connection with the separation but the amount of such awards, if any, has not yet been determined and no expense with respect thereto has been
reflected herein.
- (e)
- To
reflect the elimination of intercompany interest income allocated by IAC to Ticketmaster.
- (f)
- This
reflects the incremental interest expense related to the financing referred to in note (a) above. It includes interest expense at an assumed rate of % on the
Bonds and LIBOR plus % on the Term Loans, LIBOR is assumed to be %, the aggregate assumed rate is
therefore %. It also reflects expense at % on
the RCF which is assumed to be unused. The interest expense calculation includes the amortization of debt issuance costs over the applicable term of each portion of the financing. An assumed 25 basis
point change in the interest rate would result in an increase or decrease to interest expense by $ million for the Bonds and $ million for the Term Loans.
- (g)
- To
reflect the tax effect of the pro forma adjustments at an assumed effective tax rate of 38.6% which represents a federal statutory rate of 35% and a state effective statutory rate
of 3.6%.
- (h)
- Earnings
per share and weighted average shares outstanding reflect the historical number of common shares used to calculate IAC's earnings per share, adjusted based on an expected
exchange ratio of 1/5th of a share of Ticketmaster for each share of IAC. These amounts reflect the
178
TICKETMASTER AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
portion
of outstanding equity-based awards that were included in IAC's dilutive earnings per share calculation. Pro forma earnings per share is calculated using the following:
|
|
Three Months Ended March 31, 2008
|
|
Year Ended December 31, 2007
|
|
|
(In thousands)
|
Net income |
|
$ |
|
|
$ |
|
|
|
|
|
|
Basic shares outstandingweighted average shares |
|
|
55,753 |
|
|
57,137 |
Other dilutive securities including stock options, warrants and restricted stock and share units |
|
|
1,496 |
|
|
2,729 |
|
|
|
|
|
Diluted shares outstandingweighted average shares |
|
|
57,249 |
|
|
59,866 |
|
|
|
|
|
179
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF TICKETMASTER
The following discussion describes the financial condition and results of operations of Ticketmaster as though Ticketmaster were a
separate company as of the dates and for the periods presented and includes the businesses, assets and liabilities that will comprise Ticketmaster following the
spin-off.
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying Ticketmaster as one of those five companies. We refer to the separation transaction herein as the "spin-off." Upon completion of the spin-off, Ticketmaster will
consist of the businesses that formerly comprised IAC's Ticketmaster segment, which consists of its domestic and international ticketing and ticketing related businesses, subsidiaries and investments,
excluding its ReserveAmerica subsidiary and its investment in Active.com. Ticketmaster will include IAC's investment in Front Line Management Group, Inc. ("Front Line"). The businesses to be
operated by Ticketmaster following the spin-off are referred to herein as the "Ticketmaster Businesses."
Basis of Presentation
The historical combined financial statements of Ticketmaster and its subsidiaries and the disclosure set forth in this Management's Discussion and Analysis of
Financial Condition and Results of Operations of Ticketmaster reflect the historical financial position, results of operations and cash flows of the Ticketmaster Businesses since their respective
dates of acquisition by IAC, and the allocation to Ticketmaster of certain IAC corporate expenses relating to the Ticketmaster Businesses based on the historical consolidated financial statements and
accounting records of IAC and using the historical results of operations and historical bases of the assets and liabilities of the Ticketmaster Businesses. However, for the purposes of these financial
statements, income taxes have been computed for Ticketmaster on an as if stand-alone, separate tax return basis. These financial statements are prepared on a combined, rather than a consolidated,
basis because they exclude ReserveAmerica and the
investment in Active.com that were owned, and include the investment in Front Line that was not owned, either directly or indirectly, by legal entities that comprise the Ticketmaster Businesses. The
ownership of ReserveAmerica and the investment in Active.com will be retained by IAC after the spin-off. These combined financial statements present IAC's and its subsidiaries net
investment in the Ticketmaster Businesses as invested equity in lieu of shareholders' equity. Intercompany transactions and accounts have been eliminated.
In
the opinion of Ticketmaster's management, the assumptions underlying the historical combined financial statements of Ticketmaster are reasonable. However, this financial information
does not necessarily reflect what the historical financial position, results of operations and cash flows of Ticketmaster would have been had Ticketmaster been a stand-alone company during the periods
presented.
180
MANAGEMENT OVERVIEW
Ticketmaster is the world's leading live entertainment ticketing and marketing company, providing ticket sales, ticket resale services, marketing and distribution
through www.ticketmaster.com, one of the largest e-commerce sites on the internet, approximately 6,700 independent sales outlets and 19 call centers worldwide. Ticketmaster serves leading
arenas, stadiums, amphitheaters, music clubs, concert promoters, professional sports franchises and leagues, college sports teams, performing arts venues, museums and theaters in the United States and
abroad, including Australia, Canada, China, Denmark, Finland, Germany, Ireland, the Netherlands, New Zealand, Norway, Spain, Sweden, Turkey and the United Kingdom. Ticketmaster is also a party to
joint ventures with third parties to provide ticket distribution services in Mexico and to supply ticketing services for the 2008 Beijing Olympic Games. Ticketmaster licenses its technology in Mexico,
Argentina, Brazil, Chile, China and Belgium.
Sources of Revenue
Ticketmaster earns a majority of its revenue from primary ticketing and resale ticket services on behalf of its clients. Ticketing operations revenue primarily
consists of convenience and order processing fees generated primarily through ticket sales. The sale of tickets for an event often commences several months prior to the event performance date.
Ticketmaster recognizes revenue from the sale of a ticket when the ticket is sold. Fluctuations in ticket operations revenue occur largely as a result of changes in the number of tickets sold and the
average revenue per ticket. The number of tickets sold varies as a result of (i) additions or losses of clients serviced by Ticketmaster; (ii) fluctuations in the scheduling of
events, particularly for popular performers; (iii) overall consumer demand for live entertainment events; and (iv) the percentage of tickets for events which are sold directly by
clients. The average revenue per ticket varies as a result of the amount of convenience charges earned on each ticket. The amount of convenience charges typically varies based upon numerous factors,
including the face price of the ticket, the type of event, whether the ticket is purchased at an independent sales outlet, through call centers or via Ticketmaster's websites, as well as the services
to be rendered to the client.
Operating Costs
Ticketmaster records ticket operations costs specifically associated with the distribution of tickets sold through its system. The largest components of these
operating costs are royalties paid to clients as a share of convenience and order processing fees, credit card fees, payroll, telecommunication and data communication costs associated with its call
centers, and commissions paid on tickets distributed through independent sales outlets away from the box office, and other expenses including ticket stock and postage. These costs are primarily
variable in nature. Direct payroll costs relate to the Company's call centers. Outlet commissions are paid to music chains, department stores and other independent retail locations in exchange for
their providing space and personnel to service ticket purchases. The participation, if any, by clients in Ticketmaster's revenue from convenience and order processing fees is set forth in
Ticketmaster's contracts with its clients.
Channels of Distribution; Marketing Costs
Ticketmaster sells tickets online, through independent sales outlets, call centers and via mobile. During the year ended December 31, 2007, 70%, 17%, 13%
and less than 1% of primary tickets were sold through these channels, respectively.
Ticketmaster
owns and operates various branded websites, both in the U.S. and abroad, which are customized to reflect services offered in each jurisdiction and designed to promote ticket
sales for live events and disseminate event, performer and related merchandise information online. Consumers can access www.ticketmaster.com directly, from affiliated websites and through numerous
direct links from banners and event profiles hosted by approved third party websites.
181
As
of December 31, 2007, Ticketmaster had approximately 6,700 independent sales outlets worldwide, including approximately 2,000 in the United States and approximately 4,700 in
various jurisdictions
abroad. Ticketmaster pays independent sales outlets a commission, the amount of which ranges from approximately 17% to 20% of Ticketmaster's convenience charge.
As
of December 31, 2007, Ticketmaster operated 19 call centers worldwide, through which consumers can generally purchase tickets by telephone, or by way of an interactive voice
response system, seven days a week, for at least 20 hours per day.
Ticketmaster
markets and offers services directly to customers through www.ticketmaster.com and its other branded websites allowing customers to transact directly with Ticketmaster in a
convenient manner. Ticketmaster also pays to market and distribute services on third party distribution channels, such as internet portals and search engines. In addition, some of Ticketmaster's
businesses manage affiliate programs, pursuant to which they pay commissions and fees to third parties based on revenue earned. Ticketmaster has made, and expects to continue to make, investments in
online and offline advertising to build its brands and drive traffic to its businesses.
Clients
routinely agree by contract to include Ticketmaster's name, logos, applicable website address and charge-by-phone number in advertisements in all forms of
media promoting the availability of their tickets. The Ticketmaster brand name and logo are also prominently displayed on printed tickets, ticket envelopes and e-mail alerts about upcoming events that
Ticketmaster sends to its customers.
Access to Supply
Ticketmaster's primary ticketing services, and to a lesser extent, its ticketing resale services, depend significantly upon its ability to secure ticketing
inventory through existing clients and new clients. Ticketmaster believes that the ability of its ticketing clients to reach a large qualified audience through its brands and businesses, including
through its multiple distribution channels, is a significant benefit. Ticketmaster seeks to maintain and renew client contracts, and enter into new client contracts, on a favorable basis. Revenue
attributable to Ticketmaster's largest client, Live Nation (including its subsidiary, House of Blues), represented approximately 17% of its total revenue in 2007. This client relationship consists of
four agreements, two with Live Nation (a worldwide agreement (other than England, Scotland and Wales) that expires on December 31, 2008 and an agreement covering England, Scotland and Wales
that expires on December 31, 2009) and two with House of Blues (a U.S. agreement that expires on December 31, 2009 and a Canadian agreement that expires on March 1, 2010). Revenue
attributable to the worldwide agreement and the agreement covering England, Scotland and Wales represented approximately 11% and 3%, respectively, of Ticketmaster's total revenue in 2007. Ticketmaster
anticipates that none of these agreements will be renewed. Revenue generated from the four Live Nation agreements for the years ended December 31, 2007, 2006 and 2005 are provided in the table
below:
|
|
|
|
Years Ended December 31,
|
|
|
Expiration Date
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
Live NationWorldwide agreement |
|
12/31/08 |
|
$ |
138,832 |
|
$ |
142,972 |
|
$ |
121,923 |
Live NationEngland, Scotland, Wales agreement(a) |
|
12/31/09 |
|
|
34,935 |
|
|
33,575 |
|
|
27,616 |
House of BluesU.S. agreement |
|
12/31/09 |
|
|
24,960 |
|
|
24,866 |
|
|
24,229 |
House of BluesCanadian agreement |
|
3/1/10 |
|
|
7,704 |
|
|
7,027 |
|
|
8,570 |
|
|
|
|
|
|
|
|
|
|
Total revenue under Live Nation agreements |
|
|
|
$ |
206,431 |
|
$ |
208,440 |
|
$ |
182,338 |
|
|
|
|
|
|
|
|
|
- (a)
- Each
party has the right to terminate the agreement as of December 31, 2008, in which case Live Nation would be obligated to pay Ticketmaster a termination fee in an amount
equal to 1.25 times
182
the
average of Ticketmaster's annual net profits under the agreement for 2007 and 2008. Ticketmaster currently expects that the agreement will not be terminated as of December 31, 2008.
Economic and Other Trends and Events; Industry Specific Factors
The ticketing services industry has experienced significant changes over the past decade due to the advent of online commerce. The increase in the number of
online ticket sales as a percentage of all ticket sales has resulted in a general decrease in ticketing costs, making it easier for clients to manage ticket sales in-house, either using
proprietary technology or stand-alone, automated ticketing systems licensed from a third party. The growth of online commerce has also contributed to the growth of resale ticketing services and the
consolidation of those services, which historically has been very fragmented, consisting of a significant number of local brokers with limited inventory selling through traditional storefronts. In
addition, entertainment-related expenditures such as ticket sales are sensitive to business and personal discretionary spending levels, which might tend to decline during general economic downturns.
Ticketmaster has taken steps to replace the revenue it expects to lose upon the expiration of its contract with Live Nation, Inc. at the end of 2008. These include a number of
discrete investments including new acquisitions, efforts to gain scale in the market for ticket resale services and adding resources into growth efforts internationally which come with up front costs.
These continuing investments, as well as higher royalty rates and general cost increases, are expected to impact results throughout 2008, with a continuation of faster revenue growth than profit
growth, though not to the extent seen in the first quarter.
During the second quarter of 2008, Ticketmaster began a comprehensive review of its worldwide cost structure in light of significant investments that have been made through increased
operating and capital expenditures, acquisitions in recent periods, and in advance of the termination of the Live Nation agreement in 2009. While the final conclusions and details of this review are
still being determined, Ticketmaster intends to take a series of actions that are expected to result in a significant reduction of annual operating expenses. Such actions are likely to include more
rapid integration of recently acquired companies, ticketing platform consolidation, rationalization of certain products and services, and other operating cost reductions. Achieving these expense
reductions may require certain up-front costs including cash expenditure and could result in the write-down of certain assets. Ticketmaster expects these up-front
costs to principally impact 2008 results, but the aggregate cash costs of these actions are not expected to materially impact Ticketmaster's overall financial position or liquidity.
International Operations
Ticketmaster's future growth depends in part on its ability to expand its brands and businesses abroad, including Europe and Asia, given the large consumer
marketplace for the services that Ticketmaster's brands and businesses offer. Ticketmaster's ability to expand its international operations into
jurisdictions where Ticketmaster does not currently operate depends in part on its ability to identify potential acquisition candidates, acquire them on favorable terms and successfully integrate
their operations. In addition, in many countries abroad, access to ticketing inventory is fragmented and may require significant additional investment to achieve profitability levels consistent with
Ticketmaster's established businesses. As a percentage of total Ticketmaster revenue, international operations represented approximately 34% in 2007, 29% in 2006 and 27% in 2005.
183
Results of Operations for the Years Ended December 31, 2007, 2006 and 2005
Revenue
|
|
Years Ended December 31,
|
|
|
2007
|
|
% change
|
|
2006
|
|
% change
|
|
2005
|
|
|
(Dollars in thousands)
|
Domestic |
|
$ |
814,851 |
|
7 |
% |
$ |
759,339 |
|
12 |
% |
$ |
675,781 |
International |
|
|
425,626 |
|
40 |
% |
|
303,333 |
|
20 |
% |
|
252,923 |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,240,477 |
|
17 |
% |
$ |
1,062,672 |
|
14 |
% |
$ |
928,704 |
|
|
|
|
|
|
|
|
|
|
|
Revenue
in 2007 increased $177.8 million, or 17%, from 2006 driven by increases in both domestic and international revenue as worldwide tickets sold increased 11%, with a 5%
increase in average revenue per ticket. Domestic revenue increased 7%, primarily due to a 5% increase in average revenue per ticket along with a 2% increase in the number of tickets sold. The increase
in average domestic revenue per ticket resulted from higher convenience and processing fees due in part to annual contractual increases. International revenue increased by 40%, or 31% excluding the
impact of foreign exchange, primarily due to a 26% increase in the number of tickets sold along with a 12% increase in average revenue per ticket. The increase in the number of tickets sold primarily
resulted from increased ticket sales in the United Kingdom and Canada. International acquisitions contributed approximately $23.2 million to Ticketmaster's overall revenue growth in 2007.
Ticketmaster's largest client, Live Nation, Inc. ("Live Nation") (including its subsidiary House of Blues), represented approximately 17%, 20% and 20% of its combined revenue for the
years ended December 31, 2007, 2006 and 2005, respectively. Refer to page 181, Access to Supply, for a description of Ticketmaster's client relationship with Live Nation.
Revenue
in 2006 increased $134.0 million, or 14%, from 2005 driven by increases in both domestic and international revenue as total worldwide tickets sold increased by 7%, with a
6% increase in average revenue per ticket. Domestic revenue increased by 12%, primarily due to higher domestic concert ticket sales, along with a 6% increase in average domestic revenue per ticket.
The increase in average domestic revenue per ticket resulted in part from a shift towards live music events. International revenue increased by 20%, or 17% excluding the impact of foreign exchange,
primarily due to Ticketmaster's purchase of the remaining interest in its Australian joint venture in April 2005, along with increased revenue from the United Kingdom and Canada. International revenue
reflects a 12% increase in the number of tickets sold along with a 9% increase in average revenue per ticket. International acquisitions contributed approximately $16.5 million to
Ticketmaster's overall revenue growth in 2006.
Cost of Sales
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Cost of sales |
|
$766,538 |
|
20% |
|
$637,152 |
|
14% |
|
$561,060 |
As a percentage of total revenue |
|
62% |
|
184 bp |
|
60% |
|
(46) bp |
|
60% |
Gross margins |
|
38% |
|
(184) bp |
|
40% |
|
46 bp |
|
40% |
Cost
of sales consists primarily of ticketing royalties, credit card processing fees and compensation and other employee-related costs (including stock-based compensation) for personnel
engaged in call center functions. Ticketing royalties relate to Ticketmaster's clients' share of convenience and order processing charges.
184
Cost
of sales in 2007 increased $129.4 million from 2006, primarily due to increases of $65.8 million in ticketing royalties, $20.1 million in compensation and other
employee-related costs associated, in part, with a 12% increase in headcount, and $16.6 million in credit card processing fees which resulted from an increase in ticket revenue volume processed
online. The increase in ticketing royalties is due to increased revenue and higher royalty rates. Royalties are driven in part by higher contractual royalty rates included in the renewal of contracts
with various promoters and venue clients, and are usually based on a percentage of convenience and order processing revenue. Domestic and international ticketing royalties may continue to increase as
a percentage of convenience and processing revenue.
Cost
of sales in 2006 increased $76.1 million from 2005, primarily due to increases of $53.3 million in ticketing royalties resulting from increased revenue and higher
royalty rates, $10.6 million in compensation and other employee-related costs and $7.8 million in credit card processing fees. The increase in credit card processing fees is due to
higher revenue.
Selling and marketing expense
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Selling and marketing expense |
|
$43,487 |
|
116% |
|
$20,123 |
|
14% |
|
$17,691 |
As a percentage of total revenue |
|
4% |
|
161 bp |
|
2% |
|
(1) bp |
|
2% |
Selling
and marketing expense consists primarily of advertising and promotional expenditures and compensation and other employee-related costs (including stock-based compensation) for
personnel engaged in customer service and sales functions. Advertising and promotional expenditures primarily include online marketing, including fees paid to search engines and distribution partners,
as well as offline marketing, including sports sponsorship marketing and radio spending.
Selling
and marketing expense in 2007 increased $23.4 million from 2006, primarily due to increased advertising and promotional expenditures of $17.4 million and increased
compensation and other employee-related costs of $5.9 million associated, in part, with a 31% increase in headcount. The increase in advertising and promotional expenditures includes
$6.3 million in expenses related to sports sponsorship agreements, primarily with National Football League teams, that were not incurred in the prior year period and online marketing, including
fees paid to search engines and distribution partners. Sports sponsorship agreements are intended to promote Ticketmaster's ticket resale services.
Selling
and marketing expense in 2006 increased $2.4 million from 2005, primarily due to an increase of $3.0 million in compensation and other employee-related costs,
partially offset by a decrease of $0.2 million in advertising and promotional expenditures.
General and administrative expense
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
General and administrative expense |
|
$149,478 |
|
26% |
|
$118,317 |
|
(3)% |
|
$121,695 |
As a percentage of total revenue |
|
12% |
|
92 bp |
|
11% |
|
(197) bp |
|
13% |
General
and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax,
human resources and executive management functions, facilities costs and fees for professional services.
General and administrative expense in 2007 increased $31.2 million from 2006, primarily due to a payment of $8.7 million in settlement of litigation (in excess of prior
reserves) compared to the prior
185
year period which included a reduction of $5.8 million in certain litigation reserves due to more favorable settlements than previous reserves reflected. Also contributing to the increase in
general and administrative expense is an increase of $9.7 million in compensation and other employee-related costs as Ticketmaster continues to build out its worldwide infrastructure, as well
as increases of $2.1 million and $1.0 million in facilities costs and utilities expense, respectively. Ticketmaster expects to incur increased costs related to the additional financial
and legal requirements associated with being a separate public company, as well as increased non-cash compensation associated with the modification of existing stock-based compensation awards in
connection with the spin-off and the grant of new awards post spin-off.
General
and administrative expense in 2006 decreased $3.4 million from 2005, primarily due to a $5.8 million reduction in litigation reserves, partially offset by an
increase of $0.5 million in compensation and other employee-related costs. The increase in compensation and other employee-related costs is primarily due to higher personnel costs in 2006
associated with increased headcount from growth in the business, partially offset by a decrease in non-cash compensation expense resulting from a $7.9 million charge in 2005 related
to the modification of vested stock options in connection with the Expedia spin-off from IAC.
Effective
January 1, 2006, Ticketmaster adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"),
using the modified prospective transition method. There was no impact to the amount of stock-based compensation recorded in the combined statement of operations for the years ended December 31,
2006 and 2005 as a result of adopting SFAS 123R. Ticketmaster has been recognizing expense for all stock-based grants since it
became wholly owned by IAC on January 17, 2003, in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The majority of stock-based compensation
expense is reflected in general and administrative expense. As of December 31, 2007, there was approximately $29.2 million of unrecognized compensation cost, net of estimated
forfeitures, related to all equity-based awards, which is expected to be recognized over a weighted average period of approximately 2.5 years.
Depreciation
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Depreciation |
|
$38,458 |
|
10% |
|
$35,080 |
|
5% |
|
$33,495 |
As a percentage of total revenue |
|
3% |
|
(20) bp |
|
3% |
|
(31) bp |
|
4% |
Depreciation
in 2007 and 2006 increased $3.4 million and $1.6 million, respectively, primarily due to the incremental depreciation associated with capital expenditures made
throughout 2006 and 2007 and various acquisitions, partially offset by certain fixed assets becoming fully depreciated during these periods.
Operating Income Before Amortization
Operating Income Before Amortization is a Non-GAAP measure and is defined in "Ticketmaster's Principles of Financial Reporting".
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Operating Income Before Amortization |
|
$255,088 |
|
(2%) |
|
$259,839 |
|
21% |
|
$215,068 |
As a percentage of total revenue |
|
21% |
|
(389) bp |
|
24% |
|
129 bp |
|
23% |
186
Operating Income Before Amortization in 2007 decreased $4.8 million from 2006, primarily due to increases in cost of sales, general and administrative expense and selling and
marketing expense. The increase in these expenses was driven by higher overall royalty rates, international development and expansion, and increased marketing efforts, including ticket resale
initiatives. Operating Income Before Amortization was negatively impacted by a payment of $8.7 million in settlement of litigation compared to the prior year period which included a reduction
of $5.8 million in certain litigation reserves and the favorable resolution of claims and insurance settlements of $4.3 million.
Operating Income Before Amortization in 2006 increased $44.8 million from 2005, growing at a faster rate than revenue primarily due to increased average revenue per ticket and
operational efficiencies resulting from increased online ticket volumes. Operating Income Before Amortization was further impacted by the reduction of $5.8 million in certain litigation
reserves and the favorable resolution of claims and insurance settlements of $4.3 million in the current year period. These favorable impacts were partially offset by increased cost of sales
and general and administrative expenses.
Operating income
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Operating income |
|
$216,316 |
|
(4%) |
|
$224,891 |
|
35% |
|
$166,015 |
As a percentage of total revenue |
|
17% |
|
(372) bp |
|
21% |
|
329 bp |
|
18% |
Operating
income in 2007 decreased $8.6 million from 2006, primarily due to the decrease in Operating Income Before Amortization described above and a $4.7 million increase
in non-cash compensation expense, partially offset by a decrease in amortization of intangibles.
Operating
income in 2006 increased $58.9 million from 2005, primarily due to the increase in Operating Income Before Amortization described above, a $12.5 million decrease
in non-cash compensation expense and a decrease in the amortization of intangibles.
Other income (expense)
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$33,065 |
|
(3)% |
|
$33,982 |
|
95% |
|
$17,417 |
|
Interest expense |
|
(1,003) |
|
(232)% |
|
(302) |
|
(368)% |
|
(65) |
|
Equity in income of unconsolidated affiliates |
|
6,301 |
|
110% |
|
2,997 |
|
(12)% |
|
3,401 |
|
Other income |
|
1,120 |
|
14% |
|
982 |
|
43% |
|
689 |
Interest
income in 2007 decreased $0.9 million from 2006, primarily due to lower receivable balances due from IAC and subsidiaries, partially offset by interest earned on higher
average international operating cash balances in 2007. Interest earned on the receivable balance is principally due to cash transfers to IAC in connection with IAC's centrally managed U.S. treasury
function.
Equity
in the income of unconsolidated affiliates in 2007 increased $3.3 million from 2006, primarily due to Ticketmaster's investments in Front Line and TM Mexico.
Interest
income in 2006 increased $16.6 million from 2005, primarily due to higher receivable balances due from IAC and its subsidiaries, as well as increased interest earned on
higher average operating cash balances in 2006.
187
Equity
in the income of unconsolidated affiliates in 2006 decreased $0.4 million from 2005, primarily due to the absence of any equity income from Ticketmaster's investment in its
Australian joint venture. Ticketmaster began to consolidate the results of its joint venture effective April 2005 when it acquired the interest it did not previously own.
Income tax provision
In 2007, Ticketmaster recorded an income tax provision of $89.0 million which represents an effective tax rate of 35%. The 2007 tax rate approximates the
federal statutory rate of 35% as state and local income taxes were substantially offset by foreign income taxed at lower rates. In 2006, Ticketmaster recorded a tax provision of $86.0 million
which represents an effective tax rate of 33%. The 2006 tax rate is lower than the federal statutory rate of 35% due principally to benefits associated with Ticketmaster's assertion that the earnings
of certain foreign subsidiaries are permanently reinvested and foreign income taxed at lower rates, partially offset by state and local income taxes. In 2005, Ticketmaster recorded a tax provision of
$68.3 million which represents an effective tax rate of 36%. The 2005 tax rate is higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset
by foreign income taxed at lower rates.
Ticketmaster
adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109"
("FIN 48") effective January 1, 2007. The cumulative effect of the adoption resulted in an increase of $1.3 million to invested capital. As of January 1, 2007 and
December 31, 2007, Ticketmaster had unrecognized tax benefits of approximately $0.6 million and $6.3 million, respectively, which included accrued interest of $0.1 million
and $0.8 million, respectively.
By
virtue of previously filed separate company and consolidated tax returns with IAC, Ticketmaster is routinely under audit by federal, state, local and foreign authorities in the area
of income tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered
sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between
the reserves for tax contingencies and the amounts owed by Ticketmaster are recorded in the period they become known.
The
Internal Revenue Service ("IRS") is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of
Ticketmaster from January 17, 2003, the date which Ticketmaster joined the IAC consolidated tax return. The statute of limitations for these years has been extended to December 31, 2008.
Tax filings in various state, local and foreign jurisdictions are currently under examinations, the most significant of which are Florida, New York state and New York City, for various tax years after
December 31, 2001. These examinations are expected to be completed by late 2008. Ticketmaster believes that it is reasonably possible that its unrecognized tax benefits could decrease by
approximately $3.6 million within twelve months of the current reporting date due to the reversal of deductible temporary differences which will result in a corresponding increase in net
deferred tax liabilities. An estimate of other changes in unrecognized benefits cannot be made, but are not expected to be significant.
Under
the terms of the tax sharing agreement, which will be executed in connection with the spin-off, IAC will generally retain the liability related to federal and state tax returns
filed on a consolidated or unitary basis for all periods prior to the spin-off.
188
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2007, Ticketmaster had $569.3 million of cash and cash equivalents and restricted cash and cash equivalents, including
$313.6 million in funds representing amounts equal to the face
value of tickets sold on behalf of its clients. Ticketmaster's cash and cash equivalents and restricted cash and cash equivalents held in foreign jurisdictions is approximately $359.1 million
at December 31, 2007, including $222.5 million in funds representing amounts equal to the face value of tickets sold on behalf of its clients, and is maintained principally in the United
Kingdom, Australia and Canada.
Net
cash provided by operating activities was $212.0 million and $230.7 million in 2007 and 2006, respectively. The decrease of $18.7 million in net cash provided by
operating activities reflects an increase in contract deposits and accounts receivable, partially offset by an increased contribution from client funds of $69.5 million which is primarily due
to timing of settlements with clients.
Net
cash used in investing activities in 2007 of $13.0 million primarily resulted from capital expenditures of $47.5 million and acquisitions, net of cash acquired, of
$29.4 million, partially offset by cash transfers from IAC of $64.5 million. The cash transfers from IAC relate to IAC's centrally managed U.S. treasury function. Net cash used in
investing activities in 2006 of $189.1 million primarily resulted from cash transfers to IAC of $214.2 million, capital expenditures of $39.3 million, a net increase in
long-term investments of $20.6 million and acquisitions, net of cash acquired, of $17.8 million. These uses of cash were partially offset by the net proceeds of
$108.9 million related to the purchases, sales and maturities of marketable securities. The increase in long-term investments in 2006 is primarily due to Ticketmaster's equity
investment in Evolution Artists, Inc. ("iLike").
During January and February 2008, Ticketmaster completed the acquisitions of Paciolan, Inc., GET ME IN! Ltd, and The V.I.P. Tour Company ("TicketsNow"). The aggregate
consideration for these transactions was approximately $400 million and was funded by capital contributions from IAC. These companies are wholly-owned subsidiaries operating in the U.S.
(Paciolan and TicketsNow) and United Kingdom (GET ME IN!).
Net cash provided by financing activities in 2007 and 2006 of $30.3 million and $20.6 million, respectively, were primarily due to capital contributions of
$29.4 million and $17.8 million from IAC to fund Ticketmaster's 2007 and 2006 acquisitions, respectively.
189
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
|
|
(In thousands)
|
Purchase obligations(a) |
|
$ |
95,056 |
|
$ |
30,726 |
|
$ |
35,268 |
|
$ |
25,687 |
|
$ |
3,375 |
Operating leases |
|
|
82,345 |
|
|
14,830 |
|
|
25,232 |
|
|
18,547 |
|
|
23,736 |
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
177,401 |
|
$ |
45,556 |
|
$ |
60,500 |
|
$ |
44,234 |
|
$ |
27,111 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- The
purchase obligations primarily arise from sports sponsorship agreements intended to promote Ticketmaster's ticket resale services.
|
|
Amount of Commitment Expiration Per Period
|
Other Commercial Commitments*
|
|
Total Amounts
Committed
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
|
|
(In thousands)
|
Guarantees, surety bonds and letters of credit |
|
$ |
3,911 |
|
$ |
596 |
|
$ |
65 |
|
$ |
3,250 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
- *
- Commercial
commitments are funding commitments that could potentially require performance in the event of demands by third parties or contingent events, such as under letters of credit,
surety bonds or under guarantees of debt.
Off-Balance Sheet Arrangements
Other than the items described above, Ticketmaster does not have any off-balance sheet arrangements as of December 31, 2007.
190
Results of Operations for the Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007
Revenue
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% change
|
|
2007
|
|
|
(Dollars in thousands)
|
Domestic |
|
$ |
239,707 |
|
15% |
|
$ |
209,077 |
International |
|
|
109,274 |
|
16% |
|
|
94,500 |
|
|
|
|
|
|
|
Total revenue |
|
$ |
348,981 |
|
15% |
|
$ |
303,577 |
|
|
|
|
|
|
|
Revenue in 2008 increased $45.4 million, or 15%, from 2007 driven by increases in both domestic and international revenue as worldwide tickets sold increased 3%, with a 7%
increase in average revenue per ticket. Domestic revenue grew by 15%, primarily due to contributions from Paciolan, Inc. ("Paciolan") and The V.I.P. Tour Company ("TicketsNow"), acquired in
January and February 2008, respectively, as well as a 7% increase in average revenue per ticket and a 1% increase in the number of tickets sold. The increase in average domestic revenue per ticket
resulted from higher convenience and processing fees. International revenue grew by 16%, or 6% excluding the impact of foreign exchange, primarily due to an 8% increase in average revenue per ticket
along with a 5% increase in the number of tickets sold. Both the increases in the average revenue per ticket and the number of tickets sold primarily resulted from increased revenue from Canada and
Australia. Acquisitions contributed approximately $18.4 million to Ticketmaster's overall revenue growth in 2008.
Ticketmaster's largest client, Live Nation, Inc. (including its subsidiary House of Blues), represented approximately 15% and 17% of its combined revenue for the three months ended
March 31, 2008 and 2007, respectively.
Cost of sales
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% change
|
|
2007
|
|
|
(Dollars in thousands)
|
Cost of sales |
|
$221,022 |
|
20% |
|
$184,784 |
As a percentage of total revenue |
|
63% |
|
246 bp |
|
61% |
Gross margins |
|
37% |
|
(246) bp |
|
39% |
Cost of sales consists primarily of ticketing royalties, credit card processing fees and compensation and other employee-related costs (including stock-based compensation) for personnel
engaged in call center functions. Ticketing royalties relate to Ticketmaster's clients' share of convenience and order processing charges.
Cost of sales in 2008 increased $36.2 million from 2007, primarily due to increases of $12.7 million in ticketing royalties, $11.3 million in compensation and other
employee-related costs associated, in part, with a 22% increase in headcount and $1.4 million in credit card processing fees. Included in these increases is the impact of acquisitions not in
the year ago period, which contributed $0.7 million, $6.5 million and $0.7 million to ticketing royalties, compensation and other employee-related costs and credit card processing
fees, respectively. Excluding the impact of acquisitions not in the year ago period, cost of sales increased $23.7 million, or 13%. The increase in ticketing royalties is due to increased
revenue and higher royalty rates. Royalties are driven in part by higher contractual royalty rates included in the renewal of contracts with various promoters and venue clients, and are usually
191
based on a percentage of convenience and order processing revenue. Domestic and international ticketing royalties may continue to increase as a percentage of convenience and processing revenue.
Selling and marketing expense
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% change
|
|
2007
|
|
|
(Dollars in thousands)
|
Selling and marketing expense |
|
$19,393 |
|
174% |
|
$7,073 |
As a percentage of total revenue |
|
6% |
|
323 bp |
|
2% |
Selling and marketing expense consists primarily of advertising and promotional expenditures and compensation and other employee-related costs (including stock-based compensation) for
personnel engaged in customer service and sales functions. Advertising and promotional expenditures primarily include online marketing, including fees paid to search engines and distribution partners,
as well as offline marketing, including sports sponsorship marketing and radio spending.
Selling and marketing expense in 2008 increased $12.3 million from 2007, primarily due to increased advertising and promotional expenditures of $8.2 million and increased
compensation and other employee-related costs of $2.4 million as Ticketmaster continues to build out its worldwide infrastructure. Included in these increases is the impact of acquisitions not
in the year ago period, which contributed $2.2 million and $1.3 million to advertising and promotional expenditures and compensation and other employee-related costs, respectively.
Excluding the impact of acquisitions not in the year ago period, selling and marketing expense increased $7.7 million, or 108%. The increase in advertising and promotional expenditures is due
in part to an increase in sports sponsorship agreements which are intended to promote Ticketmaster's resale ticket services such as ticket exchange.
General and administrative expense
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% change
|
|
2007
|
|
|
(Dollars in thousands)
|
General and administrative expense |
|
$41,853 |
|
22% |
|
$34,258 |
As a percentage of total revenue |
|
12% |
|
71 bp |
|
11% |
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax,
human resources and executive management functions, facilities costs and fees for professional services.
General and administrative expense in 2008 increased $7.6 million from 2007, primarily due to increases of $4.3 million in compensation and other employee-related costs and
$1.5 million in professional fees. The increase in compensation and other employee-related costs is primarily due to an increase of $3.3 million associated with recent acquisitions not
in the year ago period. Excluding the impact of acquisitions not in the year ago period, general and administrative expense increased $2.9 million, or 8%. Ticketmaster expects to incur
increased costs related to the additional financial and legal requirements associated with being a separate public company, as well as increased non-cash compensation associated with the
modification of existing stock-based compensation awards in connection with the spin-off and the grant of new awards in connection with and subsequent to the spin-off.
General and administrative expense includes non-cash compensation expense of $4.3 million in 2008 compared with $1.6 million in 2007. The increase in
non-cash compensation expense is primarily due to equity grants issued and assumed in recent acquisitions as well as equity grants issued to Ticketmaster employees subsequent to the first
quarter of 2007. As of March 31, 2008, there was
192
approximately $48.9 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is currently expected to be recognized over a weighted
average period of approximately 3.0 years (exclusive of the impact of the modification related to the spin-off, which primarily consists of the accelerated vesting of certain
restricted stock units).
Depreciation
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% change
|
|
2007
|
|
|
(Dollars in thousands)
|
Depreciation |
|
$11,055 |
|
21% |
|
$9,121 |
As a percentage of total revenue |
|
3% |
|
16 bp |
|
3% |
Depreciation in 2008 increased $1.9 million from 2007, primarily due to acquisitions not in the year ago period and the incremental depreciation associated with capital
expenditures made throughout 2007 and 2008, partially offset by certain fixed assets becoming fully depreciated during the period. Excluding the impact of acquisitions not in the year ago period,
depreciation expense increased $0.5 million, or 5%.
Operating Income Before Amortization
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% change
|
|
2007
|
|
|
(Dollars in thousands)
|
Operating Income Before Amortization |
|
$60,423 |
|
(14)% |
|
$70,220 |
As a percentage of total revenue |
|
17% |
|
(582) bp |
|
23% |
Operating Income Before Amortization in 2008 decreased $9.8 million from 2007, primarily due to increases in cost of sales, selling and marketing expense and general and
administrative expense. The increase in these expenses was driven by acquisitions and strategic investments, particularly in Germany and China, increased expenses associated with product and
technology initiatives, and higher overall royalty rates. Operating Income Before Amortization was further impacted by discrete items benefiting the prior year period. Excluding the impact of
acquisitions not in the year ago period, Operating Income Before Amortization decreased $6.7 million, or 10%.
Operating income
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% change
|
|
2007
|
|
|
(Dollars in thousands)
|
Operating Income |
|
$46,790 |
|
(24)% |
|
$61,488 |
As a percentage of total revenue |
|
13% |
|
(685) bp |
|
20% |
Operating income in 2008 decreased $14.7 million from 2007, primarily due to the decrease in Operating Income Before Amortization described above and increases of
$2.9 million in non-cash compensation expense and $2.0 million in amortization of intangibles.
193
Other income (expense)
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
% change
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
3,290 |
|
(39 |
)% |
$ |
5,378 |
|
|
Interest expense |
|
|
(735 |
) |
177 |
% |
|
(266 |
) |
|
Equity in income of unconsolidated affiliates |
|
|
666 |
|
(23 |
)% |
|
865 |
|
|
Other income |
|
|
944 |
|
1,048 |
% |
|
83 |
|
Interest income in 2008 decreased $2.1 million from 2007 as average interest rates on the receivable balance from IAC and subsidiaries decreased year over year. Interest earned on
the receivable balance is principally due to cash transfers to IAC in connection with IAC's centrally managed U.S. treasury function.
Income tax provision
For the three months ended March 31, 2008 and 2007, Ticketmaster recorded tax provisions of $18.8 million and $24.6 million, respectively,
which represent effective tax rates of 37% and 36%, respectively. The tax rates for the three months ended March 31, 2008 and 2007 are higher than the federal statutory rate of 35% due
principally to state taxes.
As of December 31, 2007 and March 31, 2008, Ticketmaster had unrecognized tax benefits of approximately $5.5 million. Included in unrecognized tax benefits at
March 31, 2008 is approximately $4.6 million for tax positions included in IAC's consolidated tax return filings that will remain a liability of IAC after the spin-off.
Ticketmaster recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. Included in income tax expense for 2008 is $0.1 million, net of
related deferred taxes, for interest on unrecognized tax benefits. At March 31, 2008, Ticketmaster has accrued $1.0 million for the payment of interest. There are no material accruals
for penalties.
By virtue of previously filed separate company and consolidated tax returns with IAC, Ticketmaster is routinely under audit by federal, state, local and foreign authorities in the area
of income tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered
sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between
the reserves for tax contingencies and the amounts owed by Ticketmaster are recorded in the period they become known. Ticketmaster believes that it is reasonably possible that its unrecognized tax
benefits could decrease by approximately $3.6 million within twelve months of the current reporting date due to the reversal of deductible temporary differences which will result in a
corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits cannot be made, but are not expected to be significant.
Under the terms of the tax sharing agreement, which will be executed in connection with the spin-off, IAC will generally retain the liability related to federal and state
returns filed on a consolidated or unitary basis for all periods prior to the spin-off.
194
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2008, Ticketmaster had $502.3 million of cash and cash equivalents and restricted cash and cash equivalents, including
$338.9 million in funds representing amounts equal to the face value of tickets sold on behalf of its clients. Ticketmaster's cash and cash equivalents and restricted cash and cash equivalents
held in foreign jurisdictions is approximately $349.6 million at March 31, 2008, including $220.3 million in funds representing amounts equal to the face value of tickets sold on
behalf of its clients, and is maintained principally in Canada, the United Kingdom and Australia.
Net cash provided by operating activities was $65.8 million and $80.7 million in 2008 and 2007, respectively. The decrease of $14.9 million in net cash provided by
operating activities reflects a decreased contribution from client funds of $24.3 million which is primarily due to timing of settlements with clients and an increase in prepaid expenses and
other current assets, partially offset by an increase in accounts payable. The increase in accounts payable is primarily due to efforts to aggressively manage working capital.
Net cash used in investing activities in 2008 of $540.1 million primarily resulted from acquisitions, net of cash acquired, of $395.0 million, cash transfers to IAC of
$135.5 million and capital expenditures of $9.5 million. The cash transfers to IAC relate to IAC's centrally managed U.S. treasury function. Acquisitions, net of cash acquired, in 2008
primarily relate to the acquisitions of Paciolan, TicketsNow and GET ME IN! Ltd. Net cash used in investing activities in 2007 of $21.0 million primarily resulted from acquisitions, net
of cash acquired, of $10.2 million and capital expenditures of $9.3 million.
Net cash provided by financing activities in 2008 and 2007 of $394.7 million and $11.2 million, respectively, were primarily due to capital contributions of
$395.0 million and $10.2 million from IAC to fund Ticketmaster's 2008 and 2007 acquisitions, respectively.
Ticketmaster anticipates that it will need to make capital and other expenditures in connection with the development and expansion of its operations.
In connection with the separation, Ticketmaster expects to raise $750 million through a combination of privately issued debt securities (the "Bonds") and secured credit facilities
(the "Term Loans"). In addition, Ticketmaster expects to negotiate a revolving credit facility (the "RCF"). The total costs expected to be incurred in connection with the issuance of the Bonds and
borrowings under the Term Loans and establishing the RCF is $18.5 million. The net proceeds are expected to be approximately $731.5 million. In connection with the separation,
Ticketmaster is expected to distribute the net proceeds of the financing to IAC and will retain its client cash and its international cash which total approximately $468.1 million as of
March 31, 2008. To the extent that the net proceeds from the Bonds and Term Loans are less than $731.5 million there would be a corresponding reduction in the transfer of cash to IAC.
Ticketmaster will describe the terms of these new credit facilities and other indebtedness
once Ticketmaster has negotiated such terms. Upon completion of the spin-off, intercompany receivable balances will be extinguished.
Ticketmaster's ability to fund its cash and capital needs will be affected by its ongoing ability to generate cash from operations, the overall capacity and terms of its financing
arrangements as discussed above, and access to the equity markets. Given the volatility in the financial markets, IAC and Ticketmaster continue to monitor the markets closely and will take steps to
maintain financial flexibility and an appropriate capital structure.
195
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
|
|
(In thousands)
|
Capital lease obligations |
|
$ |
4,490 |
|
$ |
2,274 |
|
$ |
2,216 |
|
$ |
|
|
$ |
|
Purchase obligations(a) |
|
|
87,062 |
|
|
22,957 |
|
|
35,268 |
|
|
25,462 |
|
|
3,375 |
Operating leases |
|
|
81,742 |
|
|
15,745 |
|
|
26,506 |
|
|
17,251 |
|
|
22,240 |
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
173,294 |
|
$ |
40,976 |
|
$ |
63,990 |
|
$ |
42,713 |
|
$ |
25,615 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- The
purchase obligations primarily arise from sports sponsorship agreements intended to promote Ticketmaster's ticket resale services.
196
TICKETMASTER'S PRINCIPLES OF FINANCIAL REPORTING
Ticketmaster reports Operating Income Before Amortization as a supplemental measure to generally accepted accounting principles ("GAAP"). This measure is one of
the primary metrics by which Ticketmaster evaluates the performance of its businesses, on which its internal budgets are based and by which management is compensated. Ticketmaster believes that
investors should have access to the same set of tools that it uses in analyzing its results. This non-GAAP measure should be considered in addition to results prepared in accordance with
GAAP, but should not be considered a substitute for or superior to GAAP results. Ticketmaster provides and encourages investors to examine the reconciling adjustments between the GAAP and
non-GAAP measure which are discussed below.
Definition of Ticketmaster's Non-GAAP Measure
Operating Income Before Amortization is defined as operating income excluding, if applicable:
(1) non-cash compensation expense, (2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions, and
(4) one-time items. Ticketmaster believes this measure is useful to investors because it represents the operating results from the Ticketmaster Businesses, taking into account
depreciation, which Ticketmaster believes is an ongoing cost of doing business, but excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain
limitations in that it does not take into account the impact to Ticketmaster's statement of operations of certain expenses, including non-cash compensation, and acquisition-related
accounting. Ticketmaster endeavors to compensate for the limitations of the non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and
descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measure.
Pro Forma Results
Ticketmaster will only present Operating Income Before Amortization on a pro forma basis if it views a particular transaction as significant in size or
transformational in nature. For the periods presented in this report, there are no transactions that Ticketmaster has included on a pro forma basis.
One-Time Items
Operating Income Before Amortization is presented before one-time items, if applicable. These items are truly one-time in nature and
non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods
presented in this report, there are no one-time items.
Non-Cash Expenses That Are Excluded From Ticketmaster's Non-GAAP Measure
Non-cash compensation expense consists principally of expense associated with the grants, including
unvested grants assumed in acquisitions, of restricted stock, restricted stock units and stock options. These expenses are not paid in cash, and Ticketmaster will include the related shares in its
future calculations of fully diluted shares outstanding. Upon vesting of restricted stock and restricted
stock units and the exercise of certain stock options, the awards will be settled, at Ticketmaster's discretion, on a net basis, with Ticketmaster remitting the required tax withholding amount from
its current funds.
Amortization of intangibles is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the
intangible assets of the acquired company, such as purchase and distribution agreements, are valued and amortized over their estimated lives. While it is likely that Ticketmaster will have significant
intangible amortization expense as it continues to acquire companies, Ticketmaster believes that since intangibles represent costs incurred by the acquired company to build value prior to acquisition,
they were part of transaction costs.
RECONCILIATION OF OPERATING INCOME BEFORE AMORTIZATION
For a reconciliation of Operating Income Before Amortization to net income for the years ended December 31, 2007, 2006 and 2005, see Note 7 to the
combined financial statements.
197
Critical Accounting Policies and Estimates
The following disclosure is provided to supplement the descriptions of Ticketmaster's accounting policies contained in Note 2 to the combined financial
statements in regard to significant areas of judgment. Ticketmaster's management is required to make certain estimates and assumptions during the preparation of its combined financial statements in
accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the combined financial
statements. They also impact the reported amount of net income during any period. Actual results could differ from those estimates. Because of the size of the financial statement elements to which
they relate, some of Ticketmaster's accounting policies and estimates have a more significant impact on its combined financial statements than others. What follows is a discussion of some of
Ticketmaster's more significant accounting policies and estimates.
Ticketmaster reviews the carrying value of all long-lived assets, primarily property and equipment and definite-lived intangible assets, for
impairment whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), impairment is considered to have occurred whenever the carrying value of a long-lived asset exceeds the sum of the undiscounted cash
flows that is expected to result from the use and eventual disposition of the asset. The determination of cash flows is based upon assumptions that may not occur. The value of long-lived
assets that is subject to assessment for impairment in accordance with SFAS 144 is $124.9 million at December 31, 2007.
In accordance with SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), Ticketmaster reviews the carrying value of goodwill and
indefinite-lived intangible assets on an annual basis as of October 1st or earlier upon the occurrence of certain events or substantive changes in circumstances.
Ticketmaster determines the fair value of its reporting unit and indefinite-lived intangible assets based upon an evaluation of expected discounted cash flows. This discounted cash flow analysis
utilizes an evaluation of historical and forecasted operating results. The determination of discounted cash flows is based upon forecasted operating results that may not occur. The annual assessment
for 2007 did not identify any impairment charges. The value of goodwill and indefinite-lived intangible assets that is subject to assessment for impairment in accordance with SFAS 142 is
$1.1 billion and $62.6 million, respectively, at December 31, 2007.
Estimates of deferred income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 6, and reflect
management's assessment of actual future taxes to be paid on items reflected in the combined financial statements, giving consideration to both timing and the probability of realization. As of
December 31, 2007, the balance of deferred tax liabilities, net, is $26.5 million. Actual income taxes could vary from these estimates due to future changes in income tax law, state
income tax apportionment or the outcome of any review of IAC's tax returns by the IRS, as well as actual operating results of Ticketmaster that vary significantly from anticipated results. Effective
January 1, 2007, Ticketmaster adopted the provisions of FIN 48. As a result of the adoption of FIN 48, Ticketmaster recognizes liabilities for uncertain tax positions based on the
two-step process prescribed by the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more
likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon
198
ultimate
settlement. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible outcomes. Ticketmaster considers
many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Seasonality
Ticketmaster's ticket sales are impacted by fluctuations in the availability of events for sale to the public, which may vary depending upon scheduling by the
client. The second and fourth quarters of the year generally experience the highest revenue.
New Accounting Pronouncements
Refer to Note 2 to the combined financial statements for a description of recent accounting pronouncements.
199
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Ticketmaster conducts business in certain foreign markets, primarily in the European Union and Canada. Ticketmaster's primary exposure to foreign currency risk
relates to its investments in foreign subsidiaries that transact business in a functional currency other than the U.S. Dollar, primarily the Euro, British Pound Sterling and Canadian Dollar. However,
the exposure is mitigated as Ticketmaster has generally reinvested profits from its international operations in order to fund the growth of its international operations including acquisitions.
Ticketmaster is also exposed to foreign currency risk related to its assets and liabilities denominated in a currency other than the functional currency.
As currency exchange rates change, translation of the income statements of Ticketmaster's international businesses into U.S. dollars affects year-over-year
comparability of operating results. Historically, Ticketmaster has not hedged translation risks because cash flows from international operations have been generally reinvested locally. Foreign
exchange net gains for the years ended December 31, 2007, 2006 and 2005 were $1.1 million, $1.2 million and $0.6 million, respectively. Foreign exchange net gains for the
three months ended March 31, 2008 and 2007 were $0.9 million and $0.1 million, respectively.
As
Ticketmaster increases its operations in international markets it becomes increasingly exposed to potentially volatile movements in currency exchange rates. The economic impact of
currency exchange rate movements on Ticketmaster is often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could
cause Ticketmaster to adjust its financing, operating and hedging strategies.
200
Management of Ticketmaster
Ticketmaster Board of Directors and Executive Officers
The following table sets forth information as to persons who are expected to serve as Ticketmaster directors and executive officers following the
spin-offs. The Ticketmaster Board of Directors, the composition of which will comply with the independence requirements under the current standards imposed by the Marketplace Rules, is
currently expected to consist of directors.
Name
|
|
Age
|
|
Position(s)
|
Terry Barnes |
|
56 |
|
Chairman and Director of Ticketmaster |
Susan Bracey |
|
44 |
|
Executive Vice President of Ticketmaster |
Sean Moriarty |
|
38 |
|
President, Chief Executive Officer and Director of Ticketmaster |
Brian Regan |
|
36 |
|
Executive Vice President and Chief Financial Officer of Ticketmaster |
Edward Weiss |
|
45 |
|
Executive Vice President and General Counsel of Ticketmaster |
Directors
Background information about those individuals who are expected to serve as directors of Ticketmaster appears below.
Terry R. Barnes, age 56, has been Chairman of Ticketmaster since January 2007. Prior to that, Mr. Barnes served as Chairman and
Chief Executive Officer of Ticketmaster from June 2005 to December 2006 and Chairman from January 2003 to June 2005. He was the Co-Chairman of Ticketmaster from January 2001 until January
2003 and President and Chief Executive Officer of Ticketmaster Corporation from June 1998 until January 2001. From September 1995 until June 1998, Mr. Barnes was the President and Chief
Operating Officer of Ticketmaster Ticketing Company. From 1983 until September 1995, Mr. Barnes was Vice President and General Manager of numerous subsidiaries of Ticketmaster Corporation in
the Midwest. Prior to joining Ticketmaster, Mr. Barnes enjoyed an expansive music industry career, including a partnership in Village Records, a custom record label with Mercury/Polygram in
Indianapolis. He was also a partner in national promotion, management and publishing companies. Mr. Barnes attended Ball State University.
Sean P. Moriarty, age 38, has been President and Chief Executive Officer of Ticketmaster since January 2007 and had previously been
Ticketmaster's President and Chief Operations Officer from December 2005 to January 2007, Executive Vice President and Chief Operating Officer from July 2004 to December 2005, Executive Vice
President, Product and Technology, from November 2003 to July 2004, and prior to that, held progressive roles at Ticketmaster and Citysearch.com since joining in 1997. Mr. Moriarty received his
bachelor's degree from the University of South Carolina, was an Exchange Fellow at the University of Warwick, Coventry UK, and attended graduate school at Boston University and the University of South
Carolina. He serves on the Board of Directors of iLike.com as well as several technology advisory boards.
Executive Officers
Background about Ticketmaster's executive officers who are not expected to serve as directors appears below.
Eric Korman, age 37, has been Executive Vice President of Ticketmaster since April 2006. Prior to joining Ticketmaster, Mr. Korman
served as Senior Vice President of Mergers and Acquisitions of IAC from January 2005 to April 2006. Mr. Korman joined IAC in September 2001 as Vice President of Business Development and
Strategy for Electronic Commerce Services, a former subsidiary of IAC, and
201
subsequently,
he was promoted to Vice President of Strategic Planning of IAC in February 2002, and was appointed Vice President of Mergers and Acquisitions in September 2003. From June 2000 to
September 2001, Mr. Korman was a principal in epartners, a $650 million venture fund backed by SOFTBANK and News Corporation. From January 2000 to May 2000, Mr. Korman served as
Vice President of Digital Convergence Corporation. From 1995 to 1997, Mr. Korman served in the Corporate Business Development group of The Coca-Cola Company, and from 1993 to 1995
served in the Customer Marketing group of Coca-Cola USA. Mr. Korman holds a Bachelor of Arts degree in Economics from Emory University and an MBA from the J.L. Kellogg Graduate
School of Management. Mr. Korman sits on the Board of Directors of The Active Network Inc. and BET.com.
Brian Regan, age 36, has been Executive Vice President and Chief Financial Officer of Ticketmaster since June 2008. Prior to that,
Mr. Regan was the Senior Vice President of Finance of Expedia, Inc., from March 2005 to June 2008, and had previously been Expedia's Vice President of Finance from August 2004 to March
2005. Before joining Expedia, Mr. Regan served in a variety of financial roles at LendingTree, Inc. from November 1998 to August 2004, including Vice President and Controller; Vice
President of Finance and Investor Relations; and, most recently, Chief Consumer Officer. Prior to that, Brian was an auditor and consultant for PricewaterhouseCoopers LLP in its banking and
securities industry practice in New York and Charlotte, North Carolina from August 1993 to November 1998. Mr. Regan earned a Bachelor of Science degree in Business Administration and Accounting
from Bucknell University.
Edward J. Weiss, age 45, has been Executive Vice President and General Counsel of Ticketmaster since March 2005. Mr. Weiss joined
Ticketmaster in January 1998 and prior to his appointment to Executive Vice President and General Counsel, served as the company's Senior Vice President and Assistant General Counsel from
August 2002 to March 2005. Prior to that, Mr. Weiss served as Vice President, Assistant General Counsel. Before joining Ticketmaster, Mr. Weiss served as an Assistant US
Attorney in Los Angeles from September 1994 to December 1997. Mr. Weiss was an associate at the law firm of Manatt, Phelps & Phillips, LLP in Los Angeles from October 1988 to July
1994. Mr. Weiss is a graduate of University of California, Berkeley and earned his J.D. from the University's Boalt Hall School of Law. He currently serves on the Board of Directors for Big
Brothers Big Sisters of Greater Los Angeles & Inland Empire.
Committees of the Board of Directors
Concurrent with the completion of the spin-offs, the Ticketmaster Board of Directors will establish the following committees, with committee
membership to be determined: the Audit Committee, the Compensation and Human Resources Committee, the Nominating Committee and the Executive Committee.
Audit Committee. The Audit Committee of the Ticketmaster Board of Directors will consist of three
persons and the composition of the committee will satisfy the independence requirements under the current standards imposed by the rules of the SEC and the Marketplace Rules. The Ticketmaster Board of
Directors will determine which member of the Audit Committee is an "audit committee financial expert," as such term is defined in applicable SEC rules.
The
Audit Committee will function pursuant to a written charter adopted by the Ticketmaster Board of Directors, pursuant to which it will be granted the responsibilities and authority
necessary to comply with Rule 10A-3 of the Securities Exchange Act of 1934, as amended. The Audit Committee will be appointed by the Ticketmaster Board of Directors to assist the
Ticketmaster Board with a variety of matters, including monitoring (1) the integrity of Ticketmaster's financial statements, (2) the effectiveness of Ticketmaster's internal control over
financial reporting, (3) the qualifications and independence of Ticketmaster's independent registered public accounting firm, (4) the performance of
202
Ticketmaster's
internal audit function and independent registered public accounting firm and (5) the compliance by Ticketmaster with legal and regulatory requirements.
Compensation and Human Resources Committee. The Compensation and Human Resources Committee will be
authorized to exercise all of the powers of the Ticketmaster Board of Directors with respect to matters pertaining to compensation and benefits, including, but not limited to, salary matters,
incentive/bonus plans, stock compensation plans, retirement programs and insurance plans. The composition of this committee will satisfy the independence requirements under the current standards
imposed by the Marketplace Rules, as well as applicable SEC and Internal Revenue Service rules.
Nominating Committee. The Nominating Committee will be responsible for identifying individuals
qualified to become members of Ticketmaster's Board of Directors, recommending to the Board director nominees for the annual meeting of shareholders and otherwise on an as needed basis. The
composition of this committee will satisfy the independence requirements under the current standards imposed by the Marketplace Rules.
Executive Committee. The Executive Committee will have all the power and authority of the
Ticketmaster Board of Directors, except those powers specifically reserved to the Ticketmaster Board of Directors by Delaware law or Ticketmaster's organizational documents.
Other Committees. In addition to the foregoing committees, the Ticketmaster Board of Directors, by
resolution, may from time to time establish other committees of the Ticketmaster Board of Directors, consisting of one or more of its directors.
Director Compensation
Non-Employee Director Arrangements. Each member of the Ticketmaster Board of Directors
will receive an annual retainer in the amount of $50,000. Each member of the Audit and Compensation and Human Resources Committees (including their respective chairs) will receive an additional annual
retainer in the amount of $10,000. Each member of the Nominating Committee will receive an additional annual retainer in the amount of $5,000. Lastly, the chair of each of the Audit and Compensation
and Human Resources Committees will receive an additional annual chairperson retainer in the amount of $15,000.
In addition, each non-employee director will receive a grant of restricted stock units with a dollar value of $100,000 upon his or her initial election to the Ticketmaster
Board of Directors and annually thereafter upon re-election on the date of Ticketmaster's annual meeting of stockholders. The terms of these restricted stock units provide for
(i) vesting in two equal annual installments commencing on the first anniversary of the grant date, (ii) cancellation and forfeiture of unvested units in their entirety upon termination
of service with the Ticketmaster Board of Directors and (iii) full acceleration of vesting upon a change in control of Ticketmaster. Non-employee directors are also reimbursed for
all reasonable expenses incurred in connection with attendance at Ticketmaster Board and Committee meetings.
The Compensation and Human Resources Committee will have primary responsibility for establishing non-employee director compensation arrangements, which are designed to
provide competitive compensation necessary to attract and retain high quality non-employee directors and to encourage ownership of Ticketmaster stock to further align directors' interests
with those of Ticketmaster's stockholders. When considering non-employee director compensation arrangements, Ticketmaster management will provide the Compensation and Human Resources
Committee with information regarding various types of non-employee director compensation arrangements and practices of select peer companies.
203
Deferred Compensation Plan for Non-Employee Directors. Under Ticketmaster's Deferred Compensation Plan
for Non-Employee Directors, non-employee directors will be able to defer all or a portion of their Board and Board Committee fees. Eligible directors who defer all or any
portion of these fees can elect to have such fees applied to the purchase of share units, representing the number of shares of Ticketmaster common stock that could have been purchased on the relevant
date, or credited to a cash fund. If any dividends are paid on Ticketmaster common stock, dividend equivalents will be credited on the share units. The cash fund will be credited with deemed interest
at an annual rate equal to the weighted average prime lending rate of JPMorgan Chase Bank. After a director ceases to be a member of the Ticketmaster Board of Directors, he or she will receive
(i) with respect to share units, such number of shares of Ticketmaster common stock as the share units represent and (ii) with respect to the cash fund, a cash payment in an amount equal
to deferred amounts, plus accrued interest. These payments will be made in either one lump sum or up to five installments, as previously elected by the eligible director at the time of the related
deferral election.
Director Independence
Under the Marketplace Rules, Ticketmaster's Board will have a responsibility to make an affirmative determination that those members of its Board that serve as
independent directors do not have any relationships with Ticketmaster and its businesses that would impair their independence. In connection with these determinations, Ticketmaster's Board will review
information regarding transactions, relationships and arrangements involving Ticketmaster and its businesses and each director that it deems relevant to independence, including those required by the
Marketplace Rules. This information is obtained from director responses to a questionnaire circulated by Ticketmaster management, Ticketmaster records and publicly available information. Following
these determinations, Ticketmaster management will monitor those transactions, relationships and arrangements that are relevant to such determinations, as well as solicit updated information
potentially relevant to independence from internal personnel and directors, to determine whether there have been any developments that could potentially have an adverse impact on Ticketmaster's prior
independence determinations.
Compensation Committee Interlocks and Insider Participation
Ticketmaster's Board of Directors will have a Compensation and Human Resources Committee. None of the members of this Committee will be or will have been in the
past an officer or employee of Ticketmaster or any of its businesses at the time of their respective service on the Committee.
Ticketmaster Executive Compensation
Compensation Discussion and Analysis
To date, the compensation of Ticketmaster's executive officers has been predominantly determined by IAC, acting in effect as Ticketmaster's compensation
committee. IAC's compensation process is principally driven by IAC's General Counsel, who has primary responsibility for administering compensation and making compensation recommendations, with all
material decisions approved by IAC's Chairman and Chief Executive Officer and, where appropriate, the Compensation Committee of IAC's Board of Directors (specifically with respect to all awards of
IAC equity).
This Compensation Discussion and Analysis deals exclusively with historical information while Ticketmaster has been a part of IAC. Following the spin-off, Ticketmaster will
have an independent board of directors, which will in turn have a compensation committee with the responsibility of establishing Ticketmaster's compensation philosophy and programs and determining
appropriate payments and awards to its executive officers. Because Ticketmaster's compensation committee has not
204
yet been established, Ticketmaster cannot predict what compensation philosophies and programs will be adopted following the spin-off, and therefore this historical report is not
necessarily indicative of the practices it will follow when it is an independent public company.
In general, IAC has been responsible for establishing bonus pools and equity pools for Ticketmaster, and then such pools are allocated throughout Ticketmaster, with
IAC directly establishing all compensation elements for Ticketmaster's CEO and Chairman, while the Ticketmaster CEO makes the determinations for Ticketmaster's other executive officers, subject
to IAC's review and approval.
Neither Ticketmaster nor IAC has an ongoing relationship with any particular compensation consulting firm, though IAC has from time to time retained the services of
consultants on specific occasions regarding broad-based IAC compensation programs. At no time has a consultant been engaged with respect to compensation of any of Ticketmaster's
executive officers.
Ticketmaster's executive officer compensation program is designed to increase long-term stockholder value by attracting, retaining, motivating and
rewarding leaders with the competence, character, experience and ambition necessary to enable Ticketmaster to meet its growth objectives.
When establishing compensation packages for a given executive, Ticketmaster has followed a flexible approach, and has made decisions based on a host of factors particular to a given
executive situation, including its firsthand experience with the competition for recruiting and retaining executives, negotiation and discussion with the relevant individual, competitive survey data,
internal equity considerations and other factors Ticketmaster deems relevant at the time.
Similarly, Ticketmaster has not followed an arithmetic approach to establishing compensation levels and measuring and rewarding performance, as Ticketmaster believes these often fail to
adequately take into account the multiple factors that contribute to success at the individual and business level. In any given period, Ticketmaster may have multiple objectives, and these objectives,
and their relative importance, often change as the competitive and strategic landscape shifts, even within a given compensation cycle. As a result, formulaic approaches often
over-compensate or under-compensate a given performance level. Accordingly, Ticketmaster has historically avoided the use of strict formulas in its compensation practices and
has relied primarily on a discretionary approach.
Ticketmaster's compensation packages for executive officers have primarily consisted of salary, annual bonuses, long term incentives (typically equity awards),
perquisites and other benefits. Prior to making specific decisions related to any particular element of compensation, Ticketmaster typically reviews the total compensation of each executive,
evaluating the executive's total near and long-term compensation in the aggregate. Ticketmaster determines which element or combinations of compensation elements (salary, bonus or equity)
can be used most effectively to further its compensation objectives. However, all such decisions are subjective, and made on a facts and circumstances basis without any prescribed relationship between
the various elements of the total compensation package.
General. Ticketmaster typically negotiates a new executive officer's starting salary upon arrival, based on the executive's
prior compensation history, prior compensation levels for the particular position within Ticketmaster, Ticketmaster's location, salary levels of other executives within Ticketmaster, salary levels
available to the individual in alternative opportunities, reference to certain survey information and the extent to which Ticketmaster desires to secure the executive's services.
205
Once established, salaries can increase based on a number of factors, including the assumption of additional responsibilities, internal equity, periodic market checks and other factors
which demonstrate an executive's increased value to Ticketmaster.
Ticketmaster utilizes the Radford Executive Survey, Radford International Survey and the Croner Executive Compensation Survey when referring to survey data in formulating compensation
packages.
2007. Mr. Moriarty received a salary increase from $400,000 to $500,000 effective January 1, 2007 in connection
with his assuming the Ticketmaster CEO position. In establishing this salary level, IAC relied on comparable internal positions as well as its general experience recruiting for similar roles.
No other executive officer salaries were adjusted during 2007.
General. Ticketmaster's bonus program is designed to reward performance on an annual basis. Because of the variable nature of
the bonus program, and because in any given year bonuses have the potential
to make up a significant portion of an executive's total compensation, the bonus program provides an important incentive tool to achieve Ticketmaster's annual objectives.
After consultation with Ticketmaster management, IAC establishes the annual bonus pool for Ticketmaster based on its assessment of Ticketmaster's performance for the completed
year. In large part, success has been measured based on Ticketmaster's growth in profitability, but this is measured subjectively both in absolute terms over the prior year and in comparison to
Ticketmaster's competitors, taking into account economic and other factors, without any pre-established targets. Additionally, consideration has sometimes been given to achievement of
various strategic objectives over the course of the year and other factors IAC and Ticketmaster's management deem relevant. No quantified weight has been given to any particular consideration
and there has generally been no formulaic calculation. Rather, IAC has engaged in an overall assessment of appropriate bonus levels based on a subjective interpretation of corporate
performance.
IAC has established the bonus of the Ticketmaster CEO and the Chairman, in large part based on the same considerations used in establishing the bonus pool for Ticketmaster
generally. The CEO has then generally been responsible for allocating the remainder of the bonus pool to the rest of the company, including the other executive officers. No executive officers of
Ticketmaster have target bonus opportunities.
Ticketmaster generally pays bonuses shortly after year-end following finalization of financial results for the prior year.
2007. Ticketmaster's 2007 bonus pool primarily reflects disappointing year over year profit growth, with aggregate executive
officer bonuses being considerably lower than those paid in previous years. Overall, the bonus pool reflected approximately 50% of the bonus pool from the prior year, adjusted to account for increased
headcount, and executive officer bonuses reflected similar reductions.
General. Ticketmaster believes that ownership shapes behavior, and that by providing a meaningful portion of an executive
officer's compensation in stock, an executive's incentives are aligned with stockholder interests in a manner that drives better performance over time. As part of IAC, that led to Ticketmaster's
executive officers receiving IAC equity awards on a regular basis.
In setting particular award levels, the predominant objectives have been providing the person with effective retention incentives, appropriate reward for past performance, and incentives
for strong future performance. Appropriate levels to meet these goals may vary from year to year, and from individual to individual, based on a variety of factors.
206
The annual corporate performance factors relevant to setting bonus amounts that were discussed above, while taken into account, have generally been less relevant in setting annual equity
awards, as the awards tend to be more forward looking, and are a longer-term retention and reward instrument than annual bonuses.
Awards to the Ticketmaster CEO and Chairman are made by IAC. Additionally, IAC establishes a pool for annual equity awards which the Ticketmaster CEO allocates to the company's
employees, including the executive officers, subject to IAC's approval. In establishing the equity pool for Ticketmaster, IAC has taken into account historical practices, its view of market
compensation generally, the dilutive impact of equity grants across IAC, and other relevant factors. Additionally, IAC approves any equity grants recommended to be made to Ticketmaster
executives outside of the annual process. Executive officers receive grants that are subjectively determined based on the Ticketmaster CEO's view of how best to allocate the equity pool for retention,
reward and motivation based on a host of subjective factors (including past contribution, retention risk, contribution potential, and market data), with grants equal to annual salary being a basic
guideline.
Except where otherwise noted, equity awards have been made following year-end after finalization of financial results for the prior year. The meeting of the Compensation and
Human Resources Committee of the IAC Board at which the awards are made is generally scheduled months in advance and without regard to the timing of the release of earnings or other material
information.
Restricted Stock Units. Until 2008, IAC used restricted stock units, or RSUs, as its exclusive equity compensation
tool for Ticketmaster's executive officers. Through 2006, these awards generally vested in equal annual installments over 5 years (annual vesting RSUs), or cliff vested at the end of five years
(cliff-vesting RSUs). Annual awards were intended to provide frequent rewards and near-term retention incentives, while cliff-vesting RSUs provided more of a
long-term retention mechanism.
In February 2007, IAC implemented a new equity instrument, Growth Shares, which were RSU grants that cliff vested at the end of three years in varying amounts depending upon
growth in IAC's publicly reported metric, Adjusted Earnings Per Share, with certain modifications.
These awards were introduced throughout IAC to more closely link long-term reward with IAC's overall performance and to provide greater retentive effect by providing
the opportunity to earn greater amounts through increased IAC performance. However, in connection with the spin-off, these awards will be converted into three-year
cliff-vesting awards at the "target" value (or 50% of the shares actually granted), without variability based on performance. For information regarding the reasons behind this conversion,
see "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
Stock Options. In 2008, IAC used non-qualified stock options as its primary equity compensation tool for
Ticketmaster's executive officers to continue the shift to performance-based equity that began with the granting of Growth Shares in 2007. IAC believes that following the
spin-offs, Ticketmaster's performance will have a greater correlation to the Ticketmaster stock price than it did to IAC's stock price in the current conglomerated structure, thus making
stock options a more targeted equity incentive tool for Ticketmaster than it would have been as part of IAC. Stock options generally vest in equal installments over four years. IAC continues to
use RSUs with a cliff-vesting schedule in certain cases to reward executive leadership, contribution and to provide a retention mechanism.
2007. Mr. Moriarty received 10,038 annual vesting RSUs and 35,131 Growth Shares (at target performance). This
increased grant coincided with his assumption of the Ticketmaster CEO position. Mr. Barnes did not receive a grant due to his receipt of an RSU grant with a value of $1 million on the
date of grant the prior year in connection with his entering into an employment agreement with Ticketmaster, which grant vested in early 2008. Mr. Korman received 5,019 RSUs and 17,565 Growth
207
Shares, Ms. Bracey received 4,391 RSUs and 10,664 Growth Shares and Mr. Weiss received 4,391 RSUs and 4,391 Growth Shares.
2008. Mr. Barnes and Mr. Korman each received 100,000 non-qualified stock options, and
Mr. Korman also received 16,000 RSUs that will cliff vest after three years. These awards were specifically determined by IAC as a means of increasing the stakes of these two key
executives prior to the spin-off. Mr. Weiss received 30,000 stock options as determined by Mr. Moriarty. As Ms. Bracey has announced that she is leaving the company,
she did not receive stock options in 2008.
Spin-Off Adjustments. In the spin-off, equity awards denominated in IAC stock will be adjusted
as described in "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
Presuming the spin-off transactions occur prior to February 2009, the following table reflects the effect of these adjustments on all equity awards held by Ticketmaster's
executive officers:
|
|
Upon Completion of the Spin-Off
|
Name
|
|
RSUs
that will
vest (#)
|
|
RSUs
that will
convert exclusively into RSUs of Ticketmaster
and vest
on regular schedule (#)(*)
|
|
RSUs that
will be split
among the
post-transaction
companies and vest after February 2009 on regular schedule (#)
|
|
Options outstanding at December 31, 2007all of which will be split among the post-transaction companies (#)
|
|
Options granted after December 31, 2007all of which will be converted into options of Ticketmaster
(#)
|
Sean Moriarty |
|
48,497 |
|
36,529 |
|
34,260 |
|
23,374 |
|
|
Terry Barnes |
|
43,129 |
|
|
|
|
|
56,783 |
|
100,000 |
Eric Korman |
|
21,389 |
|
26,024 |
|
38,487 |
|
|
|
100,000 |
Susan Bracey(1) |
|
12,440 |
|
11,940 |
|
7,108 |
|
16,353 |
|
|
Edward Weiss |
|
5,380 |
|
10,750 |
|
2,927 |
|
|
|
30,000 |
- *
- Excludes
19,358, 44,876, 8,637, 11,335, 6,278 RSUs that vested since December 31, 2007 or will vest prior to August 1, 2008 for Mr. Moriarty, Mr. Barnes,
Mr. Korman, Ms. Bracey and Mr. Weiss, respectively.
- (1)
- Received
during 2007 in her role as Chief Financial Officer of Ticketmaster. Ms. Bracey has since announced she will be leaving Ticketmaster.
Ticketmaster believes that providing executives with severance and change of control protection is critical to allowing executives to fully value the forward
looking elements of their compensation packages, and therefore limit retention risk during uncertain times. Accordingly, Ticketmaster employment agreements and equity awards generally provide for
salary continuation in the event of certain employment terminations beyond the control of the executive, as well as varying degrees of accelerated vesting in the event of a change of control of the
company.
Under limited circumstances, certain Ticketmaster executive officers have received non-cash and non-equity compensatory benefits. The
values of these benefits are reported under the heading "Other Annual Compensation" in this filing pursuant to applicable rules. The executive officers do not participate in any deferred compensation
or retirement program other than IAC's 401(k) plan.
208
IAC's practice has been to structure Ticketmaster's compensation program in such a manner so that the compensation is deductible by IAC for federal income
tax purposes. However, because Ticketmaster's executive officers will now be subject to the limitations on deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended,
and were not previously, certain compensatory arrangements established prior to the spin-off but that will be paid following the spin-off may not result in deductible
compensation for Ticketmaster.
Summary Compensation Table
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)(1)
|
|
All Other
Compensation
($)(2)
|
|
Total
($)
|
Terry Barnes
Chairman |
|
2007 |
|
600,000 |
|
375,000 |
|
959,988 |
|
38,239 |
|
1,973,227 |
Sean Moriarty
CEO |
|
2007 |
|
500,000 |
|
375,000 |
|
1,241,277 |
|
6,300 |
|
2,112,577 |
Eric Korman
EVP |
|
2007 |
|
350,000 |
|
240,000 |
|
621,576 |
|
9,571 |
|
1,221,147 |
Susan Bracey
CFO |
|
2007 |
|
315,000 |
|
140,000 |
|
461,204 |
|
6,643 |
|
922,847 |
Edward Weiss
EVP and General Counsel |
|
2007 |
|
315,000 |
|
150,000 |
|
228,999 |
|
6,300 |
|
700,299 |
- (1)
- Reflects
the dollar amount recognized by IAC for financial statement reporting purposes for the fiscal year ended December 31, 2007, in accordance with SFAS 123R,
for IAC restricted stock units ("RSUs") awarded in and prior to 2007 under IAC's stock and annual incentive plans. These amounts do not, therefore, represent the value of IAC equity
compensation awarded or realized in 2007. For further discussion of IAC's accounting for its equity compensation plans, see note 4 of IAC's audited financial statements for the fiscal year
ended December 31, 2007 included in its Annual Report on Form 10-K filed with the SEC on February 29, 2008. For information on awards made and realized in 2007, see
the Grants of Plan-Based Awards and Option Exercises and Stock Vested tables below.
- (2)
- See
the table below for additional information on amounts for 2007. Pursuant to SEC rules, perquisites and personal benefits are not reported for any named executive for whom such
amounts were less than $10,000 in aggregate for the fiscal year.
|
|
Terry
Barnes
|
|
Sean
Moriarty
|
|
Eric
Korman
|
|
Susan
Bracey
|
|
Edward
Weiss
|
Premium for supplemental life, health and disability insurance |
|
$ |
27,082 |
|
|
|
|
|
|
|
|
|
|
|
|
Tax gross up for relocation expenses |
|
|
|
|
|
|
|
$ |
3,271 |
|
|
|
|
|
|
401(k) plan company match |
|
$ |
6,857 |
|
$ |
6,300 |
|
$ |
6,300 |
|
$ |
6,643 |
|
$ |
6,300 |
Auto and phone expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total All Other Compensation |
|
$ |
38,239 |
|
$ |
6,300 |
|
$ |
9,571 |
|
$ |
6,643 |
|
$ |
6,300 |
|
|
|
|
|
|
|
|
|
|
|
209
Grants of Plan-Based Awards
The table below provides information regarding IAC equity awards granted to Ticketmaster's named executives in 2007.
|
|
|
|
Estimated Future Payouts Under Equity Incentive Plan Awards (1)(2)
|
|
All other stock awards: number of shares of stock or units (#)(2)
|
|
|
|
|
|
|
Grant Date Fair Value of Stock and Option Awards ($)(3)
|
Name
|
|
Grant
Date
|
|
Threshold
(#)
|
|
Target
(#)
|
|
Maximum
(#)
|
Terry Barnes |
|
|
|
|
|
|
|
|
|
|
|
|
Sean Moriarty |
|
2/16/07 |
|
1,953 |
|
35,131 |
|
70,262 |
|
10,038 |
|
1,799,984 |
Eric Korman |
|
2/16/07 |
|
976 |
|
17,565 |
|
35,130 |
|
5,019 |
|
899,972 |
Susan Bracey |
|
2/16/07 |
|
592 |
|
10,664 |
|
21,328 |
|
4,391 |
|
599,941 |
Edward Weiss |
|
2/16/07 |
|
244 |
|
4,391 |
|
8,782 |
|
4,391 |
|
349,963 |
- (1)
- Reflects
performance based RSU awards which cliff vest at the end of three years in varying amounts depending upon the growth in IAC's publicly reported metric, Adjusted
Earnings Per Share, with certain modifications. The threshold amount represents 5.56% of the target payout, which amount would vest upon achieving the minimum growth threshold. These awards will be
converted into three year cliff-vesting awards in the spin-offs as described under "Treatment of Outstanding IAC Compensatory Equity-Based Awards."
- (2)
- RSU award
recipients would be credited with amounts for cash dividends paid on IAC common stock, with such additional amounts vesting concurrently with the related
RSU award. For information on the treatment of RSU awards granted to Ticketmaster named executives upon a termination of employment or a change in control, see the discussion under
Potential Payments Upon Termination or Change in Control below.
- (3)
- The
fair value of equity incentive plan awards is based on the target payout.
210
Outstanding Equity Awards at Fiscal Year-End
The table below provides information regarding various IAC equity awards held by Ticketmaster's named executives as of December 31, 2007. The market
value of all RSU awards is based on the closing price of IAC common stock as of December 31, 2007 ($26.92), the last trading day of 2007.
|
|
|
|
|
|
|
|
Stock Awards(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($)(4)
|
|
|
Option Awards(1)
|
|
|
|
|
|
|
Name
|
|
Number of securities underlying unexercised options
(#)(3)
(exercisable)
|
|
Option exercise price ($)
|
|
Option expiration date
|
|
Number of shares or units of stock that have not vested
(#)(4)
|
|
Market value of shares or units of stock that have not vested
($)(4)
|
|
Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested
(#)(4)
|
Terry Barnes |
|
17,509
39,274
|
|
$ $
|
31.00
33.13
|
|
12/20/09
3/19/12
|
|
88,005 |
|
2,369,095 |
|
|
|
|
Sean Moriarty |
|
23,374
|
|
$
|
46.77
|
|
12/27/09
|
|
103,513 |
|
2,786,570 |
|
1,953 |
|
52,575 |
Eric Korman |
|
|
|
|
|
|
|
|
60,972 |
|
1,641,366 |
|
976 |
|
26,274 |
Susan Bracey |
|
5,250
11,103
|
|
$ $
|
25.55
33.13
|
|
5/1/10
3/19/12
|
|
32,159 |
|
865,720 |
|
592 |
|
15,937 |
Edward Weiss |
|
|
|
|
|
|
|
|
20,944 |
|
563,812 |
|
244 |
|
6,568 |
- (1)
- For
a discussion regarding how these IAC equity awards will be treated in the spin-offs, see under "The SeparationTreatment of Outstanding
IAC Compensatory Equity-Based Awards."
- (2)
- Amounts
shown for equity incentive plan awards are based on achieving the minimum growth threshold in accordance with SEC rules.
- (3)
- On
August 9, 2005, IAC completed the separation of its travel and travel-related businesses and investments (other than Interval and TV Travel Shop) into an
independent public company (the "Expedia Spin-Off"). In connection with the Expedia Spin-Off, each then vested option to purchase shares of IAC common stock was
converted into an option to purchase shares of IAC common stock and an option to purchase shares of Expedia common stock. Adjustments were made to the number of shares subject to each
IAC and Expedia stock option to give effect to the one-for-two reverse stock split effected in connection with the Expedia Spin-Off and to the corresponding
exercise prices based on the relative market capitalizations of IAC and Expedia at the time of the Expedia Spin-Off. The adjusted IAC and Expedia stock options otherwise have
the same terms and conditions, including exercise periods, as the corresponding vested IAC stock options outstanding immediately prior to the Expedia Spin-Off.
For
the named executives, any value realized upon the exercise of Expedia stock options is treated for tax purposes as compensation payable to them in their respective capacities as executive officers
of Ticketmaster. Accordingly, information regarding Expedia stock options held by Ticketmaster's named executives as of December 31, 2007 appears in the table immediately below
211
and information regarding any exercises of Expedia stock options by such named executives is reported in the Option Exercises and Stock Vested table below.
Name
|
|
Number of Options
(#)
|
|
Option Exercise Price ($)
|
|
Option Expiration Date
|
Sean Moriarty |
|
23,374 |
|
$ |
37.45 |
|
12/27/09 |
Susan Bracey |
|
4,910
2,750 |
|
$ $ |
26.53
20.46 |
|
3/19/12
5/1/10 |
- (4)
- The
table below provides the following information regarding RSU awards held by Ticketmaster's named executives as of December 31, 2007: (i) the grant date of
each award, (ii) the number of RSUs outstanding (on an aggregate and grant-by-grant basis), (iii) the market value of RSUs outstanding as of December 31,
2007, (iv) the vesting schedule for each award and (v) the total number of RSUs that vested or are scheduled to vest in each of the fiscal years ending December 31, 2008, 2009,
2010, 2011 and 2012.
|
|
Number of Unvested RSUs as of 12/31/07
|
|
Market Value of Unvested RSUs as of 12/31/07
|
|
Vesting Schedule (#)
|
Grant Date
|
|
(#)
|
|
($)
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
Terry Barnes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
7,669 |
|
206,449 |
|
3,834 |
|
3,835 |
|
|
|
|
|
|
|
2/4/04(b) |
|
29,490 |
|
793,871 |
|
|
|
29,940 |
|
|
|
|
|
|
|
2/10/05(a) |
|
14,706 |
|
395,886 |
|
4,902 |
|
4,901 |
|
4,903 |
|
|
|
|
|
12/14/05(c) |
|
36,140 |
|
972,889 |
|
36,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
88,005 |
|
2,369,095 |
|
44,876 |
|
38,226 |
|
4,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sean Moriarty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/12/03(d) |
|
4,502 |
|
121,194 |
|
4,502 |
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
5,841 |
|
157,240 |
|
2,920 |
|
2,921 |
|
|
|
|
|
|
|
2/4/04(b) |
|
29,490 |
|
793,871 |
|
|
|
29,940 |
|
|
|
|
|
|
|
2/10/05(a) |
|
12,442 |
|
334,939 |
|
4,147 |
|
4,147 |
|
4,148 |
|
|
|
|
|
12/14/05(e) |
|
23,130 |
|
622,660 |
|
5,782 |
|
5,783 |
|
5,782 |
|
5,783 |
|
|
|
12/14/05(f) |
|
18,070 |
|
486,444 |
|
|
|
|
|
|
|
18,070 |
|
|
|
2/16/07(a) |
|
10,038 |
|
270,223 |
|
2,007 |
|
2,008 |
|
2,007 |
|
2,008 |
|
2,008 |
|
2/16/07(g) |
|
35,131 |
|
945,727 |
|
|
|
|
|
35,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
138,644 |
|
3,732,296 |
|
19,358 |
|
44,349 |
|
47,068 |
|
25,861 |
|
2,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric Korman |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/12/03(d) |
|
1,577 |
|
42,453 |
|
1,577 |
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
1,770 |
|
47,648 |
|
885 |
|
885 |
|
|
|
|
|
|
|
2/10/05(a) |
|
3,394 |
|
91,366 |
|
1,131 |
|
1,131 |
|
1,132 |
|
|
|
|
|
2/10/05(b) |
|
15,081 |
|
405,981 |
|
|
|
|
|
15,081 |
|
|
|
|
|
2/6/06(a) |
|
8,624 |
|
232,158 |
|
2,156 |
|
2,156 |
|
2,156 |
|
2,156 |
|
|
|
2/6/06(b) |
|
17,966 |
|
483,645 |
|
|
|
|
|
|
|
17,966 |
|
|
|
5/17/06(a) |
|
7,541 |
|
203,004 |
|
1,885 |
|
1,885 |
|
1,885 |
|
1,886 |
|
|
|
2/16/07(a) |
|
5,019 |
|
135,111 |
|
1,003 |
|
1,004 |
|
1,004 |
|
1,004 |
|
1,004 |
|
2/16/07(g) |
|
17,565 |
|
472,850 |
|
|
|
|
|
17,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
78,537 |
|
2,114,216 |
|
8,637 |
|
7,061 |
|
38,823 |
|
23,012 |
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212
Susan Bracey |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/12/03(d) |
|
2,815 |
|
75,780 |
|
2,815 |
|
|
|
|
|
|
|
|
|
9/30/03(d) |
|
901 |
|
24,255 |
|
901 |
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
3,505 |
|
94,355 |
|
1,752 |
|
1,753 |
|
|
|
|
|
|
|
2/10/05(a) |
|
9,049 |
|
243,599 |
|
3,016 |
|
3,016 |
|
3,017 |
|
|
|
|
|
2/6/06(a) |
|
11,498 |
|
309,526 |
|
2,874 |
|
2,875 |
|
2,874 |
|
2,875 |
|
|
|
2/16/07(a) |
|
4,391 |
|
118,206 |
|
878 |
|
878 |
|
878 |
|
878 |
|
879 |
|
2/16/07(g) |
|
10,664 |
|
287,075 |
|
|
|
|
|
10,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
42,823 |
|
1,152,795 |
|
12,236 |
|
8,522 |
|
17,433 |
|
3,753 |
|
879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward Weiss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/12/03(d) |
|
901 |
|
24,255 |
|
901 |
|
|
|
|
|
|
|
|
|
2/4/04(a) |
|
1,453 |
|
39,115 |
|
726 |
|
727 |
|
|
|
|
|
|
|
2/10/05(a) |
|
2,701 |
|
72,711 |
|
899 |
|
900 |
|
902 |
|
|
|
|
|
2/6/06(a) |
|
11,498 |
|
309,526 |
|
2,874 |
|
2,875 |
|
2,874 |
|
2,875 |
|
|
|
2/16/07(a) |
|
4,391 |
|
118,206 |
|
878 |
|
878 |
|
878 |
|
878 |
|
879 |
|
2/16/07(g) |
|
4,391 |
|
118,206 |
|
|
|
|
|
4,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
25,335 |
|
682,019 |
|
6,278 |
|
5,380 |
|
9,045 |
|
3,753 |
|
879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (a)
- These
awards vest in five equal annual installments on each of the first five anniversaries of the grant date, subject to continued employment.
- (b)
- These
awards vest in one lump sum installment on the fifth anniversary of the grant date, subject to continued employment.
- (c)
- This
award vests in one lump sum installment on January 31, 2008.
- (d)
- These
awards vest in four equal installments, beginning on the second anniversary of the grant date, subject to continued employment.
- (e)
- This
award vests in five equal annual installments on each of the first five anniversaries of February 1, 2006, subject to continued employment.
- (f)
- This
award vests in one lump sum installment on February 1, 2011, subject to continued employment.
- (g)
- Represents
the initial "target" award. See the Grants of Plan-Based Awards table and footnote (1) thereto.
Option Exercises and Stock Vested
The table below provides information regarding the number of shares acquired by Ticketmaster's named executives in 2007 upon the exercise of stock options and the
vesting of RSU awards and the related value realized, in each case, excluding the effect of any applicable taxes. The dollar value realized upon exercise of stock options represents the
difference between (i) the sale price of the shares acquired on exercise for simultaneous exercise and sale transactions and (ii) the exercise price of the stock option, multiplied by
the number of stock options that were exercised. The dollar value
213
realized upon vesting of RSUs represents the closing price of IAC common stock on the applicable vesting date multiplied by the number of RSUs so vesting.
|
|
Option Awards
|
|
Stock Awards
|
Name
|
|
Number of Shares Acquired on Exercise
(#) (1)
|
|
Value Realized on Exercise
($)
|
|
Number of Shares Acquired on Vesting
(#)
|
|
Value Realized on Vesting
($)
|
Terry Barnes |
|
219,544 |
|
1,852,600 |
|
8,734 |
|
342,246 |
Sean Moriarty |
|
27,360 |
|
163,502 |
|
17,350 |
|
677,463 |
Eric Korman |
|
- |
|
- |
|
7,630 |
|
297,278 |
Susan Bracey |
|
15,587 |
|
164,548 |
|
11,354 |
|
438,151 |
Edward Weiss |
|
18,441 |
|
136,439 |
|
5,399 |
|
212,186 |
- (1)
- Includes
119,544, 12,086, 15,587 and 8,603 Expedia shares acquired by Mr. Barnes, Mr. Moriarty, Ms. Bracey and Mr. Weiss, respectively, upon the exercise
of Expedia stock options received in connection with the Expedia Spin-Off.
Potential Payments Upon Termination or Change in Control
Pursuant to the terms of IAC's (and, following the spin-off, Ticketmaster's) equity compensation plans and the award agreements thereunder, upon a
change of control the named executive officers are generally entitled to accelerated vesting of (i) equity awards made prior to 2006 and, in the case of Mr. Moriarty, awards made in
2007, and (ii) equity awards made thereafter if, following such change in control, their employment is terminated by the company for any reason other than death, disability or cause (as defined
in the relevant employment agreement), or by the executive for good reason (as defined in the plan or relevant employment agreement) (a "Qualifying Termination").
Cash. Upon a Qualifying Termination, Ticketmaster's executive officers are generally entitled to
salary continuation for the remainder of their agreements. The expiration dates of the employment agreements for Mr. Moriarty, Mr. Korman and Mr. Weiss are February 1,
2009, April 10, 2009, and December 31, 2009, respectively. Mr. Barnes' agreement recently expired and a new agreement has not yet been executed. Ms. Bracey announced that
she will be leaving Ticketmaster. In connection with her departure, Ms. Bracey will receive (i) an amount equal to her monthly base salary ($26,250) multiplied by the number of complete months
she was employed by Ticketmaster from December 1, 2007 through her date of termination (but no more than 9 months of salary), and (ii) an amount sufficient to enable Ms. Bracey to cover
the cost of her continued participation in Ticketmaster's health plan for a number of months equal to the number of complete months she was employed by Ticketmaster from December 1, 2007
through her date of termination. Additionally, Mr. Weiss has the right to receive this salary continuation in the event he resigns voluntarily following a change in his reporting officer.
Equity. In the event Mr. Weiss is terminated or resigns following a change in his reporting
officer, he will be entitled to acceleration of all his equity awards that were granted prior to 2008. Additionally, Ms. Bracey will receive accelerated vesting of any RSUs granted to
Ms. Bracey on or prior to December 1, 2007 that are not vested on the date of her termination.
Obligations. The receipt of the payments and benefits described above are all subject to the
execution of a general release and to compliance with confidentiality, non-solicitation of employees and non-solicitation of customer covenants set forth in the relevant
employment agreements. Salary continuation payments will be offset by the amount of any compensation earned by an executive from
214
other employment during the severance payment period. Additionally, Mr. Moriarty has agreed to provide consulting services following any termination of employment and abide by certain
agreements not to compete with Ticketmaster for a period of two years, for which he will receive $14,000 per year.
The amounts shown in the table assume that the termination or change in control was effective as of December 31, 2007 and that the price of IAC common stock on which
certain calculations are based was the closing price of $26.92 on The Nasdaq Stock Market on that date. These amounts are estimates of the incremental amounts that would have been paid out to the
executive upon such terminations/change in control, and do not take into account equity grants made, and contractual obligations entered into, after December 31, 2007. The actual amounts to be
paid out can only be determined at the time the event actually occurs.
Name and Benefit
|
|
Termination
without
cause
|
|
Resignation
for good
reason
|
|
Death or
Disability
|
|
Change in
Control
|
|
Termination
w/o cause or
for good
reason in
connection
with Change
in Control
|
Terry Barnes |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
50,000 |
|
50,000 |
|
50,000 |
|
|
|
50,000 |
RSUs (vesting accelerated) |
|
972,889 |
|
|
|
|
|
1,396,206 |
|
2,369,095 |
Consulting Payments (1) |
|
60,000 |
|
|
|
60,000 |
|
|
|
60,000 |
Total estimated value |
|
1,082,889 |
|
50,000 |
|
100,000 |
|
1,396,206 |
|
2,479,095 |
Sean Moriarty |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
541,667 |
|
|
|
|
|
|
|
541,667 |
RSUs (vesting accelerated) |
|
121,194 |
|
|
|
105,015 |
|
2,635,306 |
|
3,732,296 |
Consulting Payments (1) |
|
28,000 |
|
|
|
28,000 |
|
|
|
28,000 |
Total estimated value |
|
690,861 |
|
|
|
133,105 |
|
2,635,306 |
|
4,301,963 |
Eric Korman |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
447,125 |
|
447,125 |
|
|
|
|
|
447,125 |
RSUs (vesting accelerated) |
|
21,240 |
|
|
|
36,773 |
|
587,448 |
|
2,114,216 |
Total estimated value |
|
468,365 |
|
447,125 |
|
36,773 |
|
587,448 |
|
2,561,341 |
Susan Bracey |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
|
|
|
|
|
|
|
|
|
RSUs (vesting accelerated) |
|
12,114 |
|
|
|
75,349 |
|
600,370 |
|
1,152,795 |
Total estimated value |
|
12,114 |
|
|
|
75,349 |
|
600,370 |
|
1,152,795 |
Edward Weiss |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
|
|
|
|
|
|
|
|
|
RSUs (vesting accelerated) |
|
12,114 |
|
|
|
20,998 |
|
136,081 |
|
682,018 |
Total estimated value |
|
12,114 |
|
|
|
20,998 |
|
136,081 |
|
682,018 |
- (1)
- Consulting
payments are payable upon termination other than for death or cause.
215
TICKETMASTER SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the date hereof, all of Ticketmaster's outstanding shares of common stock are owned by IAC. After the distribution, IAC will no longer own any shares of
Ticketmaster common stock. The following table presents information relating to the expected beneficial ownership of shares of Ticketmaster common stock, assuming completion of the distribution as if
it occurred on [ ], 2008, by (i) each individual or entity expected to own beneficially more than 5% of the outstanding shares
of Ticketmaster common
stock, assuming that there are 278,735,546 shares of common stock and Class B common stock of IAC outstanding immediately prior to the spin-offs and a distribution ratio of
one-fifth of a share of TM common stock for every share of IAC common stock and/or Class B common stock (ii) each director of Ticketmaster, (iii) the Chief Executive
Officer, the Chief Financial Officer and the other three named executive officers in the Ticketmaster summary compensation table (see "Ticketmaster Executive Compensation") and (iv) all of
Ticketmaster's executive officers and directors as a group.
Unless otherwise indicated, beneficial owners listed here may be contacted at Ticketmaster's corporate headquarters at 8800 West Sunset Boulevard, West Hollywood, CA 90069. For each
listed person, the number of shares of Ticketmaster common stock and percent of such class listed assumes the conversion or exercise of any Ticketmaster equity securities owned by such person that are
or will become convertible or exercisable, and the exercise of stock options and the vesting of restricted stock units, if any, that will vest, within 60 days of April 30, 2008, but does
not assume the conversion, exercise or vesting of any such equity securities owned by any other person.
The share amounts for each beneficial owner listed here are based on each such individual's beneficial ownership of shares of IAC common stock and/or Class B common stock as of
April 30, 2008, and assuming a distribution ratio of one-fifth of a share of Ticketmaster common stock for every share of IAC common stock and/or Class B common stock. To the extent that
Ticketmaster directors and executive officers own shares of IAC common stock at the time of the distribution, they will participate in the distribution on the same terms as other holders of IAC common
stock. In addition, following the distribution, Ticketmaster expects that all IAC stock-based awards held by these individuals will be adjusted to become awards relating to common stock of all five
companies resulting from the spin-offs. Those awards that will relate to Ticketmaster common stock are reflected in the table below based upon the expected adjustment formula described under the
caption "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
The actual number of shares of Ticketmaster capital stock outstanding as of the date of the distribution may differ due, among other things, to the exercise of stock options or warrants
or the
216
vesting of restricted stock units, in each case, between April 30, 2008 and the date of the distribution and to the extent the other assumptions set forth above differ from actual developments.
|
|
Ticketmaster Common Stock
|
Name and Address of Beneficial Owner
|
|
Shares
|
|
%
|
Clearbridge Advisors, LLC, et al(1)(2)
399 Park Avenue
New York, NY 10022 |
|
2,651,312 |
|
4.75 |
Lord Abbett & Co. LLC(1)(2)
90 Hudson Street, 11th Floor
Jersey City, NJ 07302 |
|
7,839,768 |
|
14.06 |
Liberty Media Corporation(3)(4)
12300 Liberty Boulevard
Englewood, CO 80112 |
|
16,643,961 |
|
29.86 |
Terry Barnes |
|
|
|
|
Susan Bracey |
|
|
|
|
Eric Korman |
|
|
|
|
Sean Moriarty |
|
|
|
|
Edward Weiss |
|
|
|
|
All executive officers and directors as a group ( persons) |
|
|
|
|
- (1)
- We
have not been able to determine the person or persons controlling the fund through publicly available information.
- (2)
- Based
upon information regarding IAC holdings reported on a Schedule 13G, as amended, which was filed with the SEC on February 14, 2008 and a distribution ratio of
one-fifth of a share of TM common stock for every share of IAC common stock and/or Class B common stock.
- (3)
- Liberty
Media Corporation is a publicly traded corporation. According to Liberty Media Corporation's Schedule 14A, filed April 24, 2008, Liberty's chairman,
John C. Malone, controls 33% of the voting power of Liberty Media Corporation.
- (4)
- Based
on 58,796,381 shares of IAC common stock held by Liberty and 4,000,000, 15,618,230, 4,005,190 and 800,006 shares of IAC Class B common stock held by each of
BDTV Inc., BDTV II Inc., BDTV III Inc. and BDTV IV Inc., respectively and a distribution ratio of one-fifth of a share of TM common stock for every share of IAC
common stock and/or Class B common stock.
217
CERTAIN INFORMATION WITH RESPECT TO TREE.COM
BUSINESS OF TREE.COM
When used with respect to any periods following the spin-offs and unless otherwise indicated, the term "Tree.com" refers to Tree.com, Inc., a
Delaware corporation that was incorporated in connection with the spin-offs in April 2008 to hold IAC's lending and real estate businesses, subsidiaries and investments, the results of
which were previously reported in the Lending and Real Estate reporting segments of IAC's Transactions reporting sector immediately prior to the completion of the spin-offs. The following
disclosure regarding Tree.com's business assumes completion of the spin-offs.
For information regarding the results of operations of Tree.com and its segments on a historical basis, see the Consolidated Financial Statements of Tree.com and the disclosure set forth
under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations of Tree.com." For information regarding the results of operations of Tree.com on a
pro forma basis to give effect to the completion of the spin-offs, see the Unaudited Pro Forma Condensed Consolidated Financial Statements for Tree.com.
History and Overview
Tree.com is the parent of LendingTree, LLC and is the indirect parent of several companies owned by LendingTree, LLC. LendingTree, LLC
(formerly, LendingTree, Inc.) was incorporated in the state of Delaware in June 1996 and commenced nationwide operations in July 1998. LendingTree, Inc. was acquired by IAC in 2003 and
converted to a Delaware limited liability company (LendingTree, LLC) in December 2004. Through its various subsidiaries, Tree.com currently operates a lending business (the "Lending Business")
and a real estate business (the "Real Estate Business"). Tree.com's main website address is www.lendingtree.com.
The
Lending Business consists of online networks, principally LendingTree.com® and GetSmart.com®, as well as call centers, which match consumers with lenders and
loan brokers. In addition, the Lending Business originates, processes, approves and funds various types of residential real estate loans under two brand names, LendingTree Loans® and
HomeLoanCenter.com®, and offers residential mortgage loan settlement services under the name LendingTree Settlement Services.
The
Real Estate Business consists primarily of an internet-enabled national residential real estate brokerage that currently operates offices in 14 markets under the brand name
"RealEstate.com, REALTORS®." Outside of these 14 markets, RealEstate.com maintains relationships with a network of third-party brokerages that receive leads from RealEstate.com and pay a
referral fee on closed transactions. The Real Estate Business also consists of a brokerage that matches residential home buyers interested in newly constructed homes with builders and currently
operates under the brand name "iNest."
Lending Business
Consumers can access Tree.com's nationwide network of more than 200 banks, lenders and loan brokers online (via www.lendingtree.com or
www.getsmart.com) or by calling
1-800-555-TREE. Loans offered by these banks, lenders and loan brokers (the "Network Lenders") consist primarily of home mortgages (in connection with refinancings
and purchases) and home equity loans.
Tree.com selects lenders throughout the country in an effort to provide full geographic lending coverage of the country and to offer a complete suite of loan products available in the
market. Frequently, before a lender joins the Network, Tree.com performs credit and financial reviews on the lender. In addition, as a further quality assurance measure, Tree.com recently began
checking new lenders against a national antifraud database maintained by the Mortgage Asset Research Institute. All
218
Network Lenders are required to enter into a contract that generally may be terminated upon notice by either party. No individual Network Lender accounted for more than 5% of the Lending Segment
revenue in any period.
Consumers
seeking mortgage loans through one of Tree.com's lending networks can receive multiple conditional loan offers from Network Lenders, or from Tree.com's subsidiary doing
business under the name "LendingTree Loans" (as described below), in response to a single loan request form.
The process by which the Lending Business matches consumers and Network Lenders, which is referred to in the document as the "matching process," is innovative and customer-friendly. This
matching process consists of the following steps:
-
- Credit Request. Consumers complete a single loan request form for the selected loan with
information regarding their income, assets and liabilities, loan preferences and other data. Consumers also consent to the retrieval of their credit report.
-
- Loan Request Form Matching and Transmission. Tree.com matches a given consumer's loan
request form data, credit profile and geographic location against certain pre-established creditworthiness criteria of Network Lenders, which may be modified from time to time. Once a
given loan request passes through the matching process, the loan request is automatically transmitted to up to four or five Network Lenders.
-
- Lender Evaluation and Response. Network Lenders who receive a loan request form evaluate
the information in the loan request to determine whether to make a conditional loan offer. If a given Network Lender does not respond with a conditional loan offer, the loan request form is directed
through the matching process a second time in an attempt to match the consumer with another Network Lender.
-
- Communication of a Conditional Offer. If one or more Network Lenders make a conditional
offer, the consumer is automatically notified via e-mail, typically within minutes after the submission of the loan request form. Through these e-mails, consumers may access a
dedicated webpage where they can view the proposed terms of each conditional offer, including: interest rate, closing costs, monthly payment amount, lender fees and other information. If a consumer
does not have access to e-mail, conditional offers are provided to the consumer by phone or fax.
-
- Loan Processing. Consumers work offline with the relevant Network Lender to provide
additional information bearing on creditworthiness to the Network Lender. If the Network Lender approves a consumer, it will then underwrite and originate the loan.
-
- Ongoing Consumer and Lender Support. Active e-mail and telephone
follow-up and support is provided to both Network Lenders and consumers during the loan transaction process. This follow-up and support is designed to provide technical
assistance and increase overall satisfaction of Network Lenders, as well as increase the percentage of consumers who close a loan through financial institutions found through the Lending Business.
The
Lending Business also offers a short-form matching process under the LendingTree® and GetSmart® brands. This process, which provides consumers
with lender contact information only, typically requires the consumer to submit less data than that required in connection with the matching process described above.
The
Lending Business does not charge consumers a fee to use its lending networks. Substantially all revenues from lending networks are derived from both up-front matching
fees and paid by Network Lenders who receive a loan request form and closing fees paid by Network Lenders who close a transaction with the consumer. Since a given loan request form can be matched with
more than one Network Lender, multiple match fees may be generated from the same form. Matching fees are recognized at the time the loan request form is transmitted and closing fees are recognized at
the time
219
the
Network Lender reports that it has closed the loan, which may be several months after the time the loan request form is transmitted.
LendingTree Loans/Home Loan Center, Inc.
The Lending Business also originates, processes, approves and funds various consumer mortgage loans through a Tree.com subsidiary, Home Loan Center, Inc.,
which operates primarily under the brand name "LendingTree Loans®." For these purposes, the Lending Business maintains loan origination offices in California and, to a lesser extent, North
Carolina, and is able to provide a broad range of mortgage loan products to consumers in most states, primarily conforming and prime loans, and, to a lesser extent, non-conforming,
Alt-A and subprime loans. Products available include both adjustable loans and fixed rate loans.
A summary of loans sold by type of loan for each of the three years in the period ended December 31, 2007 and the three months ended March 31, 2008 and 2007 and the loans
held as of the periods then ended is presented below (in millions):
|
|
|
|
Year Ended December 31,
|
|
Three Months
Ended March 31,
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
2008
|
|
Loans Sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conforming |
|
$ |
3,462 |
|
$ |
3,773 |
|
$ |
4,210 |
|
$ |
1,132 |
|
$ |
523 |
|
% of Total |
|
|
48.2 |
% |
|
47.9 |
% |
|
69.3 |
% |
|
58.6 |
% |
|
86.3 |
% |
Non-Conforming /Alt-A |
|
$ |
2,291 |
|
$ |
2,386 |
|
$ |
1,323 |
|
$ |
504 |
|
$ |
83 |
|
% of Total |
|
|
31.9 |
% |
|
30.0 |
% |
|
21.8 |
% |
|
26.1 |
% |
|
13.7 |
% |
SubPrime |
|
$ |
269 |
|
$ |
251 |
|
$ |
51 |
|
$ |
44 |
|
$ |
|
|
% of Total |
|
|
3.7 |
% |
|
3.2 |
% |
|
0.8 |
% |
|
2.3 |
% |
|
|
|
Home equity |
|
$ |
1,161 |
|
$ |
1,461 |
|
$ |
489 |
|
$ |
252 |
|
$ |
0.2 |
|
% of Total |
|
|
16.2 |
% |
|
18.6 |
% |
|
8.1 |
% |
|
13.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,183 |
|
$ |
7,871 |
|
$ |
6,073 |
|
$ |
1,932 |
|
$ |
606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
March 31,
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
2008
|
|
Loans Held For Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conforming |
|
$ |
124 |
|
$ |
147 |
|
$ |
76 |
|
$ |
219 |
|
$ |
74 |
|
% of Total |
|
|
33.0 |
% |
|
42.2 |
% |
|
82.2 |
% |
|
53.0 |
% |
|
79.1 |
% |
Non-Conforming /Alt-A |
|
$ |
140 |
|
$ |
102 |
|
$ |
10 |
|
$ |
119 |
|
$ |
13 |
|
% of Total |
|
|
37.5 |
% |
|
29.2 |
% |
|
10.5 |
% |
|
28.8 |
% |
|
14.0 |
% |
SubPrime |
|
$ |
32 |
|
$ |
22 |
|
$ |
2 |
|
$ |
6 |
|
$ |
2 |
|
% of Total |
|
|
8.7 |
% |
|
6.3 |
% |
|
2.7 |
% |
|
1.5 |
% |
|
2.5 |
% |
Home equity |
|
$ |
78 |
|
$ |
78 |
|
$ |
4 |
|
$ |
69 |
|
$ |
4 |
|
% of Total |
|
|
20.8 |
% |
|
22.3 |
% |
|
4.6 |
% |
|
16.7 |
% |
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
374 |
|
$ |
349 |
|
$ |
92 |
|
$ |
413 |
|
$ |
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All LendingTree Loans® -branded loan originations are derived from consumer loan requests received through www.lendingtree.com,
www.getsmart.com or 1-800-555-TREE. A portion of all consumer loan request forms received
through these channels are referred to LendingTree Loans. LendingTree Loans offers those consumers a choice among various loan alternatives, with loan pricing based upon different wholesale offerings
received by LendingTree Loans from the secondary market investors who purchase the loans (plus a fixed margin to cover internal costs). LendingTree Loans maintains controls to ensure that its consumer
loan pricing correlates to secondary market pricing and to ensure that its consumers receive multiple loan alternatives, thus maintaining the competition and choice elements inherent in the
LendingTree brand. Tree.com believes that LendingTree Loans provides value to consumers who do not wish to negotiate with multiple lenders, but still wish to obtain loan alternatives.
220
LendingTree Loans® -branded loans are funded and closed using proceeds from borrowings under available warehouse lines of credit or repurchase agreements. Substantially all
of the loans funded are sold, along with the accompanying loan servicing rights, to investors in the secondary market, generally within 30 days of funding, with the proceeds from such sales
being used to repay borrowings under the warehouse lines of credit or repurchase agreements. For terms of the warehouse lines of credit and repurchase agreements see "Financial Position, Liquidity and
Capital Resources."
Although
most of Home Loan Center, Inc.'s consumer leads are sourced through www.lendingtree.com or
1-800-555-TREE and originated under the LendingTree Loans® brand, a small portion of Home Loan Center' Inc.'s leads are sourced from a variety of
non-LendingTree channels, including third-party online lead aggregators, direct mail marketing campaigns and www.homeloancenter.com. When
obtaining leads from third-party sources, Home Loan Center, Inc. operates under its traditional name and brand (HomeLoanCenter®). Consumers who request loans through the
HomeLoanCenter® brand typically receive single loan offers. HomeLoanCenter® -branded loans are funded, closed and sold into the secondary market in the same manner, and on
substantially the same terms, as LendingTree Loans® -branded loans.
Revenues
from direct lending operations are derived from the sale of loans to secondary market investors and from origination and other fees paid by borrowers. Of Home Loan
Center, Inc.'s seventeen secondary market investors, the two largest, Countrywide and CitiMortgage, represented approximately 28% and 13%, respectively, of Tree.com's consolidated revenue in
2007. See "Risk Factors Relating to the Business of Tree.com Following the Spin-OffsAdverse Events and Trends."
The Lending Business also provides loan settlement services, including title insurance, appraisal and other collateral evaluation products, flood insurance,
escrow, and closing services, through LendingTree Settlement Services, Inc., which provides services to Network Lenders, as well as to Home Loan Center, Inc. (including when doing
business as LendingTree Loans®). In addition, Home
Loan Center, Inc. offers escrow and sub-escrow services through its subsidiary, HLC Escrow, Inc.
Revenues
from LendingTree Settlement Services are derived from service fees paid by lenders, which fees may or may not be passed on by the lender to the loan customer. Revenues from
escrow and sub-escrow services are derived from fees charged to the consumer by the lender or by Home Loan Center, Inc.
Through the LendingTree.com and GetSmart.com websites, Tree.com's Lending Business also offers:
-
- unsecured
loans, through which consumers are matched with multiple lenders using a network-based process similar to the mortgage loan matching process described above;
-
- automobile
loans, through which consumers are linked with one or more third-party automobile lenders;
-
- credit
cards, through which consumers can search various credit card offerings through a third-party vendor;
-
- student
loans, through which consumers receive initial student loan offers through a third-party vendor; and
-
- various
consumer insurance products, pursuant to which consumers are linked with licensed insurance agents and insurance lead aggregators to obtain insurance offers.
221
Revenues
from these businesses are derived either from matching and closing fees, or in some cases, volume-based marketing fees. While the revenues from these businesses do not currently
represent a significant portion of the revenues of the Lending Business, these revenues are expected to grow over time.
Tree.com's Lending Business, particularly its lending networks, competes with other lead aggregators, including online intermediaries that operate
network-type arrangements. In the case of the direct lending operations, Tree.com believes that the primary competitors of its Lending Business are traditional lending institutions,
including those that are developing their own direct, online lending channels. While these financial institutions do not operate lending networks, they process, close and fund loans as direct lenders
through well-recognized, national brands, many of which are industry leaders. Tree.com's Lending Business also faces additional competition from direct lending websites owned and operated
by other online lenders that originate the bulk of their loans through their websites or by phone. These companies typically operate a consumer-branded website and attract consumers via online banner
ads, key word placement on search engines, partnering with affiliates and business development arrangements with other properties, including major online portals.
Real Estate Business
RealEstate.com, REALTORS® is Tree.com's proprietary real estate brokerage business, which currently operates in the following 14 markets: Greater
Portland, Seattle, Denver, Salt Lake City, San Diego, Las Vegas, Phoenix, Tucson, Sierra Vista (AZ), Charlotte, New York, New Jersey, Philadelphia and Boston. Most of the business for the proprietary
real estate brokerage is internally generated based on consumers accessing www.realestate.com or by calling
1-800-REALESTATE. The brokerage recruits agents to join as independent contractors, for whom it then generates leads, with the brokerage retaining a significant share of the
gross commission on closed transactions originating from company-generated leads (and a lesser share in the case of agent-generated leads). Tree.com uses both a central agent recruiting group in
Charlotte, as well as local recruiting efforts, to identify agents who fit its model and would be willing to join the company. Third-party brokerage services provided by approximately 300 real estate
brokerage firms are also available through www.realestate.com or by calling 1-800-REALESTATE. The Real Estate Business has
developed relationships with brokers over the years, and targets prospective companies based on available lead flow by geography, their willingness to work with a lead generation company under
Tree.com's terms and conditions, and the belief that such brokerage firms would generate an acceptable closing conversion rate. These third-party brokerage services are available nationwide, as well
as in the 14 markets in which RealEstate.com, REALTORS® currently operates. Once the consumer and the real estate professional are matched and agree to work together, the remainder of the
transaction is completed locally.
The
proprietary real estate brokerage business earns revenues through the real estate brokerage commissions it collects in connection with company- and agent-generated transactions. The
Real Estate Business also earns revenue from referral fees paid by participating real estate brokerages.
The Real Estate Business also owns and operates www.inest.com, a website that matches potential purchasers of
newly constructed homes with new home builders. iNest.com is currently available in 28 states and allows consumers to view new home community information (new home listings) on the iNest website. From
the iNest website consumers can print a coupon to present to builders that participate in the iNest.com network upon his or her first visit to a home site, which signifies that iNest.com will act as
the buyer's real estate broker for a new home purchase from that builder. Upon
222
closing, the builder pays a commission to iNest, which in turn is split between iNest, the licensed iNest real estate broker representing the consumer, and the consumer.
Tree.com's Real Estate Business competes with all real estate brokerages within the RealEstate.com, REALTORS fourteen markets. These brokerages are comprised
mainly of traditional real estate
companies operating as independent brands or franchisees, as well as non-traditional models, such as salaried-agent, fee-for-service, flat-fee,
discount, or rebate commission models, many of which generate leads from the Internet. In addition, the Real Estate Business competes for customers with companies that are not brokerages, such as
websites that aggregate real estate broker listings without related services and customer support. Given the downturn in the credit and mortgage markets, and the decline in the number of housing
transactions, competition in this segment has increased.
Regulation and Legal Compliance
Tree.com businesses market and provide services in heavily regulated industries through a number of different online and offline channels across the United States
(see "Risk Factors Relating to the Business of Tree.com Following the Spin-OffsCompliance and Changing Laws, Rules and Regulations"). As a result, they are subject to a
variety of statutes, rules, regulations, policies and procedures in various jurisdictions in the United States, including:
-
- Restrictions
on the amount and nature of fees or interest that may be charged in connection with a loan, in particular, state usury and fee restrictions;
-
- Restrictions
on the manner in which consumer loans are marketed and originated, including the making of required consumer disclosures, such the federal
Truth-in-Lending Act, the federal Equal Credit Opportunity Act, the federal Fair Credit Reporting Act, the federal Fair Housing Act, the federal Real Estate Settlement
Procedures Act (RESPA), and similar state laws;
-
- Restrictions
on the amount and nature of fees that may be charged lenders and real estate professionals for providing or obtaining consumer leads, in particular, RESPA;
-
- Restrictions
on the amount and nature of fees that may be charged consumers for real estate brokerage transactions, including any incentives and rebates, that may be offered
to consumers by Tree.com businesses;
-
- State,
and in some instances, federal, licensing or registration requirements applicable to both individuals or businesses engaged in the making or brokerage of loans (or
certain kinds of
loans,
such as loans made pursuant to the Federal Housing Act), or the brokering of real estate transactions; and
-
- State
and federal restrictions on the marketing activities conducted by telephone, the mail or by email, or over the internet, including the Telemarketing Sales Rule, state
telemarketing laws, federal and state privacy laws, the CAN-SPAM Act, the Federal Trade Commission Act and its accompanying regulations and guidelines.
Employees
As of December 31, 2007, Tree.com had approximately 1,000 full-time employees. None of Tree.com's employees are represented under collective
bargaining agreements. Tree.com considers its relations with its employees and independent contractors to be good.
223
Properties
Tree.com's principal executive offices, together with certain personnel and operations of its Lending and Real Estate Businesses, are currently located in
approximately 89,000 square feet of office space in Charlotte, North Carolina under leases that expire in 2015. 95,500 square feet of office space in Irvine, California is utilized by Home Loan
Center, Inc. under a lease expiring in 2010, and 31,667 square feet of office space in Jacksonville, Florida is utilized by LendingTree Settlement Services under leases that expire in 2009.
Tree.com Legal Proceedings
In the ordinary course of business, Tree.com and its subsidiaries are parties to litigation involving property, personal injury, contract, intellectual property
and other claims. The amounts that may be recovered in such matters may be subject to insurance coverage. Tree.com does not believe that such
ordinary course litigation will have a material effect on its business, financial condition or results of operations.
Rules of the Securities and Exchange Commission require the description of material pending legal proceedings, other than ordinary, routine litigation incident to the registrant's
business, and advise that proceedings ordinarily need not be described if they primarily involve damage claims for amounts (exclusive of interest and costs) not exceeding 10% of the current assets of
the registrant and its subsidiaries on a consolidated basis. Certain of the pending litigation matters described below, which management believes are the material litigations that Tree.com now faces,
could involve amounts of the magnitude described above.
Patent Litigation
Block Financial Corp. v. LendingTree, Inc., No. 01-cv-1007 ODS (U.S. Dist.
Ct., W.D. Mo.); LendingTree, LLC v. Block Financial LLC, No. 08-cv-164 ODS (U.S. Dist. Ct., W.D.
Mo.). On September 14, 2001, Block Financial Corporation ("Block") filed suit against LendingTree, LLC in the U.S. District Court for the Western District of
Missouri, alleging that LendingTree, LLC's loan-matching process infringes U.S. Patent No. 6,014,645 (the "'645 patent"), which generally claims a real-time
application system for financial cards. Block seeks damages, attorneys' fees and injunctive relief.
In
2002, LendingTree, LLC filed a petition to reexamine the '645 patent with the United States Patent and Trademark Office. The Patent Office agreed to reexamine the '645 patent,
and the court stayed the litigation pending reexamination. In December 2006, the Patent Office republished the patent, with certain modifications. The court then lifted its stay of the litigation. On
September 27, 2007, the court issued a claim construction order. The case is currently in discovery. Trial is scheduled for March 2009.
In February 2008, Block provided LendingTree, LLC with notice of a recently issued patent, U.S. Patent No. 7,310,617 (the "'617 patent"), a continuation of the '645 patent
that purports to claim a real-time application system for financial offerings (as opposed to only financial cards). On March 6, 2008, LendingTree, LLC filed suit in the U.S.
District Court for the Western District of Missouri seeking a declaration that the '617 patent is invalid. On April 14, 2008, Block filed an answer and counterclaim. Block asserts that
LendingTree, LLC's loan-matching process infringes the '617 patent. Block seeks damages, attorneys' fees and injunctive relief. The case is currently in discovery.
IMX, Inc. v. E-Loan, Inc., et al., No. 03-CV-1067 (U.S. Dist. Ct., D.
Del.). On November 24, 2003, IMX, Inc. ("IMX") filed suit against LendingTree, LLC and several other companies in the U.S. District Court for the District
of Delaware, alleging infringement of U.S. Patent No. 5,995,947 (the "'947 patent"), which generally claims an interactive real-time trading system for loans. In its complaint,
224
IMX
sought damages, attorneys' fees and injunctive relief. On January 26, 2004, LendingTree, LLC filed a counterclaim seeking a declaration that the '947 patent is invalid and
unenforceable.
On
December 14, 2005, the court (i) construed the claims of the '947 patent, (ii) granted partial summary judgment to LendingTree, LLC, limiting recoverable
damages to the period commencing after the filing of suit due to IMX's failure to "mark" its website with its patent and (iii) denied the parties' cross-motions for summary judgment on the
issues of infringement and invalidity.
The
case against LendingTree, LLC went to trial, and on January 23, 2006, the jury returned a verdict finding infringement and awarding IMX approximately
$5.8 million in damages. The jury also found that the infringement was willful and that the asserted claims of the '947 patent are valid. LendingTree, LLC subsequently designed and
implemented a work-around to avoid further infringement of the '947 patent.
On
January 10, 2007, the court, ruling on various post-trial motions, (i) denied IMX's motion for a permanent injunction and its request for attorneys' fees,
(ii) enhanced the damages award by 50% in light of the jury's finding of willful infringement, (iii) awarded IMX pre- and post-judgment interest,
(iv) rejected LendingTree, LLC's counterclaim alleging inequitable conduct by IMX and (v) entered judgment in favor of IMX for approximately $8.7 million plus interest.
On
July 27, 2007, the court, ruling on additional motions, (i) denied IMX's renewed request for an injunction, (ii) awarded IMX approximately $2.7 million in
supplemental damages for the post-verdict, pre-design-around period, (iii) denied IMX's request to enhance those supplemental damages and (iv) awarded IMX
approximately $1.0 million in pre-judgment interest and approximately $0.2 million in post-judgment interest to date. On August 9, 2007, an amended
judgment was entered in favor of IMX for the foregoing amounts.
LendingTree, LLC
appealed from this judgment to the U.S. Court of Appeals for the Federal Circuit. IMX cross-appealed from the District Court's order prohibiting recovery of
damages attributable to the period prior to the filing of the complaint, and from the court's refusal to award enhanced damages for post-verdict infringement. Briefing on the appeals has
been completed. Oral argument has not yet been scheduled.
As
of December 31, 2007, LendingTree, LLC's reserve for this matter was approximately $12.8 million. In connection with the appeal, IAC executed a guarantee in favor
of LendingTree, LLC in the amount of $13.5 million in lieu of LendingTree, LLC posting a bond. Before the spin-off of Tree.com is consummated, LendingTree, LLC
will have to put in place a bond or similar security.
Source Search Technologies, LLC v. LendingTree, LLC, No. 2:04-CV-04420 (U.S. Dist. Ct.,
D.N.J.). On September 13, 2004, Source Search Technologies, LLC ("SST") filed suit against LendingTree, LLC and other companies in the U.S. District Court
for the District of New Jersey, alleging infringement of U.S. Patent No. 5,758,328 (the "'328 patent"), which generally claims a computerized procurement system. SST seeks damages, attorneys'
fees and injunctive relief. On November 10, LendingTree, LLC filed a counterclaim seeking a declaration that the '328 patent is invalid and unenforceable.
The
court issued claim construction orders on October 16 and November 13, 2007. Following the completion of discovery, LendingTree, LLC and SST filed cross-motions
for summary judgment on the issues of infringement and invalidity. LendingTree, LLC also filed a motion for summary judgment on the ground that any infringement was not willful. The court heard
oral argument on these motions on November 13, 2007 and February 4, 2008. The motions remain pending. No trial date has been set.
Employment (Wage-and-Hour) Litigation
Gonzalez v. Home Loan Center, Inc., No. CV06-5007 (U.S. Dist. Ct., C.D.
Cal.). On August 9, 2006, Daniel Gonzalez filed this putative class action against Home Loan Center, Inc. (hereinafter, for the purpose of this section, "HLC") in
the U.S. District Court for the Central District of California.
225
Plaintiff,
a former HLC loan officer, asserts that HLC: failed to pay overtime; failed to pay wages due upon termination; failed to provide proper wage statements; failed to reimburse employees for
expenses and/or improperly deducted wages for business-related expenses; and failed to provide meal and rest periods. Based upon these factual allegations, Plaintiff asserts violations of various
California wage and hour laws, conversion, and violations of California Business & Professions Code § 17200. Plaintiff purports to represent a class of loan officers employed
by HLC in California since August 9, 2002, and seeks damages, restitution, attorneys' fees and injunctive relief.
On
December 27, 2006, Plaintiff filed a second amended complaint, adding two additional plaintiffs, David Nottingham and Jeffrey Howerton. Because these new plaintiffs had signed
agreements with HLC to arbitrate all employment-related claims, HLC filed a motion to compel arbitration.
Following a mediation held in September 2007, the parties entered into an agreement to settle this action. Under the settlement agreement, HLC has agreed to pay a maximum of
$4.0 million, inclusive of payments to class members as well as attorneys' fees and costs. The settlement agreement must be approved by the court in order to become effective. On May 13,
2008, Plaintiffs filed a motion for preliminary approval of the settlement. On June 13, 2008, the court, following a hearing, granted Plaintiffs' motion and preliminarily approved the
settlement. The court also scheduled a final approval hearing for December 16, 2008.
As
of December 31, 2007, LendingTree, LLC's reserve for this matter was approximately $2.1 million. This figure reflects Tree.com's estimates as to the minimum
percentage of class members likely to submit claims for payment and the contractual indemnity obligations of former HLC shareholders for liability that arose prior to LendingTree, LLC's
acquisition of HLC.
Richardson v. Home Loan Center, Inc., No. 07CC01337 (Cal. Super. Ct., Orange Cty.). On
August 2, 2007, Angela Richardson filed this putative class action against HLC in the California Superior Court for Orange County. Plaintiff, a former HLC loan processor, alleges that HLC:
failed to pay overtime; failed to provide meal and rest periods; failed to pay wages due upon termination; and failed to provide proper wage statements. Based upon these factual allegations, plaintiff
asserts that HLC violated various California wage and hour laws as well as California Business & Professions Code § 17200. Plaintiff purports to represent all loan
processors, funders and underwriters employed by HLC since August 2, 2003, and seeks damages, restitution, attorneys' fees and injunctive relief.
On
December 21, 2007, plaintiff filed a second amended complaint. On February 15, 2008, HLC filed a demurrer and a motion to strike portions of the second amended
complaint. On April 3, 2008, the court overruled the demurrer and denied the motion to strike. On April 23, 2008, HLC filed an answer to the second amended complaint.
Plaintiffs
have not yet filed a motion for class certification. No trial date has been set.
As
of December 31, 2007, LendingTree, LLC's reserve for this matter was approximately $0.4 million. This reserve was established in connection with a settlement
offer by HLC. No settlement has been reached to date.
Primanto v. Home Loan Center, Inc., No. 07CC01382 (Cal. Super. Ct., Orange Cty.). On
September 28, 2007, William Primanto filed this putative class action against HLC in the California Superior Court for Orange County. Plaintiff, a former HLC loan officer, alleges that HLC
failed to pay overtime and asserts violations of various California wage and hour laws and of California Business & Professions Code § 17200. Plaintiff purports to represent
all loan officers employed by HLC in California since September 28, 2003, and seeks compensatory damages, statutory penalties, restitution and attorneys' fees.
On
December 13, 2007, the court, at the request of the parties, entered an order staying the action pending resolution of the Gonzalez action (discussed above). The case remains stayed.
226
Johanson v. Home Loan Center, Inc., No. 07CC01405 (Cal. Super. Ct., Orange Cty.). On
November 8, 2007, Brian Johanson and Brendan Dwyer filed this putative class action against HLC in the California Superior Court for Orange County. Plaintiffs, former HLC loan officers, assert
that HLC: failed to pay overtime, compensation, commission wages and bonus wages; failed to provide proper wage statements; failed to provide rest periods and meal periods or compensation in lieu
thereof; and failed to pay wages due employees upon termination. Based upon these factual allegations, Plaintiffs assert violations of various California wage and hour laws and of California
Business & Professions Code § 17200. Plaintiffs purport to represent a class of all persons employed by HLC in California since November 8, 2003, and seek compensatory
damages, statutory penalties, restitution and attorneys' fees.
On
February 21, 2008, HLC filed an answer to the complaint. Plaintiffs have not yet filed a motion for class certification. No trial date has been set.
D'Asero v. Home Loan Center, Inc., No. SACV08-384 (U.S. Dist. Ct., C.D. Cal.). On
April 9, 2008, Frank D'Asero, Ezekial Mohammed, Pouria Safabakhsh and Michael McCarver filed this putative class action against HLC in the U.S. District Court for the Central District of
California. Plaintiffs, former HLC loan officers, allege that HLC: denied overtime compensation in violation of federal labor law; denied overtime compensation in violation of California labor law;
failed to pay wages for compensable meal breaks in violation of California labor law; made unauthorized deductions from earned wages, failed to indemnify employees and coerced purchases in violation
of California labor law; made unauthorized deductions from wages in violation of North Carolina labor law; failed to pay timely wages in violation of California labor law; failed to pay wages in
violation of North Carolina labor law; failed to furnish itemized wage statements in violation of California labor law; and based upon the foregoing, committed unfair business practices in violation
of California Business & Professions Code § 17200.
Plaintiffs
purport to represent all loan officers employed by HLC in California since April 9, 2004 and all loan officers employed by HLC in North Carolina since April 9,
2006. Plaintiffs also purport to bring a collective action under the federal Fair Labor Standards Act on behalf of all loan officers employed by HLC since April 9, 2005. Plaintiffs seek
declaratory relief, an injunction, liquidated damages, compensatory damages, attorneys' fees, restitution and penalties.
On May 30, 2008, HLC filed a motion to compel arbitration of Plaintiffs' claims based upon their signed agreements with HLC to arbitrate all employment-related claims.
On June 10, 2008, Plaintiffs filed a first amended complaint, which added a new claim for violation of California's Private Attorneys General Act of 2004. In addition, on
June 10, 2008, Plaintiffs filed a motion for conditional class certification. A hearing date on Plaintiffs' motion is scheduled for July 1, 2008.
On June 17, 2008, the parties executed a joint stipulation and proposed order staying all proceedings for 90 days to facilitate mediation. The parties have filed the joint
stipulation and proposed order with the court for approval.
Plaintiffs have not yet filed a motion for class certification. No trial date has been set.
Privacy/Information Security Litigation
Miller v. LendingTree, LLC, No. 08cv2300 (U.S. Dist. Ct., N.D. Ill.). On
April 22, 2008, Eugene Miller filed this putative class action against LendingTree, LLC in the U.S. District Court for the Northern District of Illinois. The case arises out of
LendingTree, LLC's April 21, 2008 announcement that unauthorized persons had gained access to non-public information relating to its customers. Plaintiff alleges that
LendingTree, LLC is a "consumer reporting agency" within the meaning of the FCRA and has violated the FCRA by failing to maintain reasonable procedures designed to limit the
227
furnishing
of consumer reports. Plaintiff also asserts claims for negligence, breach of implied contract, invasion of privacy and misappropriation of confidential information. Plaintiff purports to
represent all LendingTree, LLC customers affected by the information security breach, and seeks damages, attorneys' fees and injunctive relief.
Plaintiffs
have not yet filed a motion for class action certification. No trial date has been set.
Mitchell v. Home Loan Center, Inc., No. 08-448-HE (U.S. Dist. Ct., W.D.
Okla.). On April 28, 2008, Angela Mitchell filed this putative class action against Home Loan Center, Inc. and LendingTree, LLC in the U.S. District Court
for the Western District of Oklahoma. As in the Miller case (discussed above), the case arises out of LendingTree, LLC's April 21, 2008
announcement that unauthorized persons had gained access to non-public information relating to its customers. Plaintiff asserts claims for breach of contract, negligence and negligence per
se. Plaintiff purports to represent all similarly situated persons, and seeks damages, attorneys' fees and injunctive relief.
Plaintiffs
have not yet filed a motion for class action certification. No trial date has been set.
Constance Spinozzi v. LendingTree, LLC, No. 3:08-cv-229 (U.S. Dist. Ct.,
W.D.N.C.). On May 15, 2008, Constance Spinozzi filed this putative class action against LendingTree, LLC in the U.S. District Court for the Western District of
North Carolina. As in the Miller case (discussed above), the case arises out of LendingTree, LLC's April 21, 2008 announcement that
unauthorized persons had gained access to non-public information relating to its customers. Plaintiff alleges that LendingTree, LLC is a "consumer reporting agency" within the
meaning of the FCRA and has violated the FCRA by failing to maintain reasonable procedures designed to limit the furnishing of consumer reports. Plaintiff also asserts claims for negligence and breach
of implied contract. Plaintiff purports to represent all LendingTree, LLC customers affected by the information security breach, and seeks damages, attorneys' fees and injunctive relief.
On June 11, 2008, Plaintiff and the plaintiff in the Carson case (discussed below) filed a motion with the Judicial Panel on
Multidistrict Litigation requesting that it (1) exercise jurisdiction over all actions arising out of LendingTree, LLC's April 21, 2008 announcement that unauthorized persons had
gained access to non-public information relating to its customers; and (2) consolidate all such cases and transfer them to the U.S. District Court for the Western District of North
Carolina.
Plaintiffs have not yet filed a motion for class certification. No trial date has been set.
Marvin Garcia v. LendingTree, LLC, No. 08 Civ. 4551 (U.S. Dist. Ct., S.D.N.Y.). On May 16,
2008, Marvin Garcia filed this putative class action against LendingTree, LLC in the U.S. District Court for the Southern District of New York. As in the Miller case (discussed above), the case
arises out of LendingTree, LLC's April 21, 2008 announcement that unauthorized persons had gained
access to non-public information relating to its customers. Plaintiff asserts claims for breach of contract and negligence. Plaintiff purports to represent all LendingTree, LLC
customers affected by the information security breach, and seeks damages, attorneys' fees and injunctive relief.
Plaintiffs have not yet filed a motion for class certification. No trial date has been set.
Sylvia Carson v. LendingTree, LLC, No. 3:08-cv-247 (U.S. Dist. Ct., W.D.N.C.). On May 30, 2008, Sylvia Carson
filed this putative class action against LendingTree, LLC in the U.S. District Court for the Western District of North Carolina. As
in the Miller case (discussed above), the case arises out of LendingTree, LLC's April 21, 2008 announcement that unauthorized persons had
gained access to non-public information relating to its customers. Plaintiff alleges that LendingTree, LLC is a "consumer reporting agency" within the meaning of the FCRA and
has violated the FCRA by failing to maintain reasonable procedures designed to limit the furnishing of consumer reports. Plaintiff also asserts claims for negligence and breach of implied contract.
Plaintiff purports to represent all LendingTree, LLC customers affected by the information security breach, and seeks damages, attorneys' fees and injunctive relief.
228
As set forth in the Spinozzi discussion (above), on June 11, 2008, Plaintiff and the Spinozzi
plaintiff filed a motion with the Judicial Panel on Multidistrict Litigation requesting that it (1) exercise jurisdiction over all
actions arising out of LendingTree, LLC's April 21, 2008 announcement that unauthorized persons had gained access to non-public information relating to its customers; and
(2) transfer and consolidate all such cases in the U.S. District Court for the Western District of North Carolina.
Plaintiffs have not yet filed a motion for class certification. No trial date has been set.
Amy Bercaw v. LendingTree, LLC, No. SACV08-660 (U.S. Dist. Ct., C.D. Cal.). On
June 13, 2008, Amy Bercaw, Russell Winsett and Ty Woods filed this putative class action against LendingTree, LLC in the U.S. District Court for the Central District of California. As in
the Miller case (discussed above), the case arises out of LendingTree, LLC's April 21, 2008 announcement that unauthorized persons had
gained access to non-public information relating to its customers. Plaintiffs allege that LendingTree, LLC is a "consumer reporting agency" within the meaning of the FCRA and has
violated the FCRA by failing to maintain reasonable procedures designed to limit the furnishing of consumer reports. Plaintiffs also assert claims against LendingTree, LLC for negligence,
breach of implied contract, invasion of privacy, misappropriation of confidential information in violation of California Civil Code § 17980.89, and violation of California Business
and Professions Code § 17200. Plaintiff purports to represent all LendingTree, LLC customers affected by the information security breach, and seeks damages, attorneys' fees
and injunctive relief.
Plaintiffs have not yet filed a motion for class certification. No trial date has been set.
Other Litigation
Boschma v. Home Loan Center, Inc., No. SACV07-613 (U.S. Dist. Ct., C.D.
Cal.). On May 25, 2007, Clarence and Shirley Boschma filed this putative class action against HLC in the U.S. District Court for the Central District of California.
Plaintiffs allege that HLC sold them an option ARM (adjustable-rate mortgage) loan but failed to disclose in a clear and conspicuous
manner, among other things, that the interest rate was not fixed, that negative amortization could occur and that the loan had a prepayment penalty. Based upon these factual allegations, Plaintiffs
assert violations of the federal Truth in Lending Act (the "TILA"), violations of California Business and Professions Code § 17200 (the "UCL"), breach of contract,
breach of the covenant of good faith and fair dealing and violations of California's Consumer Legal Remedies Act (the "CLRA"). Plaintiffs purport to represent a class of all individuals who between
June 1, 2003 and May 31, 2007 obtained through HLC an option ARM loan on their primary residence located in California, and seek rescission, damages, attorneys' fees and injunctive
relief. On August 10, 2007, Plaintiffs filed a first amended complaint that dropped their CLRA claim.
On September 11, 2007, HLC filed a motion to dismiss and a motion to strike the amended complaint. In its motion to dismiss, HLC argued that Plaintiffs' UCL claim should be
dismissed because they fail to properly allege that they or the putative class members suffered injury as a result of HLC's alleged misrepresentations. The motion to dismiss also requests dismissal of
Plaintiffs' claims for breach of contract and for breach of the implied covenant of good faith and fair dealing. HLC's motion to strike requests that the court strike Plaintiffs' demand for
class-wide rescission under the TILA and demand for disgorgement the UCL. Plaintiffs opposed both motions. On May 27, 2008, the court granted HLC's motion to dismiss, denied HLC's
motion to strike as moot, and granted Plaintiffs leave to file a second amended complaint. On June 16, 2008, Plaintiffs filed a second amended complaint, which added a claim for
fraudulent omissions.
The
parties have agreed not to conduct discovery until after the court rules on HLC's motions. Plaintiffs have not yet filed a motion for class certification. No trial date has been set.
229
Gaines v. Home Loan Center, Inc., No. SACV08-667 (U.S. Dist. Ct., C.D. Cal.). On
June 13, 2008, Joanne Gaines and Johnnie Cave filed this putative class action against HLC and LendingTree, LLC in the U.S. District Court for the Central District of California.
Plaintiffs allege, in essence, that (1) HLC failed to disclose that the bundled amount for certain loan closing services (called the "TrueCost") that HLC charged to Plaintiffs was greater than
HLC's actual costs for those services; (2) HLC's option ARM (adjustable rate mortgage) note failed to tell Plaintiffs that the stated interest rate and payment amounts would change after the
first month and that the payment amount stated in the note was not sufficient to pay interest charges, resulting in negative amortization; and (3) HLC misrepresented that Plaintiffs would have
to obtain a home equity line of credit in order to obtain a low interest rate on their option ARM loans. Based upon these factual allegations, Plaintiffs assert violations of the federal Racketeer
Influenced and Corrupt Organizations Act, the federal Truth in Lending Act, California Business and Professions Code §§ 17200 and 17500, California's Consumers Legal
Remedies Act, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, conversion, and money had and received.
Plaintiffs purport to represent all HLC customers who, since December 14, 2004 (1) were charged by HLC and paid a TrueCost amount that exceeded HLC's actual costs for the
TrueCost services; and/or (2) entered into option ARM loan agreements with HLC; and/or (3) were misled into taking out a home equity line of credit along with their option ARM mortgage.
Plaintiffs seek restitution, disgorgement, damages, attorneys' fees and injunctive relief.
Plaintiffs have not yet filed a motion for class certification. No trial date has been set.
Cavin v. Home Loan Center, Inc., No. 05 C 4987 (U.S. Dist. Ct., N.D. Ill.). On August 29,
2005, Lawrence and Theresa Cavin filed this putative class action against HLC in the U.S. District Court for the Northern District of Illinois. Plaintiffs allege that HLC violated the federal Fair
Credit Reporting Act (the "FCRA") by accessing credit report files in order to send them and other Illinois residents a "prescreened" mailer that did not contain a "firm offer of credit" as required
by the statute. Plaintiffs purport to represent all Illinois residents who received an HLC prescreened mailer since August 29, 2003, and seek statutory damages, attorneys' fees and injunctive
relief.
On May 10, 2006, the district court certified a class of approximately 50,000 Illinois residents. Following the completion of discovery, the parties filed cross-motions for
summary judgment on the issues of (i) whether HLC's prescreened mailer was a "firm offer of credit" under the FCRA and (ii) whether any violation of the statute by HLC was "willful" and
therefore could serve as a predicate for statutory damages. On January 10, 2007, the court granted HLC's motion and dismissed the case, ruling that HLC's prescreened mailer was a "firm offer of
credit" under the FCRA.
On January 16, 2007, Plaintiffs appealed to the U.S. Court of Appeals for the Seventh Circuit. Oral argument on the appeal was heard on October 24, 2007. No decision has
been issued to date.
Schnee v. LendingTree, LLC and Home Loan Center, Inc., No. 06CC00211 (Cal. Super. Ct., Orange Cty.). On
October 11, 2006, four individual plaintiffs filed this putative class action against LendingTree, LLC and HLC in the California Superior Court for Orange County. Plaintiffs allege that they
used the LendingTree.com website to find potential lenders and without their knowledge were referred to LendingTree, LLC's direct lender, HLC; that Lending Tree, LLC and HLC did not adequately
disclose the relationship between them; and that HLC charged Plaintiffs higher rates and fees than they otherwise would have been charged. Based upon these allegations, Plaintiffs assert that
LendingTree, LLC and HLC violated California Business and Professions Code §§ 17200 and 17500 and California's Consumer Legal Remedies Act. Plaintiffs purport to represent a
nationwide class of consumers who sought lender referrals from LendingTree, LLC and obtained loans from HLC since December 1, 2004. Plaintiffs seek damages, restitution, attorneys' fees and
injunctive relief.
On November 27, 2006, LendingTree, LLC and HLC filed demurrers and a motion to strike portions of the complaint, arguing, among other things, that the complaint did not adequately
allege
230
that the named class representatives read and relied upon the allegedly deceptive representations on LendingTree, LLC's website. On January 25, 2007, the court sustained the demurrers and
granted the motion to strike on the reliance issue, but otherwise overruled the demurrers and denied the motion to strike. On February 14, 2007, Plaintiffs filed their first amended complaint.
On March 12, 2007, LendingTree, LLC and HLC filed demurrers and a motion to strike portions of the first amended complaint. On May 17, 2007, the court overruled the
demurrers and denied the motion to strike. On June 11, 2007, LendingTree, LLC and HLC filed an answer to the first amended complaint.
The case is currently in discovery. Plaintiffs have not yet filed a motion for class certification. No trial date has been set.
Mortgage Store, Inc. v. LendingTree Loans d/b/a Home Loan Center, Inc., No. 06CC00250 (Cal. Super. Ct., Orange
Cty.). On November 30, 2006, The Mortgage Store, Inc. and Castleview Home Loans, Inc. filed this putative class action against HLC in the California Superior Court for
Orange County. Plaintiffs, two former Network Lenders, allege that HLC interfered with LendingTree, LLC's contracts with Network Lenders by taking referrals from LendingTree, LLC. The complaint is
largely based upon the factual allegations made in the Schnee complaint (described above). Based upon these factual allegation, Plaintiffs assert claims
for intentional interference with contractual relations, intentional interference with prospective economic advantage, and violation of California Business and Professions Code
§§ 17200 and 17500. Plaintiffs purport to represent all Network Lenders from December 14, 2004 to date, and seek damages, restitution, attorneys' fees, and punitive
damages.
On February 8, 2007, HLC filed a demurrer and a motion to strike portions of Plaintiffs' complaint. On March 15, 2007, the court overruled the demurrer but granted the
motion to strike in part, striking the portion of the complaint that sought restitution and disgorgement of all profits made by HLC from December 14, 2004 to date.
The case is currently in discovery. Plaintiffs have not yet filed a motion for class certification. No trial date has been set.
231
RISK FACTORS RELATING TO THE BUSINESS OF TREE.COM FOLLOWING THE SPIN-OFFS
Tree.com's business, financial condition and results of operations are subject to certain risks that are described below and in the section "Risk Factors"
beginning on page [ ]. You should carefully consider these risks and uncertainties. While Tree.com believes that the risks and uncertainties described below
and elsewhere in this information statement include the most significant risk factors that should be considered by Tree.com's investors, these risks and uncertainties are not the only ones facing
Tree.com and its businesses.
Adverse Events and TrendsAdverse conditions in the credit and secondary mortgage markets, as well as the economy generally, could
materially and adversely affect Tree.com's business, financial condition and results of operations.
The credit and secondary mortgage markets have been (and are currently) experiencing unprecedented and continuing disruption, which have had, and are expected to
continue to have, an adverse effect on Tree.com's business, financial condition and results of operations. These conditions, coupled with adverse economic conditions and continuing declines in
residential real estate prices generally, has resulted, and is expected to continue to result, in decreased consumer demand for the lending and real estate offerings provided by Tree.com's networks
and other businesses. Generally, increases in interest rates adversely affect the ability of the Lending Business and Network Lenders to close loans, while adverse economic trends limit the ability of
the Lending Business and Network Lenders to offer home loan products other than low margin conforming loans. Likewise, adverse economic trends have reduced, and are expected to continue to reduce, the
number of prospective home purchasers and home prices, which adversely affects Tree.com's Real Estate Business. Tree.com businesses may experience a further decline in demand for their offerings due
to decreased consumer demand as a result of the conditions described above now or in the future. Conversely, during periods of robust consumer demand, which are typically associated with decreased
interest rates, some Network Lenders may have less incentive to use Tree.com's networks. Prolonged declines in demand for offerings of Tree.com businesses could have a material adverse effect on
Tree.com's business, financial condition and results of operations.
Tree.com's Lending Business originates, processes, approves and funds various consumer mortgage loans through Home Loan Center, Inc., which operates primarily under the brand name
"LendingTree Loans®." These direct lending operations have significant financing needs that are currently being met through borrowings under warehouse lines of credit or repurchase
agreements to fund and close loans, followed by the sale of substantially all loans funded to investors in the secondary mortgage markets. Current credit market conditions, such as significantly
reduced (in comparison to historical periods) and limited availability of credit, increased credit risk premiums for certain market participants and increased interest rates generally, increase the
cost and reduce the availability of debt and may continue for a prolonged period of time or worsen in the future. On January 31, 2008, a warehouse credit line of $500 million expired and
was subsequently renewed at a reduced size of $50 million, which will expire on the earlier of 60 days prior to the spin-off or January 24, 2009 and can be cancelled
at the option of the lender without default upon sixty days notice. On June 25, 2008, certain terms of the warehouse line of credit were waived in order for the line of credit not to expire
60 days prior to the spin-off. However, if the lender determines at any time prior to January 24, 2009 the spin-off materially and adversely affects Tree.com, the lender reserves the
right to deem the line of credit expired prior to January 24, 2009. Although Tree.com believes that its lines of credit are sufficient for its current operations, further reductions in
Tree.com's available credit could have an adverse effect on Tree.com's business, financial condition and results of operations. The Lending Business attempts to mitigate the impact of current
conditions and future credit market disruptions by maintaining committed and uncommitted warehouse lines of credit (currently, two committed warehouse lines of credit) with financial institutions.
However, these mitigation efforts may not be successful, current committed warehouse lines of credit may be inadequate to support operations or the cost of debt may
232
not allow Home Loan Center, Inc. to operate at profitable levels. Because Home Loan Center, Inc. is highly dependent on the availability of credit to finance its operations, the
continuation of current credit market conditions for a prolonged period of time or worsening of such conditions could have an adverse effect on Tree.com's business, financial condition and results of
operations, particularly over the next few years.
The
secondary mortgage markets have also been (and are currently) experiencing unprecedented and continued disruptions resulting from reduced investor demand for mortgage loans and
mortgage-backed securities and increased investor yield requirements for those loans and securities. These conditions may continue for a prolonged period of time or worsen in the future. Home Loan
Center, Inc. does not have the capital resources or credit necessary to retain the loans it funds and closes, and as a result sells substantially all such loans within 30 days of funding
as discussed above. Accordingly, a prolonged period of secondary market illiquidity may force the Lending Business to significantly reduce the volume of loans that it originates and funds through Home
Loan Center, Inc., which could have an adverse effect on Tree.com's business, financial condition and results of operations.
Contingent LiabilitiesLitigation and Indemnification of Secondary Market PurchasersLitigation and indemnification of secondary
market purchasers could have a material adverse effect on Tree.com's business, financial condition, results of operations and liquidity.
In connection with the sale of loans to secondary market purchasers, Home Loan Center, Inc. makes certain representations regarding related consumer credit
information, loan documentation and collateral. To the extent that these representations are incorrect, Home Loan Center, Inc. may be required to repurchase loans or indemnify secondary market
purchasers for losses due to borrower defaults. While Home Loan Center, Inc. seeks to ensure that loans it originates comply with these representations and warranties, secondary market
purchasers may take a contrary position. In connection with the sale of loans to secondary market purchasers, Home Loan Center, Inc. also agrees to repurchase loans or indemnify secondary
market purchasers for losses due to early payment defaults (i.e., late payments during a limited time period immediately following origination). In
connection with the sale of a majority of its loans to secondary market purchasers, Home Loan Center, Inc. also agrees to repay all or a portion of the initial premiums paid by secondary market
purchasers in instances where loans are prepaid prior to the end of relevant prepayment penalty periods.
Tree.com
and its businesses are also parties to litigation involving a variety of matters, many of which involve damage claims for substantial amounts (see "Business of
Tree.comLegal Proceedings").
Tree.com believes that following the spin-offs it will have adequate resources to satisfy its obligations relating to the potential exposures described above. However, it is possible
that these liabilities will be greater than anticipated. Given that Tree.com may have limited access to the credit markets following the spin-offs, if the liabilities are in excess of expectations,
Tree.com's ability to satisfy such obligations may be dependent upon its ability to raise capital in the equity markets, which may be uncertain.
Third-Party RelationshipsTree.com depends on relationships with Network Lenders, real estate professionals, credit providers and secondary
market investors and any adverse changes in these relationships could adversely affect its business, financial condition and results of operations.
The success of Tree.com depends, in significant part, on the quality and pricing of services provided by, and/or the continued financial stability of, Network
Lenders and real estate professionals participating on Tree.com networks, credit providers and secondary market investors. Network Lenders or real estate professionals could, for any reason, cease
participating on the networks operated by (or otherwise choose not to enter into relationships with) Tree.com's businesses, fail to pay matching and/or closing fees when due and/or cease providing
quality services on competitive terms. In addition, credit providers and/or secondary market investors could, for any reason, choose not to make credit available
233
to
(or otherwise enter into relationships with) Home Loan Center, Inc., and in the case of secondary market investors only, cease purchasing loans from Home Loan Center, Inc. In
particular, revenues attributable to purchases of loans by two such entities, Countrywide and CitiMortgage, represented approximately 28% and 13%, respectively, of Tree.com's consolidated revenues in
2007. The occurrence of one of more of these events by a significant number of Network Lenders, real estate professionals, credit providers and/or secondary market investors, particularly Countrywide
and CitiMortgage, could, alone or in combination, have a material adverse effect on Tree.com's business, financial condition and results of operations.
Network SecurityA breach of Tree.com's network security or the misappropriation or misuse of personal consumer information may have an
adverse impact on Tree.com's business, financial condition and results of operations.
Any penetration of network security or other misappropriation or misuse of personal consumer information maintained by Tree.com, could cause interruptions in the
operations of Tree.com's businesses and subject Tree.com to increased costs, litigation and other liabilities. Claims could also be made against Tree.com for other misuse of personal information, such
as for unauthorized purposes or identity theft, which could result in litigation and financial liabilities, as well as administrative action from governmental authorities. Security breaches could also
significantly damage the reputation of Tree.com with consumers and third parties with whom they do business. In that regard, on April 21, 2008, Tree.com announced that several mortgage
companies had gained unauthorized access to LendingTree's customer information database and had used the information to solicit mortgage loans directly from Tree.com's customers. Tree.com promptly
reported the situation to the Federal Bureau of Investigation and has been cooperating fully with the FBI's investigation. While LendingTree does not believe this situation resulted in any fraud on
the consumer or identity theft, LendingTree notified affected consumers as required by applicable law. Notwithstanding the foregoing, following Tree.com's announcement, several putative class action
lawsuits were filed against LendingTree, seeking to recover damages for consumers allegedly injured by this incident (see "Business of Tree.comLegal Proceedings").
As in the case of any financial services company, Tree.com may be required to expend significant capital and other resources to protect against and remedy any potential or existing
security breaches and their consequences. Tree.com also faces risks associated with security breaches affecting third parties with which they are affiliated or otherwise conduct business online.
Consumers are generally concerned with security and privacy of the internet, and any publicized security problems affecting the businesses of a Tree.com and/or third parties may discourage consumers
from doing business with Tree.com, which could have an adverse effect on its business, financial condition and results of operations.
Failure to Provide Competitive ServiceNetwork Lenders and real estate professionals may not provide competitive levels of service to
consumers, which could adversely affect Tree.com brands and businesses and their ability to attract consumers.
The ability of Tree.com businesses to provide consumers with a high-quality experience depends, in part, on consumers receiving competitive levels of
convenience, customer service, price and responsiveness from Network Lenders and real estate professionals with whom they are matched through Tree.com networks. If Network Lenders and real estate
professionals do not provide consumers with competitive levels of convenience, customer service, price and responsiveness, the value of Tree.com's various brands may be harmed, the ability of Tree.com
businesses to attract consumers to Tree.com websites may be limited and the number of consumers ultimately matched through Tree.com networks may decline, which could have a material adverse effect on
Tree.com's business, financial condition and results of operations.
234
Brand RecognitionFailure to maintain brand recognition and attract and retain customers in a cost-effective manner could
adversely affect Tree.com's business, financial condition and results of operations.
In order to attract visitors to their websites, convert these visitors into paying customers and capture repeat business from existing customers, Tree.com
businesses must promote and maintain their various brands successfully, which involves the expenditure of considerable money and resources for online and offline advertising, marketing and related
efforts, as well as the continued provision and introduction of high-quality products and services.
Tree.com
believes that continuing to build and maintain the recognition of its various brands is critical to achieving increased demand for the services provided by its businesses, given
that brand recognition
is a key differentiating factor among providers of online services. Accordingly, Tree.com has spent, and expects to continue to spend, significant amounts of money on, and devotes significant
resources to, branding, advertising and other marketing initiatives, which may not be successful or cost-effective. Tree.com believes that rates for desirable online and offline
advertising and marketing are likely to increase in the foreseeable future. The failure of Tree.com businesses to maintain the recognition of their respective brands and attract and retain customers
in a cost-effective manner could adversely affect Tree.com's business, financial condition and results of operations.
Lastly,
publicity from legal proceedings against Tree.com or its businesses, particularly governmental proceedings, consumer class action litigation or the disclosure of information
security breaches, could negatively impact Tree.com's various brands, which could adversely affect Tree.com's business, financial condition and results of operations.
Third-Party Relationships Are Not ExclusiveNetwork Lenders and real estate professionals affiliated with Tree.com networks are not
precluded from offering products and services outside of these networks.
Because Tree.com businesses do not have exclusive relationships with Network Lenders and real estate professionals, consumers may obtain loans and real estates
offerings directly from these third-party service providers without having to go through Tree.com networks. Network Lenders can offer loans (and real estate professionals can offer services) directly
to consumers through marketing campaigns or other traditional methods of distribution, such as referral arrangements, brick and mortar operations or, in the case of lending, broker agreements. Network
Lenders and real estate professionals can also offer loans and services to prospective customers online directly or through one or more online competitors of Tree.com businesses or both. If a
significant number of consumers seek loans and services directly from Network Lenders and real estate professionals as opposed to through Tree.com's networks, Tree.com's business, financial conditions
and results of operations would be adversely affected.
Compliance and Changing Laws, Rules and RegulationsFailure to comply with existing laws, rules and regulations, or to obtain and maintain
required licenses, could adversely affect Tree.com's business, financial condition and results of operations.
The failure of Tree.com businesses to comply with existing laws, rules and regulations, or to obtain required licenses, could result in administrative fines
and/or proceedings against Tree.com or its businesses by governmental agencies and/or litigation by consumers, which could adversely affect Tree.com's business, financial conditions and results of
operations. Tree.com businesses market and provide services in heavily regulated industries through a number of different online and offline channels across the United States. As a result, they are
subject to a variety of statutes, rules, regulations, policies and procedures in various jurisdictions in the United States, which are subject to change at any time.
Tree.com businesses conduct marketing activities via the telephone, the mail and/or through online marketing channels, which activities are governed by numerous federal and state
regulations, such as the Telemarketing Sales Rule, state telemarketing laws, federal and state privacy laws, the CAN-SPAM
235
Act, the Federal Trade Commission Act and its accompanying regulations and guidelines, among others. While Tree.com believes that the practices of its businesses have been structured in a manner to
ensure compliance with these laws and regulations, federal or state regulatory authorities may take a contrary position.
Most states require licenses to solicit, broker or make loans secured by residential mortgages and other consumer loans to residents of those states, as well as to operate real estate
referral and brokerage services, and in many cases require the licensure or registration of individual employees engaged in aspects of these businesses. Currently, Congress, many state legislatures
and state agencies are proposing to adopt, or have recently implemented, additional licensing requirements on mortgage lenders, brokers and their employees. While Tree.com businesses have endeavored
to comply with applicable requirements, the application of these licensing requirements to persons operating online is not always clear. Moreover, any of the licenses or rights currently held by
Tree.com businesses or their employees may be revoked prior to, or may not be renewed upon, their expiration. In addition, Tree.com businesses or their employees may not be granted new licenses or
rights for which they may be required to apply from time to time in the future.
Tree.com businesses are also subject to various state, federal and/or local laws, rules and regulations that regulate the amount and nature of fees that may be charged for transactions
and incentives, such as rebates, that may be offered to consumers by Tree.com businesses, as well as the manner in which these businesses may offer, advertise or promote transactions. For example, the
Real Estate Settlement Procedures Act, or RESPA, generally prohibits the payment or receipt of referral fees and fee shares or splits in connection with residential mortgage loan transactions, subject
to certain exceptions. The applicability of referral fee and fee sharing prohibitions to lenders and real estate providers, including online networks, may have the effect of reducing the types and
amounts of fees that may be charged or paid in connection with real estate-secured loan offerings or activities, including mortgage brokerage, lending and real estate brokerage services, or otherwise
limiting the ability to conduct marketing and referral activities. Although Tree.com believes that its businesses have been structured in such a way so as to comply with RESPA, the relevant regulatory
agency may take a contrary position.
In
addition, some states have regulations that prohibit real estate brokers from providing consumers with rebates or other incentives in connection with real estate transactions.
Additional states could promulgate similar regulations or interpret existing regulations in a way that limits the ability of online networks to offer consumer incentives in connection with real estate
transactions, thereby limiting the attractiveness of real estate brokerage activities offered by Tree.com's Real Estate Business.
Additional federal, state and in some instances, local, laws regulate residential lending and real estate brokerage activities. These laws generally regulate the manner in which lending,
lending-related and real estate brokerage activities are made available, including advertising and other consumer disclosures, payments for services and record keeping requirements, and include RESPA,
the Fair Credit Reporting Act, the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Housing Act. In addition, state laws often restrict the amount of interest and fees that may be
charged by a lender or mortgage broker, or otherwise regulate the manner in which lenders or mortgage brokers operate or advertise. Furthermore, Congress, many state legislatures and state agencies
are proposing, or have recently implemented, additional restrictions on mortgage lending practices. Failure to comply with applicable laws and regulatory requirements may result in, among other
things, revocation of required licenses or registrations, loss of approval status, termination of contracts without compensation, administrative enforcement actions and fines, class action lawsuits,
cease and desist orders and civil and criminal liability. While Tree.com believes that its businesses have been structured in such a way so as to comply with existing and new laws, the relevant
regulatory authorities may take a contrary position or future legislation may adversely affect Tree.com's business, financial condition and results of operations.
236
Likewise,
states or municipalities may adopt statutes or regulations making it unattractive, impracticable, or infeasible for Tree.com businesses to continue to conduct business in that
jurisdiction. The withdrawal from any jurisdiction due to emerging legal requirements could adversely affect Tree.com's business, financial condition and results of operations.
Federal,
state and in some instances, local, laws also prohibit unfair and deceptive sales practices generally. While Tree.com has adopted appropriate policies and procedures to address
these requirements (such as appropriate consumer disclosures and call scripting, call monitoring, pricing controls and other quality assurance and compliance measures, which have evolved and improved
over time), employees do not always comply with policies and procedures, and therefore, liability and brand injury could result from such employee misconduct.
As
employers, Tree.com's businesses are subject to federal and state employment laws. In particular, the Fair Labor Standards Act and California wage and hour laws govern the treatment
of "non-exempt" employees, which may include loan officers and loan processors at Home Loan Center, Inc. Failure to comply with applicable employment laws may result in, among other
things, administrative fines, class action lawsuits, damages awards and injunctions, any of which could adversely affect Tree.com's business, financial condition and results of operations.
Parties
with whom Tree.com businesses conduct business similarly may be subject to federal and state regulation. These parties typically act as independent contractors and not as agents
in their solicitations and transactions with consumers. Consequently, Tree.com cannot ensure that these entities will comply with applicable laws and regulations at all times. Failure on the part of a
lender, real estate
professional, website operator or other third party to comply with these laws or regulations could result in, among other things, claims of vicarious liability or a negative impact on the reputation
of Tree.com and its businesses. The occurrence of one or more of these events could have an adverse effect on Tree.com's business, financial condition and results of operation.
Tree.com's Real Estate Business is subject to rules and regulations of various real estate boards, as well as the rules of various non-governmental associations and
organizations, including but, not limited to, local and regional Multiple Listing Services that provide real estate listing data. Tree.com's Real Estate Business is dependent on real estate listing
data made available through Multiple Listing Services and other sources. While Tree.com believes that its Real Estate Business is structured to comply with these rules and regulations, the relevant
organization may take a contrary position, which could adversely affect Tree.com's business, financial condition and results of operations.
Third Party ComplianceIf Network Lenders fail to produce required documents for examination by, or other affiliated parties fail to make
certain filings with, state regulators, Tree.com may be subject to fines, forfeitures and the revocation of required licenses.
Some of the states in which Tree.com businesses maintain licenses require them to collect various loan documentation from Network Lenders and produce this
documentation for examination by state regulators. While Network Lenders are contractually obligated to provide these documents upon request, these measures may be insufficient. Failure to produce
required documents for examination could result in fines, as well as the revocation of Tree.com businesses licenses to operate in key states, which could have a material adverse affect on Tree.com's
business, financial condition and results of operations.
Regulations
promulgated by some states may impose compliance obligations on directors, executive officers, large customers and any person who acquires a certain percentage (for example,
10% or more) of Tree.com common stock, including requiring such persons to periodically file financial and other personal and business information with state regulators. If any such person refuses or
fails to comply with these requirements, Tree.com businesses may be unable to obtain a license, and existing licensing arrangements may be jeopardized, in particular states. The inability to obtain,
or the loss of, required licenses could have a material adverse effect on Tree.com's business, financial conditions and results of operations.
237
CAPITALIZATION
The following table presents Tree.com's cash and cash equivalents and capitalization as of March 31, 2008 on an historical basis and on an unaudited pro
forma basis for the separation. Pro forma for the separation includes the transfer of $ million in cash from IAC to Tree.com. IAC determined to contribute additional capital in
anticipation of the spin-off to help Tree.com, which has not recently generated positive Free Cash Flow, weather continued uncertainties in the industries in which it operates. The
separation of Tree.com is described in the notes to the Unaudited Pro Forma Condensed Consolidated Balance Sheet under the Unaudited Pro Forma Condensed Consolidated Financial Statements as if the
separation and the related transactions and events had been consummated on March 31, 2008.
The
assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and Tree.com believes such assumptions are reasonable under the
circumstances. Such adjustments are subject to change based upon the finalization of the terms of the separation and the underlying separation agreements.
This
table should be read in conjunction with "Selected Historical Financial Data," "Transfers to IAC and Financing," "Description of Capital Stock of the Spincos," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of Tree.com" the consolidated financial statements of Tree.com and the "Unaudited Pro Forma Condensed Consolidated Financial
Statements" and accompanying notes included in this information statement.
The table below is not necessarily indicative of Tree.com's cash and cash equivalents and capitalization had the separation and the related transactions been completed on the date
assumed. The capitalization table below may not reflect the capitalization or financial condition which would have resulted had Tree.com been operating as an independent, publicly-traded company at
that date and is not necessarily indicative of Tree.com's future capitalization or financial condition.
|
|
As of March 31, 2008
|
|
|
Historical
|
|
Unaudited
Pro Forma
for the
Separation
|
|
|
(In millions)
|
Cash and cash equivalents |
|
$ |
53 |
|
$ |
|
|
|
|
|
|
Indebtedness: |
|
|
|
|
|
|
|
Short term borrowings: |
|
|
|
|
|
|
|
|
Lines of credit (primarily warehouse lines) |
|
$ |
79 |
|
$ |
|
|
|
|
|
|
Total indebtedness |
|
|
79 |
|
|
|
|
|
|
|
|
Shareholders' equity |
|
|
245 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
324 |
|
$ |
|
|
|
|
|
|
238
SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical consolidated financial information for Tree.com, Inc. ("Tree.com"). This data was derived, in
part, from the historical consolidated financial statements of Tree.com included elsewhere in this document and reflects the operations and financial position of Tree.com at the dates and for the
periods indicated. The information in this table should be read in conjunction with the consolidated financial statements and accompanying notes and other financial data pertaining to Tree.com
included herein. However, this information does not necessarily reflect what the historical financial position and results of operations of Tree.com would have been had Tree.com been a stand-alone
company during the periods presented.
|
|
Year Ended December 31,
|
|
Three Months Ended March 31,
|
|
|
|
2007(1)
|
|
2006
|
|
2005
|
|
2004(2)
(unaudited)
|
|
2003(3)
(unaudited)
|
|
2008
(unaudited)
|
|
2007
(unaudited)
|
|
|
|
(In thousands)
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
346,378 |
|
$ |
476,478 |
|
$ |
421,355 |
|
$ |
189,783 |
|
$ |
55,795 |
|
$ |
70,193 |
|
$ |
109,999 |
|
Operating (loss) income |
|
|
(540,440 |
) |
|
14,171 |
|
|
19,254 |
|
|
(12,067 |
) |
|
(18,068 |
) |
|
(9,488 |
) |
|
(8,404 |
) |
Net (loss) income |
|
|
(550,402 |
) |
|
8,693 |
|
|
5,851 |
|
|
(9,187 |
) |
|
(11,359 |
) |
|
(9,799 |
) |
|
(5,123 |
) |
|
|
December 31,
|
|
March 31,
|
|
|
2007(1)
|
|
2006
|
|
2005
|
|
2004(2)
(unaudited)
|
|
2003(3)
(unaudited)
|
|
2008
(unaudited)
|
|
|
(In thousands)
|
Balance Sheet Data (end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit) |
|
$ |
(16,487 |
) |
$ |
79,463 |
|
$ |
74,754 |
|
$ |
35,784 |
|
$ |
10,540 |
|
$ |
18,662 |
Total assets |
|
|
443,587 |
|
|
1,261,045 |
|
|
1,326,961 |
|
|
1,074,896 |
|
|
745,400 |
|
|
442,810 |
Long-term obligations, net of current maturities |
|
|
|
|
|
19,347 |
|
|
28,894 |
|
|
36,755 |
|
|
375 |
|
|
|
Shareholders' equity |
|
|
214,624 |
|
|
773,453 |
|
|
766,486 |
|
|
753,674 |
|
|
707,948 |
|
|
244,545 |
- (1)
- Net
loss includes impairment charges of $475.7 million related to the write-down of Tree.com's Lending segment goodwill and intangible assets.
- (2)
- Includes
the results of Home Loan Center since its acquisition on December 14, 2004.
- (3)
- Includes
the results of LendingTree since its acquisition by IAC on August 8, 2003.
239
TREE.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidated Financial Statements of Tree.com, Inc. and subsidiaries ("Tree.com") reflect adjustments to the
historical consolidated financial statements of Tree.com to give effect to the separation and related transactions described in the notes to the Unaudited Pro Forma Condensed Consolidated Financial
Statements as of March 31, 2008 for the Unaudited Pro Forma Condensed Consolidated Balance Sheet and as of January 1, 2007 and January 1, 2008 for the Unaudited Pro Forma
Condensed Consolidated Statement of Operations for the year ended December 31, 2007 and the three months ended March 31, 2008, respectively.
The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and Tree.com believes such assumptions are reasonable under the
circumstances. At this time Tree.com does not expect material changes to the separation, however, the amount of cash that will be transferred from IAC to Tree.com upon consummation of the separation
has not yet been determined.
The following Unaudited Pro Forma Condensed Consolidated Financial Statements should be read in conjunction with the historical consolidated financial statements of Tree.com and
"Management's Discussion and Analysis of Financial Condition and Results of Operations" of Tree.com included in this information statement.
These Unaudited Pro Forma Condensed Consolidated Financial Statements are not necessarily indicative of Tree.com's results of operations or financial condition had the separation and
related transactions been completed on the dates assumed. Also, they may not reflect the results of operations or financial condition which would have resulted had Tree.com been operating as an
independent publicly-traded company during such periods. In addition, they are not necessarily indicative of Tree.com's future results of operations or financial condition.
These Unaudited Pro Forma Condensed Consolidated Financial Statements are forward looking information within the meaning of "Forward-Looking Statements" as described on
pages 2-3 of this Information Statement.
240
TREE.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2008
|
|
Historical
|
|
Pro Forma
Adjustments
|
|
Notes
|
|
Pro Forma
|
|
|
(In thousands, except share data)
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
52,516 |
|
$ |
|
|
(a) |
|
$ |
|
Other current assets |
|
|
124,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
176,630 |
|
|
|
|
|
|
|
|
Non-current assets |
|
|
266,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
442,810 |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
157,968 |
|
$ |
|
|
|
|
$ |
|
Long-term liabilities |
|
|
40,297 |
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
Common shares, $0.01 par value,authorized; 9,291,185 issued and outstanding on a pro forma basis |
|
|
|
|
|
|
|
(a) |
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
(a) |
|
|
|
Invested capital |
|
|
766,374 |
|
|
|
|
(a) |
|
|
|
Payables to IAC and subsidiaries |
|
|
42,237 |
|
|
|
|
(a) |
|
|
|
Accumulated deficit |
|
|
(564,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity |
|
|
244,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
|
$ |
442,810 |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are an integral part of these statements.
241
TREE.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2008
|
|
Historical
|
|
Pro Forma
Adjustments
|
|
Notes
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
Revenue |
|
$ |
70,193 |
|
$ |
|
|
|
|
$ |
70,193 |
|
Operating expenses |
|
|
79,681
|
|
|
1,379
1,071 |
|
(b)
(c) |
|
|
82,131
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(9,488 |
) |
|
(2,450 |
) |
|
|
|
(11,938 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
9 |
|
|
|
|
|
|
|
9 |
|
|
Interest expense |
|
|
(109 |
) |
|
32 |
|
(d) |
|
|
(77 |
) |
|
Other expense |
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(102 |
) |
|
32 |
|
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(9,590 |
) |
|
(2,418 |
) |
|
|
|
(12,008 |
) |
Income tax (provision) benefit |
|
|
(209 |
) |
|
1,001 |
|
(e) |
|
|
792 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(9,799 |
) |
$ |
(1,417 |
) |
|
|
$ |
(11,216 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma loss per share:(f)(g) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share |
|
$ |
(1.21 |
) |
|
Diluted loss per share |
|
$ |
(1.21 |
) |
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are
an integral part of these statements.
242
TREE.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007
|
|
Historical
|
|
Pro Forma Adjustments
|
|
Notes
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
Revenue |
|
$ |
346,378 |
|
$ |
|
|
|
|
$ |
346,378 |
|
Operating expenses |
|
|
886,818
|
|
|
5,351
4,286 |
|
(b)
(c) |
|
|
896,455
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(540,440 |
) |
|
(9,637 |
) |
|
|
|
(550,077 |
) |
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,171 |
|
|
(1,000 |
) |
(d) |
|
|
171 |
|
|
Interest expense |
|
|
(986 |
) |
|
|
|
|
|
|
(986 |
) |
|
Other income |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
|
199 |
|
|
(1,000 |
) |
|
|
|
(801 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(540,241 |
) |
|
(10,637 |
) |
|
|
|
(550,878 |
) |
Income tax provision |
|
|
(10,161 |
) |
|
4,404 |
|
(e) |
|
|
(5,757 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(550,402 |
) |
$ |
(6,233 |
) |
|
|
$ |
(556,635 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma loss per share:(f)(g) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share |
|
$ |
(58.45 |
) |
|
Diluted loss per share |
|
$ |
(58.45 |
) |
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are
an integral part of these statements.
243
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-
(a)
- To
effect the terms of the separation as follows:
- (i)
- the
transfer of $ million in cash from IAC to Tree.com to bring Tree.com's cash balance to $ million
upon its separation from
IAC;
- (ii)
- the
extinguishment of the payable to IAC and subsidiaries; and
- (iii)
- the
issuance of 9.3 million Tree.com shares to effect the transfer of its ownership from IAC to IAC's shareholders based on an expected exchange ratio of
1/30th of a share of Tree.com for each share of IAC and the number of IAC common shares outstanding as of March 31, 2008 before giving effect to the 1 for 2 reverse
stock split of IAC shares that is expected to be effected in connection with the spin-off.
-
(b)
- Tree.com
expects to incur additional costs related to being a stand-alone, public company. These costs have been estimated to be $6.3 million on an annual basis. These costs
relate to the following:
-
- additional
personnel including accounting, tax, treasury, internal audit and legal personnel;
-
- professional
fees associated with audits, tax and other services;
-
- increased
insurance premiums;
-
- increased
health and welfare benefit costs;
-
- costs
associated with a board of directors;
-
- increased
franchise taxes, stock exchange listing fees, fees for preparing and distributing periodic filings with the Securities and Exchange Commission; and
-
- other
administrative costs and fees.
The
total costs referred to above were compared to the corporate allocations from IAC for the three months ended March 31, 2008 and for the year ended December 31, 2007 in order to
determine the incremental costs expected to be incurred for each period as follows:
|
|
Three Months Ended
March 31, 2008
|
|
Year Ended
December 31, 2007
|
|
|
|
(In thousands)
|
|
Estimated stand-alone, public company costs |
|
$ |
1,569 |
|
$ |
6,344 |
|
Less: corporate allocations |
|
|
(190 |
) |
|
(993 |
) |
|
|
|
|
|
|
Incremental costs of being a stand-alone, public company |
|
$ |
1,379 |
|
$ |
5,351 |
|
|
|
|
|
|
|
244
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-
- the
type and level of other costs expected to be incurred in connection with being a stand-alone public company.
This
amount excludes $0.6 million of estimated one-time recruiting fees, professional fees for legal and tax services (e.g. initial benefit plan design) and other costs
(e.g. initial stock exchange listing fees) expected to be incurred in initially establishing Tree.com as a stand-alone public company. These costs are therefore not expected to recur.
- (c)
- To
reflect the additional compensation expense associated with equity-based awards that will be granted upon consummation of the separation.
The
awards related to the consummation of the separation were granted to the Chairman and Chief Executive Officer in connection with the employment agreement that was executed upon his appointment to
that role. The issuance of these awards are contingent upon the consummation of the separation. The expense related to these awards is included as a pro forma adjustment because they will vest over
five years and will therefore have an impact on the ongoing operations of Tree.com. The amount was determined using a Black Scholes calculation for the stock option awards and an assumed value for the
restricted stock award. The aggregate estimated value of these awards is being amortized to expense on a straight-line basis over the five year vesting period of the awards. This does not
reflect non-recurring compensation expense related to modifications of existing equity-based awards that will be made in connection with the separation described below.
Vested stock options to purchase shares of IAC common stock will be modified as follows in connection with the separation:
Each
option will convert into an option to purchase shares of common stock of all five companies, with adjustments to the number of shares subject to each option and the option exercise prices based
on the relative values of IAC and the other four companies following the separation, with the intent to generally maintain equivalent value immediately pre and post the transaction.
A
calculation of the estimated value of the vested options immediately prior to the separation and immediately after the separation was performed using the Black Scholes model. The incremental charge
of $0.1 million resulted from the higher estimated value of the vested stock options after the separation. This higher value is due to higher estimated weighted average volatility of the stock
price of the five companies after the separation than the expected volatility of IAC's stock price. The expense is a one-time charge because the options are fully vested and there is no
future service requirement.
The modification related to IAC restricted stock units ("RSUs") relates to the accelerated vesting, upon the consummation of the separation, of all RSUs granted prior to August 8, 2005 and all
awards that were scheduled to vest prior to February 28, 2009. The estimated expense of $3.1 million is the previously unrecognized compensation expense associated with these awards. The
expense is treated as non-recurring because after the separation no future service is required with respect to these awards.
There may be additional stock-based awards granted in connection with the separation but the amount of such awards, if any, has not yet been determined and no expense with respect thereto has been
reflected herein.
245
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- (d)
- To
reflect the elimination of intercompany interest expense for the three months ended March 31, 2008 and intercompany interest income for the year ended December 31,
2007 allocated by IAC to Tree.com.
- (e)
- To
reflect the tax effect of the pro forma adjustments at an assumed effective tax rate of 41.4% which represents a federal statutory tax rate of 35% and a state effective statutory
rate of 6.4%.
- (f)
- Loss
per share and weighted average shares outstanding reflect the historical number of IAC common shares used to calculate IAC's earnings per share, adjusted based on an expected
exchange ratio of 1/30th of a share of Tree.com for each share of IAC before giving effect to the 1 for 2 reverse stock split for IAC shares that is expected to be
effected in connection with the separation. These amounts reflect the outstanding equity-based awards that were included in IAC's dilutive earnings per share calculation. Pro forma loss per share is
calculated using the following:
|
|
Three Months Ended
March 31, 2008
|
|
Year Ended
December 31, 2007
|
|
|
|
(In thousands)
|
|
Net loss |
|
$ |
(11,216 |
) |
$ |
(556,635 |
) |
|
|
|
|
|
|
Basic shares outstandingweighted average shares |
|
|
9,292 |
|
|
9,523 |
|
Other dilutive securities including stock options, warrants and restricted stock and share units(g) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares outstandingweighted average shares |
|
|
9,292 |
|
|
9,523 |
|
|
|
|
|
|
|
- (g)
- The
effect of dilutive securities would be antidilutive due to the net loss and are therefore excluded from the calculation of diluted earnings per share.
246
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TREE.COM
The following discussion describes the financial condition and results of operations of Tree.com, Inc. ("Tree.com") as though
Tree.com were a separate company as of the dates and for the periods presented and includes the businesses, assets and liabilities that will comprise Tree.com following the spin-off.
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying Tree.com as one of those five companies. We refer to the separation transaction herein as the "spin-off." In connection with the spin-off, Tree.com was incorporated
as a Delaware corporation in April 2008. Tree.com currently does not have any material assets or liabilities, nor does it engage in any business or other activities and, other than in connection with
the spin-off, will not acquire or incur any material assets or liabilities, nor will it engage in any business or other activities. Upon completion of the spin-off, Tree.com
will consist of the businesses that formerly comprised IAC's Lending and Real Estate segments. We refer herein to these businesses as the "Tree.com Businesses," which include LendingTree.com,
RealEstate.com, GetSmart.com, LendingTree Loans, iNest and Domania.
Basis of Presentation
The historical consolidated financial statements of Tree.com and its subsidiaries and the disclosure set forth in this Management's Discussion and Analysis of
Financial Condition and Results of Operations of Tree.com reflect the contribution or other transfer to Tree.com of all of the subsidiaries and assets and the assumption by Tree.com of all of the
liabilities relating to the Tree.com Businesses in connection with the spin-off and the allocation to Tree.com of certain IAC corporate expenses relating to the Tree.com Businesses.
Accordingly, the historical consolidated financial statements of Tree.com reflect the historical financial position, results of operations and cash flows of
the Tree.com Businesses since their respective dates of acquisition by IAC, based on the historical consolidated financial statements and accounting records of IAC and using the historical results of
operations and historical bases of the assets and liabilities of the Tree.com Businesses with the exception of accounting for income taxes, which have been computed for Tree.com on an as if stand-
alone, separate tax return basis. Intercompany transactions and accounts have been eliminated.
In
the opinion of Tree.com's management, the assumptions underlying the historical consolidated financial statements of Tree.com are reasonable. However, this financial information does
not necessarily reflect what the historical financial position, results of operations and cash flows of Tree.com would have been had Tree.com been a stand-alone company during the periods presented.
247
MANAGEMENT OVERVIEW
Tree.com's Lending segment consists of online networks (principally LendingTree.com and GetSmart.com) and call centers that connect consumers and financial
providers in the lending industry (the "lending networks"). Tree.com also originates, processes, approves and funds various residential real estate loans through Home Loan Center, which does business
as LendingTree Loans in certain jurisdictions. The Home Loan Center and LendingTree Loans brand names are collectively referred to in this report as "LendingTree Loans". Additionally, Tree.com
provides mortgage settlement services, including title search, appraisals, flood certification and closing transactions, under the name "LendingTree Settlement Services".
Tree.com's
Real Estate segment primarily consists of a proprietary full-service real estate brokerage that operates in 14 U.S. markets, www.RealEstate.com, an online network that connects consumers with real
estate brokerages around the country, iNest, an online network that matches
buyers and builders of new homes, and Domania, an online lead provider for banks, mortgage lenders and real estate professionals (the "real estate networks").
Sources of Revenue
Lending is generally compensated on a fee basis by the lenders who participate in its online lending networks, with LendingTree Loans principally deriving revenue
from the origination and sale in the secondary markets of various residential real estate loans. Real Estate is generally compensated from
subscription and cooperative brokerage fees paid by real estate professionals participating in its real estate networks and from commissions paid by consumers for its agents closing a real estate
transaction on their behalf.
Channels of Distribution; Marketing Costs
Tree.com markets and offers services directly to customers through branded websites allowing customers to transact directly with Tree.com in a convenient manner.
Tree.com has made, and expects to continue to make, substantial investments in online and offline advertising to build its brands and drive traffic to its businesses.
Tree.com
also pays to market and distribute services on third-party distribution channels, such as internet portals and search engines. In addition, some of the Tree.com Businesses
manage affiliate marketing programs, pursuant to which the Tree.com businesses pay commissions and fees to third parties based on the number of leads generated or the revenue earned. These
distribution channels might also offer their own products, as well as those of other third parties, that compete with those made available and offered by Tree.com businesses.
The
cost of acquiring new customers through online and offline third-party distribution channels has increased, particularly in the case of online channels as internet commerce continues
to grow and competition in the housing market increases. Tree.com expects sales and marketing expense as a percentage of revenue to continue to increase. Sales and marketing expense as a percentage of
revenue increased to approximately 54% in 2007 from approximately 46% in 2006 and 42% in 2005.
Access to Supply
Tree.com provides lending and real estate network partners with important customer acquisition channels. Tree.com believes that the ability of its partners to
reach a large qualified audience through its brands and businesses is a significant benefit. Tree.com offers its customers the choice of multiple suppliers in one setting.
248
Economic and Other Trends and Events; Industry Specific Factors
The credit and secondary mortgage markets have been experiencing unprecedented and continuing disruption, which had an adverse effect on Tree.com's business,
financial condition and results of operations in 2007. These conditions, coupled with adverse economic conditions and continuing declines in residential real estate prices generally, have resulted in
decreased consumer demand for the lending and real estate offerings provided by Tree.com's networks and other businesses. Generally, increases in interest rates adversely affect the ability of the
Lending Business and Network Lenders to close loans, while adverse economic trends limit the ability of the Lending Business and Network Lenders to offer home loan products other than low margin
conforming loans. The number of Network Lenders also decreased in 2007 as many lenders exited the business due to the difficult economic conditions. Likewise, adverse economic trends have reduced the
number of prospective home purchasers and home prices, which adversely affected Tree.com's Real Estate Business.
Tree.com recognized impairment charges of $475.7 million related to the write-down of its Lending segment goodwill and intangible assets in the fourth quarter of 2007. These
impairments resulted from Tree.com's reassessment of the likely future profitability of Lending in light of the persistent adverse mortgage market conditions and the operational strategies Tree.com
has undertaken in response to these market realities. These adverse conditions include, among others, constrained liquidity, lender focus on low margin conforming loans, uncertainty as to the
eventuality and timing of the return of higher margin mortgage products, the decline in real estate values and a high rate of delinquency for existing mortgages. Tree.com has significantly reduced its
mortgage origination operations in response to these conditions which will reduce or slow its ability to react to possible improvements in the market. The impairments at the Lending segment occurred
during the fourth quarter of 2007 as Tree.com completed an updated assessment of mortgage market conditions and the development and implementation of Lending's responsive operational strategies, and
quantified these considerations in Lending's future forecasted results. In addition, in response to these persistent adverse mortgage market conditions, Tree.com restructured its operations in 2007
and recorded $22.9 million in restructuring expense. This restructuring affected all departments and locations within Tree.com but were principally related to the mortgage origination
operations.
These restructuring efforts may be insufficient to allow Tree.com to weather these continuing adverse market conditions. Continued protracted adverse market conditions may require
additional restructuring of Tree.com's operations, which could give rise to additional restructuring charges and additional impairment charges related to goodwill and intangible assets.
Results of Operations for the Years Ended December 31, 2007, 2006 and 2005
Revenue
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Lending |
|
$ |
294,626 |
|
(30 |
)% |
$ |
419,657 |
|
15 |
% |
$ |
363,800 |
Real Estate |
|
|
51,752 |
|
(9 |
)% |
|
56,821 |
|
(1 |
)% |
|
57,555 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
346,378 |
|
(27 |
)% |
$ |
476,478 |
|
13 |
% |
$ |
421,355 |
|
|
|
|
|
|
|
|
|
|
|
Revenue in 2007 decreased $130.1 million, or 27%, from 2006 primarily due to fewer loans sold into the secondary market, lower revenue per loan sold, fewer loans closed on the
lending networks and an increase of $13.5 million in the liability for losses on previously sold loans. Also contributing to the decrease in revenue is a decrease of $13.1 million
related to the Real Estate builder and broker networks, which decreased closings year over year. Lenders' narrowing focus on traditional mortgages in reaction to changes in the mortgage market
contributed to lower close rates, a shift to lower margin
249
products, and lower revenue per loan sold at LendingTree Loans. Revenue from home equity loans fell 58% due in part to an exit from certain home equity loans at LendingTree Loans and as a result of
deteriorating market conditions. Additionally, purchase mortgage revenue and refinance mortgage revenue declined 21% and 16%, respectively. The dollar value of loans closed by network lenders and
directly by LendingTree Loans in 2007 decreased 23% to $24.9 billion. This includes refinance mortgages of $13.0 billion, purchase mortgages of $6.9 billion and home equity loans
of $4.2 billion. The dollar value of closed loans in 2006 was $32.1 billion, including refinance mortgages of $16.9 billion, purchase mortgages of $8.3 billion and home
equity loans of $5.9 billion.
Partially
offsetting the revenue decrease in 2007 is an increase of $9.7 million in revenue from our company-owned brokerage business, which increased closings by 190%. The
company-owned brokerage business began closing transactions in the first quarter of 2006 and now operates in fourteen metropolitan markets. Similar to closing loans in our own name, through
LendingTree Loans, the company-owned brokerage enables Real Estate to capture a larger portion of the transaction revenue.
LendingTree Loans originates mortgage loans on property located throughout the United States, with no one location representing more than 10% of Tree.com's consolidated revenue for any
periods presented. Revenue from loans originated for property located in California and Florida in the aggregate totaled approximately 10%, 14% and 14% of Tree.com's consolidated revenue for the years
ended December 31, 2007, 2006 and 2005, respectively.
Revenue
in 2006 increased $55.1 million, or 13%, from 2005 driven primarily by higher revenue per loan, increased sales of loans into the secondary market and increased transmit
revenue due to both growth in loan request form volume and higher prices on the networks. Increased revenue from settlement services also impacted revenue growth in 2006. Revenue from refinance
mortgage, home equity loans and purchase mortgage loans grew 15%, 16% and 26%, respectively, from the prior year, despite the difficult market conditions in 2006. The dollar value of loans closed by
exchange lenders and directly by LendingTree Loans in 2006 decreased 8% to $32.1 billion. This includes refinance mortgages of $16.9 billion, purchase mortgages of $8.3 billion
and home equity loans of $5.9 billion. The dollar value of closed loans in 2005 was $34.7 billion, including refinance mortgages of $19.8 billion, purchase mortgages of
$8.0 billion and home equity loans of $5.8 billion.
Cost of revenue
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Lending |
|
$47,264 |
|
(0)% |
|
$47,412 |
|
22% |
|
$38,904 |
Real Estate |
|
25,850 |
|
0% |
|
25,805 |
|
(6)% |
|
27,438 |
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$73,114 |
|
(0)% |
|
$73,217 |
|
10% |
|
$66,342 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
21% |
|
574 bp |
|
15% |
|
(38) bp |
|
16% |
Gross margins |
|
79% |
|
(574) bp |
|
85% |
|
38 bp |
|
84% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Cost of revenueLending |
|
$47,264 |
|
(0)% |
|
$47,412 |
|
22% |
|
$38,904 |
As a percentage of Lending revenue |
|
16% |
|
474 bp |
|
11% |
|
60 bp |
|
11% |
Lending gross margins |
|
84% |
|
(474) bp |
|
89% |
|
(60) bp |
|
89% |
Cost of revenueReal Estate |
|
$25,850 |
|
0% |
|
$25,805 |
|
(6)% |
|
$27,438 |
As a percentage of Real Estate revenue |
|
50% |
|
453 bp |
|
45% |
|
(226) bp |
|
48% |
Real Estate gross margins |
|
50% |
|
(453) bp |
|
55% |
|
226 bp |
|
52% |
250
Cost
of revenue consists primarily of costs associated with unsuccessful loan origination attempts, compensation and other employee-related costs (including stock-based compensation)
related to customer call centers, real estate network support staff and loan officers, as well as credit scoring fees, consumer incentive costs, real estate agent commissions and website network
hosting and server fees.
Cost
of revenue in 2007 was relatively unchanged from 2006 despite the significant revenue decline. The increase in cost of revenue as a percentage of total revenue is principally due to
the reduced revenue discussed above, and a $5.5 million increase in costs associated with unsuccessful loan originations. If a loan funds, these costs are deferred until the loan is sold to an
investor and are included in revenue on a net basis. However, costs associated with all unsuccessful loan origination attempts are expensed as incurred. This increase was partially offset by a
$3.5 million decrease in compensation and other employee-related costs as Tree.com reduced its personnel costs associated with its customer call center, settlement services operation and
portions of its loan processing department. Cost of revenue also increased as a percentage of revenue due to an increase of $5.0 million in commission expense primarily related to the increase
in closings at company-owned brokerage business, partially offset by a decrease of $4.6 million in consumer incentive rebates related to decreased closings at the Real Estate builder and broker
network businesses.
Cost
of revenue in 2006 increased $6.9 million from 2005 primarily due to increases of $4.5 million in compensation and other employee-related costs, $3.9 million in
commission expense related to the company-owned brokerage business and $3.0 million in direct costs associated with the growth in the settlement services business. These increases were
partially offset by a decrease of $2.8 million in customer incentive rebates at Real Estate related to the builder and broker network businesses.
Selling and marketing expense
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Lending |
|
$168,436 |
|
(14)% |
|
$195,245 |
|
32% |
|
$148,227 |
Real Estate |
|
19,176 |
|
(19)% |
|
23,665 |
|
(17)% |
|
28,522 |
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expense |
|
$187,612 |
|
(14)% |
|
$218,910 |
|
24% |
|
$176,749 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
54% |
|
822 bp |
|
46% |
|
400 bp |
|
42% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Selling and marketing expenseLending |
|
$168,436 |
|
(14)% |
|
$195,245 |
|
32% |
|
$148,227 |
As a percentage of Lending revenue |
|
57% |
|
1,064 bp |
|
47% |
|
578 bp |
|
41% |
Selling and marketing expenseReal Estate |
|
$ 19,176 |
|
(19)% |
|
$ 23,665 |
|
(17)% |
|
$ 28,522 |
As a percentage of Real Estate revenue |
|
37% |
|
(460) bp |
|
42% |
|
(791) bp |
|
50% |
Selling
and marketing expense consists primarily of advertising and promotional expenditures, fees paid to affiliates and compensation and other employee-related costs (including
stock-based compensation) for personnel engaged in the sales function. Advertising and promotional expenditures primarily include online marketing, as well as television, print and radio spending.
Advertising production costs are expensed in the period the related ad is first run.
Selling
and marketing expense in 2007 decreased $31.3 million from 2006 primarily due to a decrease of $27.2 million in advertising and promotional expenditures. In 2007,
Tree.com experienced decreases in advertising of $13.1 million, $8.8 million and $7.7 million associated with print, television and online advertising, respectively. The increase
in selling and marketing expense as a percentage of revenue is due to decreased conversions of consumer leads into closed transactions. Tree.com
251
anticipates
that selling and marketing expense will continue to represent a high percentage of revenue as it continues to promote its brands both online and offline.
Selling
and marketing expense in 2006 increased $42.2 million from 2005 primarily due to an increase of $37.7 million in advertising and promotional expenditures as
Tree.com shifted to online marketing to drive lead volume in more difficult mortgage market conditions. Selling and marketing expense as a percentage of revenue increased due in part to lower close
rates.
General and administrative expense
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Lending |
|
$79,172 |
|
(18)% |
|
$ 96,888 |
|
12% |
|
$ 86,272 |
Real Estate |
|
20,072 |
|
(10)% |
|
22,396 |
|
43% |
|
15,703 |
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense |
|
$99,244 |
|
(17)% |
|
$119,284 |
|
17% |
|
$101,975 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
29% |
|
362 bp |
|
25% |
|
83 bp |
|
24% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
General and administrative expenseLending |
|
$79,172 |
|
(18)% |
|
$96,888 |
|
12% |
|
$86,272 |
As a percentage of Lending revenue |
|
27% |
|
378 bp |
|
23% |
|
(63) bp |
|
24% |
General and administrative expenseReal Estate |
|
$20,072 |
|
(10)% |
|
$22,396 |
|
43% |
|
$15,703 |
As a percentage of Real Estate revenue |
|
39% |
|
(63) bp |
|
39% |
|
1,213 bp |
|
27% |
General
and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax,
human resources and executive management functions, facilities and infrastructure costs and fees for professional services.
General
and administrative expense in 2007 decreased $20.0 million from 2006 primarily due to a decrease of $13.2 million in compensation and other employee-related costs,
due principally to a reduction in workforce, and a decrease of $2.5 million in professional fees. Refer to "Restructuring expense" below for additional information on the reduction in
workforce. Tree.com expects to incur increased costs related to the additional financial and legal requirements associated with being a separate public company, as well as increased non-cash
compensation associated with the modification of existing stock-based compensation awards in connection with the spin-off and the grant of new awards post spin-off.
General
and administrative expense in 2006 increased $17.3 million from 2005 primarily due to an increase of $11.1 million in compensation and other employee-related costs
and an increase of $2.8 million in facilities and infrastructure costs. The increase in compensation and other employee-related costs was due in part to an increase in headcount. General and
administrative expense in 2006 and 2005 were negatively impacted by accruals of $3.5 million and $5.8 million, respectively, related to an adverse legal judgment.
Effective
January 1, 2006, Tree.com adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using
the modified prospective transition method. There was no impact to the amount of stock-based compensation recorded in the consolidated statement of operations for the years ended December 31,
2006 and 2005 as a result of adopting SFAS 123R. Tree.com has been recognizing expense for all stock-based grants since its acquisition by IAC
252
on
August 8, 2003, in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The majority of stock-based compensation expense is reflected in
general and administrative expense. As of December 31, 2007, there was approximately $10.2 million of unrecognized compensation cost, net of estimated forfeitures, related to all
equity-based awards, which is expected to be recognized over a weighted average period of approximately 2.8 years.
Product development
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Lending |
|
$ 9,720 |
|
(6)% |
|
$10,301 |
|
(5)% |
|
$10,803 |
Real Estate |
|
5,271 |
|
8% |
|
4,867 |
|
16% |
|
4,198 |
|
|
|
|
|
|
|
|
|
|
|
Product development |
|
$14,991 |
|
(1)% |
|
$15,168 |
|
1% |
|
$15,001 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
4% |
|
114 bp |
|
3% |
|
(38) bp |
|
4% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Product developmentLending |
|
$9,720 |
|
(6)% |
|
$10,301 |
|
(5)% |
|
$10,803 |
As a percentage of Lending revenue |
|
3% |
|
84 bp |
|
2% |
|
(51) bp |
|
3% |
Product developmentReal Estate |
|
$5,271 |
|
8% |
|
$ 4,867 |
|
16% |
|
$ 4,198 |
As a percentage of Real Estate revenue |
|
10% |
|
162 bp |
|
9% |
|
127 bp |
|
7% |
Product
development expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in product development, which
include costs related to the design, development, testing and enhancement of technology that are not capitalized.
Product
development expense in 2007 decreased $0.2 million from 2006, primarily due to decreased compensation and other employee-related costs.
Product
development expense in 2006 increased $0.2 million from 2005, primarily due to increased compensation and other employee-related costs related to modifying, maintaining
and enhancing its technology and web-pages.
Restructuring expense
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Lending |
|
$21,566 |
|
N/A |
|
$ |
|
|
|
$ |
Real Estate |
|
1,301 |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expense |
|
$22,867 |
|
N/A |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
7% |
|
N/A |
|
|
|
|
|
|
In
response to persistent adverse mortgage market conditions, Tree.com completed a restructuring of its operations and recorded $22.9 million in restructuring expense. As a part
of this restructuring, approximately 800 positions across all departments and locations of its business were eliminated, however the restructuring principally related to the mortgage origination
operations of LendingTree Loans. In addition, Tree.com ceased use of space in six of its facilities previously used by LendingTree Loans. In connection with this reduction in workforce and facilities
restructuring, Tree.com recorded $9.3 million in employee termination costs, $5.0 million for liabilities associated with exiting the lease
253
obligations,
$8.0 million for write-offs of fixed assets and other projects in progress and $0.6 million for other items.
Depreciation
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Lending |
|
$ 8,905 |
|
(4)% |
|
$ 9,309 |
|
68% |
|
$5,540 |
Real Estate |
|
1,153 |
|
(52)% |
|
2,401 |
|
104% |
|
1,180 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
$10,058 |
|
(14)% |
|
$11,710 |
|
74% |
|
$6,720 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
3% |
|
45 bp |
|
2% |
|
86 bp |
|
2% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
DepreciationLending |
|
$8,905 |
|
(4)% |
|
$9,309 |
|
68% |
|
$5,540 |
As a percentage of Lending revenue |
|
3% |
|
80 bp |
|
2% |
|
70 bp |
|
2% |
DepreciationReal Estate |
|
$1,153 |
|
(52)% |
|
$2,401 |
|
104% |
|
$1,180 |
As a percentage of Real Estate revenue |
|
2% |
|
(200) bp |
|
4% |
|
218 bp |
|
2% |
Depreciation
in 2007 decreased $1.7 million from 2006 primarily due to the write-off of fixed assets referred to above and certain fixed assets becoming fully
depreciated and decreased capital expenditures as Tree.com scaled back its spending in light of mortgage market conditions.
Depreciation
in 2006 increased $5.0 million from 2005 primarily due to the incremental depreciation associated with capital expenditures made throughout 2006 and 2005, partially
offset by certain fixed assets becoming fully depreciated during the period.
Operating Income Before Amortization
Operating Income Before Amortization is a Non-GAAP measure and is defined in "Tree.com's Principles of Financial Reporting".
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Lending |
|
$(23,524) |
|
NM |
|
$ 61,873 |
|
(22)% |
|
$ 78,883 |
Real Estate |
|
(20,059) |
|
7% |
|
(21,507) |
|
(27)% |
|
(16,930) |
|
|
|
|
|
|
|
|
|
|
|
Operating Income Before Amortization |
|
$(43,583) |
|
NM |
|
$ 40,366 |
|
(35)% |
|
$ 61,953 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
(13)% |
|
NM |
|
8% |
|
(623) bp |
|
15% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Operating Income Before AmortizationLending |
|
$(23,524) |
|
NM |
|
$61,873 |
|
(22)% |
|
$78,883 |
As a percentage of Lending revenue |
|
(8)% |
|
NM |
|
15% |
|
(694) bp |
|
22% |
Operating Income Before AmortizationReal Estate |
|
$(20,059) |
|
7% |
|
$(21,507) |
|
(27)% |
|
$(16,930) |
As a percentage of Real Estate revenue |
|
(39)% |
|
(91) bp |
|
(38)% |
|
(844) bp |
|
(29)% |
Operating
Income Before Amortization in 2007 decreased $83.9 million to a loss of $43.6 million, declining at a faster rate than revenue due to higher costs per loan sold
resulting from a shift to
254
lowering
margin products, lower close rates and stricter underwriting criteria, and $22.9 million in restructuring costs, due in part to a reduction in workforce, partially offset by a decrease
of $31.3 million in selling and marketing expense. Operating Income Before Amortization was adversely impacted by a $20.2 million provision for loan losses in 2007, compared to
$6.6 million in 2006. The 2007 provision reflects the increased losses Tree.com is experiencing related to obligations to investors with respect to previously sold loans. Operating Income
Before Amortization benefited by $12.9 million due to the net impact of a favorable legal settlement and an increase in certain legal reserves.
Operating
Income Before Amortization in 2006 decreased $21.6 million from 2005, negatively impacted by increased marketing expenses, an increase of $17.3 million in general
and administrative expenses, $11.1 million of which relates to an increase in compensation and other employee-related costs, and higher costs associated with the origination of loans sold into
the secondary market.
Operating (loss) income
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Lending |
|
$(512,584) |
|
NM |
|
$ 44,091 |
|
(13)% |
|
$ 50,605 |
Real Estate |
|
(27,856) |
|
7% |
|
(29,920) |
|
5% |
|
(31,351) |
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
$(540,440) |
|
NM |
|
$ 14,171 |
|
(26)% |
|
$ 19,254 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
(156)% |
|
NM |
|
3% |
|
(160) bp |
|
5% |
|
|
Years Ended December 31,
|
|
|
2007
|
|
% Change
|
|
2006
|
|
% Change
|
|
2005
|
|
|
(Dollars in thousands)
|
Operating (loss) incomeLending |
|
$(512,584) |
|
NM |
|
$ 44,091 |
|
(13)% |
|
$ 50,605 |
As a percentage of Lending revenue |
|
(174)% |
|
NM |
|
11% |
|
(340) bp |
|
14% |
Operating (loss)Real Estate |
|
$ (27,856) |
|
7% |
|
$(29,920) |
|
5% |
|
$(31,351) |
As a percentage of Real Estate revenue |
|
(54)% |
|
(117) bp |
|
(53)% |
|
181 bp |
|
(54)% |
Operating income decreased $554.6 million to a loss of $540.4 million in 2007, resulting primarily from a goodwill impairment charge of $459.5 million which was
recorded in the fourth quarter of 2007 in the accompanying consolidated statements of operations as a component of operating income. The write-down was determined by comparing the fair
value of the business and the implied value of the goodwill with the carrying amounts on the balance sheet. In addition, an impairment charge of $16.2 million was recorded in the fourth quarter
of 2007 in connection with the write-down of certain intangible assets which has been included in amortization of intangibles in the accompanying consolidated statement of operations.
These impairments were identified in connection with Tree.com's annual impairment assessment which is performed as of October 1st. Also contributing to the increase in operating
loss was the decrease in Operating Income Before Amortization described above and an increase in non-cash compensation expense.
As discussed above in the management overview, in response to adverse mortgage market conditions, Tree.com has significantly reduced its mortgage origination operations, incurred
substantial restructuring charges, recorded significant provisions for loan losses and recorded substantial impairment charges. Given that overall conditions in the credit markets and the mortgage
market continue to evolve rapidly, no assurances can be made that the changes Tree.com has undertaken will be sufficient or that Tree.com will not be required to take additional impairment or
restructuring charges. In addition, these actions will reduce or slow its ability to react to possible improvements in the market.
255
Operating
income in 2006 decreased $5.1 million from 2005 primarily due to the decrease in Operating Income Before Amortization described above, partially offset by an
$11.3 million decrease in amortization of intangibles resulting from certain intangible assets being fully amortized in 2005 and 2006, as well as a $5.2 million decrease in
non-cash compensation expense. The decrease in non-cash compensation expense is primarily due to the transfer of Tree.com's founder and Chief Executive Officer to IAC,
effective January 1, 2006.
Income tax provision
In 2007, Tree.com recorded an income tax provision of $10.2 million, despite a loss from operations, due principally to the impairment of goodwill that is
largely non-deductible for income tax purposes and an increase in the valuation allowance on deferred tax assets. In light of the reassessment of the likely future profitability of
Tree.com, it has been determined that it is not more likely than not that deferred tax assets at December 31, 2007 will be realized. In 2006, Tree.com recorded a tax provision of
$5.0 million which represents an effective tax rate of 37%. The 2006 tax rate is higher than the federal statutory rate of 35% due principally to state and local income taxes. In 2005, Tree.com
recorded a tax provision of $11.4 million which represents an effective tax rate of 66%. The 2005 tax rate is higher than the federal statutory rate of 35% due principally to state and local
income taxes which included an increase in net deferred tax liabilities due to a change in the effective state tax rate and an increase in the valuation allowance on deferred tax assets related to
state net operating losses.
Tree.com
adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109"
("FIN 48") effective January 1, 2007. There was no effect to Tree.com's accumulated deficit as a result of the adoption. As of January 1, 2007 and December 31, 2007,
Tree.com had unrecognized tax benefits of approximately $0.5 million and $5.8 million, respectively, which included accrued interest at December 31, 2007 of $1.4 million.
By
virtue of the previously filed separate company and consolidated tax returns with IAC, Tree.com is routinely under audit by federal, state and local authorities in the area of income
tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient
to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the
reserves for tax contingencies and the amounts owed by Tree.com are recorded in the period they become known.
The
Internal Revenue Service ("IRS") is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of
Tree.com from August 8, 2003, its date of acquisition by IAC. The statute of limitations for these years has been extended to December 31, 2008. Tax filings in various state, local and
foreign jurisdictions are currently under examinations, the most significant of which are Florida, New York state and New York City, for various tax years after December 31, 2001. These
examinations are expected to be completed by late 2008. Tree.com believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $2.6 million within
twelve months of the current reporting date due to the reversal of deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other
changes in unrecognized tax benefits cannot be made, but are not expected to be significant.
Under
the terms of the tax sharing agreement, which will be executed in connection with the spin-off, IAC will generally retain the liability related to federal and state tax returns
filed on a consolidated or unitary basis for all periods prior to the spin-off.
256
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2007, Tree.com had $60.9 million of cash and cash equivalents and restricted cash and cash equivalents.
Net
cash provided by operating activities was $233.0 million and $74.9 million in 2007 and 2006, respectively. The increase of $158.1 million in net cash provided by
operating activities primarily reflects an increase in net proceeds from the sale of loans held for sale of $153.2 million.
Net
cash used in investing activities in 2007 and 2006 of $10.9 million and $16.4 million, respectively, primarily resulted from capital expenditures of $9.4 million
and $13.3 million, respectively.
Net
cash used in financing activities in 2007 of $275.6 million was primarily due to net payments under various lines of credit, primarily warehouse lines, of
$259.0 million at LendingTree Loans, payments on notes payable and capital lease obligations of $11.7 million and cash transfers of $7.1 million to IAC. The net payments under
various lines of credit, primarily warehouse lines, is directly related to the net proceeds from sales of loans held for sale included within cash flows from operating activities. The cash transfers
to IAC relate primarily to the transfer of Tree.com's excess cash to IAC in connection with IAC's centrally managed U.S. treasury function. Net cash used in financing activities in 2006 of
$45.9 million was primarily due to net payments under various lines of credit, primarily warehouse lines, of $23.8 million at LendingTree Loans, payments on notes payable and capital
lease obligations of $11.5 million and cash transfers of $3.9 million to IAC.
As of December 31, 2007, LendingTree Loans had committed lines of credit, primarily warehouse lines, totaling $550 million, of which $500 million expired on
January 31, 2008, and $50 million expires on October 31, 2008, and an uncommitted line of $150 million. Borrowings under these lines of credit are used to fund, and are
secured by, consumer residential loans that are held for sale. Loans under these lines of credit are repaid from proceeds from the sales of loans held for sale by LendingTree Loans. The interest rate
under these lines of credit is 30-day LIBOR plus 75 to 100 basis points, but may be higher under certain circumstances. The committed line that expired on January 31, 2008 was
subsequently renewed at a reduced size of $50 million and will expire on the earlier of sixty days prior to the spin-off or January 24, 2009 and can be cancelled at the
option of the lender without default upon sixty days notice. On June 25, 2008, certain terms of the warehouse line of credit were waived in order for the line of credit not to expire
60 days prior to the spin-off. However, if
the lender determines at any time prior to January 24, 2009 the spin-off materially and adversely affects Tree.com, the lender reserves the right to deem the line of credit expired prior to
January 24, 2009. The interest rate under this line of credit increased at the renewal date to 30-day LIBOR plus 140 basis points, but may be higher under certain circumstances. The
$50 million committed line of credit that expires on January 24, 2009 and the $150 million uncommitted line are provided by the same lender. The $50 million committed line
that expires on October 31, 2008 is provided by one other lender. LendingTree Loans is highly dependent on the availability of credit to finance its operations. Its inability to renew or
replace existing facilities upon expiration or termination, which could be impacted by continuing disruptions in the credit market, would adversely impact its results of operations and financial
condition. At December 31, 2007 there was $79.4 million outstanding under the committed lines of credit. Under the terms of the committed lines of credit, LendingTree Loans is required
to maintain various financial and other covenants. These financial covenants include, but are not limited to, maintaining (i) minimum levels of tangible net worth, cash on hand with a certain
lender and liquid assets, (ii) a maximum ratio of total liabilities to net worth and (iii) positive pre-tax net income on a quarterly basis. During the fourth quarter,
LendingTree Loans was not in compliance with the quarterly positive pre-tax net income covenant set forth in one of its lines of credit. LendingTree Loans received a waiver of this
covenant breach on February 8, 2008. The breach and the subsequent waiver did not have an impact on LendingTree Loans' other lines of credit and Tree.com does not expect it to have an impact on
LendingTree Loans' ability to secure lines of credit in the future. Borrowings under all of LendingTree Loans' lines of credit are non-recourse to Tree.com.
257
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
|
|
(In thousands)
|
Short-term and current portion of long-term obligations |
|
$ |
99,350 |
|
$ |
99,350 |
|
$ |
|
|
$ |
|
|
$ |
|
Capital lease obligations |
|
|
272 |
|
|
272 |
|
|
|
|
|
|
|
|
|
Purchase obligations(a) |
|
|
330 |
|
|
330 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
27,633 |
|
|
7,168 |
|
|
9,674 |
|
|
4,983 |
|
|
5,808 |
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
127,585 |
|
$ |
107,120 |
|
$ |
9,674 |
|
$ |
4,983 |
|
$ |
5,808 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- The
purchase obligations primarily relate to marketing event contracts in 2008.
|
|
Amount of Commitment Expiration Per Period
|
Other Commercial Commitments*
|
|
Total Amounts
Committed
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
|
|
(In thousands)
|
Surety bonds and letters of credit |
|
$ |
8,182 |
|
$ |
7,477 |
|
$ |
705 |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
- *
- Commercial
commitments are funding commitments that could potentially require performance in the event of demands by third parties or contingent events, such as under lines of credit
extended or under guarantees of debt.
Off-Balance Sheet Arrangements
Other than the items described above, Tree.com does not have any off-balance sheet arrangements as of December 31, 2007.
258
Results of Operations for the Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007
Revenue
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Lending |
|
$ |
61,811 |
|
(36 |
)% |
$ |
96,768 |
Real Estate |
|
|
8,382 |
|
(37 |
)% |
|
13,231 |
|
|
|
|
|
|
|
Total revenue |
|
$ |
70,193 |
|
(36 |
)% |
$ |
109,999 |
|
|
|
|
|
|
|
Revenue in 2008 decreased $39.8 million, or 36%, from 2007 primarily due to fewer loan originations and sales into the secondary market and fewer loans closed on
the lending networks. Also contributing to the decrease in revenue is a decrease of $3.9 million related to the Real Estate builder and broker networks, which experienced decreased closings
year over year, as well as the absence of revenue from the agent network business which ceased operations in December 2007. Lenders' continued narrow focus on traditional mortgage products contributed
to lower close rates and a shift to lower margin
products as compared to the prior year. The dollar value of loans closed by network lenders and directly by LendingTree Loans in 2008 decreased 42% to $4.3 billion. This includes refinance
mortgages of $2.7 billion, purchase mortgages of $1.0 billion and home equity loans of $0.5 billion. The dollar value of loans closed by network lenders in 2007 was
$7.4 billion, including refinance mortgages of $4.1 billion, purchase mortgages of $1.8 billion and home equity loans of $1.3 billion. Revenue from all home loan products
declined with home equity loans, purchase mortgage revenue and refinance mortgage revenue declining 75%, 38% and 22%, respectively.
Partially offsetting the revenue decrease from fewer loans sold in 2008 is higher revenue per loan sold and an increase of $1.2 million in revenue from Tree.com's company-owned
brokerage business, which increased closings by 40%. The company-owned brokerage business began closing transactions in the first quarter of 2006 and now operates in fourteen markets. Similar to
closing loans through LendingTree Loans, the company-owned brokerage enables Real Estate to capture a larger portion of the transaction revenue.
Lending Tree Loans originates mortgage loans on property located throughout the United States, with no one location representing more than 10% of Tree.com's consolidated revenue for any
periods presented. Revenue from loans originated for property in California and Florida in the aggregate totaled approximately 8% and 11% of Tree.com's consolidated revenue for the three months ended
March 31, 2008 and 2007, respectively.
259
Cost of revenue
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Lending |
|
$12,796 |
|
(11 |
)% |
$14,312 |
Real Estate |
|
4,970 |
|
(20 |
)% |
6,184 |
|
|
|
|
|
|
|
Cost of revenue |
|
$17,766 |
|
(13 |
)% |
$20,496 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
25% |
|
668 |
bp |
19% |
Gross margins |
|
75% |
|
(668 |
) bp |
81% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Cost of revenueLending |
|
$12,796 |
|
(11 |
)% |
$14,312 |
As a percentage of Lending revenue |
|
21% |
|
591 |
bp |
15% |
Lending gross margins |
|
79% |
|
(591 |
) bp |
85% |
Cost of revenueReal Estate |
|
$4,970 |
|
(20 |
)% |
$6,184 |
As a percentage of Real Estate revenue |
|
59% |
|
1,256 |
bp |
47% |
Real Estate gross margins |
|
41% |
|
(1,256 |
) bp |
53% |
Cost of revenue consists primarily of costs associated with loan originations, compensation and other employee-related costs (including stock-based compensation) related
to customer call centers, real estate network support staff and loan officers, as well as credit scoring fees, consumer incentive costs, real estate agent commissions and website network hosting and
server fees.
Cost of revenue in 2008 decreased $2.7 million from 2007 primarily due to decreases of $1.5 million in consumer incentive rebates related to decreased closings at the Real
Estate builder and broker network businesses, $1.2 million in direct costs associated with the settlement services business and $1.2 million in compensation and other employee-related
costs. Offsetting these decreases in cost of revenue were increases of $0.6 million in costs associated with loan originations and $0.5 million in commission expense primarily related to
the increase in closings at company-owned brokerage business. The decrease in compensation and other employee-related costs is primarily due to reduced personnel costs associated with Tree.com's
customer call center, settlement services operation and portions of its loan processing department. Included in cost of revenue in 2008 is the impact of Tree.com's adoption of Statement of Financial
Accounting Standards ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115" ("SFAS 159"). Upon
adoption of SFAS 159, Tree.com elected to account for all loans held for sale issued after January 1, 2008 at fair value. Electing the fair value option requires loan origination fees
and costs to be recorded in earnings as incurred instead of being deferred until the loan is sold as in prior year periods. In 2008, all loan origination costs are recognized in cost of revenue. Prior
to 2008, Tree.com applied the provisions of SFAS 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases", effectively
deferring loan origination fees and costs until the underlying loan was sold. Upon sale of the loan, the origination fees and costs were recognized as a component of the gain on sale of the loan in
revenue.
260
Selling and marketing expense
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Lending |
|
$31,028 |
|
(39 |
)% |
$50,795 |
Real Estate |
|
2,169 |
|
(62 |
)% |
5,683 |
|
|
|
|
|
|
|
Selling and marketing expense |
|
$33,197 |
|
(41 |
)% |
$56,478 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
47% |
|
(405 |
) bp |
51% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Selling and marketing expenseLending |
|
$31,028 |
|
(39 |
)% |
$50,795 |
As a percentage of Lending revenue |
|
50% |
|
(229 |
) bp |
52% |
Selling and marketing expenseReal Estate |
|
$2,169 |
|
(62 |
)% |
$5,683 |
As a percentage of Real Estate revenue |
|
26% |
|
(1,708 |
) bp |
43% |
Selling and marketing expense consists primarily of advertising and promotional expenditures, fees paid to affiliates and compensation and other employee-related costs (including
stock-based compensation) for personnel engaged in the sales function. Advertising and promotional expenditures primarily include online marketing, as well as television, print and radio spending.
Advertising production costs are expensed in the period the related ad is first run.
Selling and marketing expense in 2008 decreased $23.3 million from 2007 primarily due to a decrease of $22.3 million in advertising and promotional expenditures. In 2008,
Tree.com experienced decreases in advertising of $11.9 million, $6.1 million and $4.1 million associated with online marketing, print and
television advertising, respectively. Tree.com anticipates that selling and marketing expense will continue to represent a high percentage of revenue as it continues to promote its brands both online
and offline.
261
General and administrative expense
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Lending |
|
$16,454 |
|
(31 |
)% |
$23,869 |
Real Estate |
|
4,310 |
|
(30 |
)% |
6,177 |
|
|
|
|
|
|
|
General and administrative expense |
|
$20,764 |
|
(31 |
)% |
$30,046 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
30% |
|
227 |
bp |
27% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
General and administrative expenseLending |
|
$16,454 |
|
(31 |
)% |
$23,869 |
As a percentage of Lending revenue |
|
27% |
|
195 |
bp |
25% |
General and administrative expenseReal Estate |
|
$4,310 |
|
(30 |
)% |
$6,177 |
As a percentage of Real Estate revenue |
|
51% |
|
473 |
bp |
47% |
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax,
human resources and executive management functions, facilities and infrastructure costs and fees for professional services.
General and administrative expense in 2008 decreased $9.3 million from 2007 primarily due to a decrease of $7.5 million in compensation and other employee-related costs,
due principally to a
reduction in workforce that occurred in 2007, subsequent to the first quarter. Offsetting this decrease in general and administrative expense is a charge of approximately $1.4 million
associated with legal and regulatory costs. Tree.com expects to incur increased costs related to the additional financial and legal requirements associated with being a separate public company, as
well as increased non-cash compensation associated with the modification of existing stock-based compensation awards in connection with the spin-off and the grant of new awards
in connection with and subsequent to the spin-off.
General and administrative expense includes non-cash compensation expense of $0.5 million in 2008 compared with $1.0 million in 2007. The decrease in
non-cash compensation expense is primarily due to a reduction in workforce that occurred in 2007, subsequent to the first quarter and various equity grants fully vesting throughout 2007.
As of March 31, 2008, there was approximately $8.2 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is currently
expected to be recognized over a weighted average period of approximately 2.7 years (exclusive of the impact of the modification related to the spin-off, which consists of the
accelerated vesting of certain restricted stock units and the modification of vested stock options).
262
Product development
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Lending |
|
$1,454 |
|
(47 |
)% |
$2,766 |
Real Estate |
|
655 |
|
(56 |
)% |
1,504 |
|
|
|
|
|
|
|
Product development |
|
$2,109 |
|
(51 |
)% |
$4,270 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
3% |
|
(88 |
) bp |
4% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Product developmentLending |
|
$1,454 |
|
(47 |
)% |
$2,766 |
As a percentage of Lending revenue |
|
2% |
|
(51 |
) bp |
3% |
Product developmentReal Estate |
|
$655 |
|
(56 |
)% |
$1,504 |
As a percentage of Real Estate revenue |
|
8% |
|
(356 |
) bp |
11% |
Product development expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in product development, which
include costs related to the design, development, testing and enhancement of technology that are not capitalized.
Product development expense in 2008 decreased $2.2 million from 2007, due to decreased compensation and other employee-related costs associated with a reduction in workforce that
occurred in 2007, subsequent to the first quarter.
Depreciation
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Lending |
|
$1,366 |
|
(46 |
)% |
$2,530 |
Real Estate |
|
409 |
|
32 |
% |
309 |
|
|
|
|
|
|
|
Depreciation |
|
$1,775 |
|
(37 |
)% |
$2,839 |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
3% |
|
(5 |
) bp |
3% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
DepreciationLending |
|
$1,366 |
|
(46 |
)% |
$2,530 |
As a percentage of Lending revenue |
|
2% |
|
(40 |
) bp |
3% |
DepreciationReal Estate |
|
$409 |
|
32 |
% |
$309 |
As a percentage of Real Estate revenue |
|
5% |
|
255 |
bp |
2% |
Depreciation in 2008 decreased $1.1 million from 2007 primarily due to certain fixed assets becoming fully depreciated and decreased capital expenditures made in 2008 and 2007 and
the write-off of certain assets subsequent to the first quarter of 2007 as Tree.com scaled back its operations in response to mortgage market conditions.
263
Operating Income Before Amortization
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Lending |
|
$(1,298) |
|
NM |
|
$3,239 |
Real Estate |
|
(3,966) |
|
37 |
% |
(6,248) |
|
|
|
|
|
|
|
Operating Income Before Amortization |
|
$(5,264) |
|
(75 |
)% |
$(3,009) |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
(7)% |
|
(476 |
) bp |
(3)% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Operating Income Before AmortizationLending |
|
$(1,298) |
|
NM |
|
$3,239 |
As a percentage of Lending revenue |
|
(2)% |
|
NM |
|
3% |
Operating Income Before AmortizationReal Estate |
|
$(3,966) |
|
37% |
|
$(6,248) |
As a percentage of Real Estate revenue |
|
(47)% |
|
(9) bp |
|
(47)% |
Operating Income Before Amortization in 2008 decreased $2.3 million to a loss of $5.3 million, declining at a faster rate than revenue due to higher costs per loan sold
resulting from lower close rates and stricter underwriting criteria, partially offset by decreases of $23.3 million in selling and marketing expense and $9.3 million in general and
administrative expense. Operating Income Before Amortization was adversely impacted in 2008 by charges, aggregating $3.1 million, associated with legal and regulatory costs and restructuring
initiatives.
Operating loss
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Lending |
|
$(4,249) |
|
(980 |
)% |
$(393) |
Real Estate |
|
(5,239) |
|
35 |
% |
(8,011) |
|
|
|
|
|
|
|
Operating loss |
|
$(9,488) |
|
(13 |
)% |
$(8,404) |
|
|
|
|
|
|
|
As a percentage of total revenue |
|
(14)% |
|
(588 |
) bp |
(8)% |
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
% Change
|
|
2007
|
|
|
(Dollars in thousands)
|
Operating lossLending |
|
$(4,249) |
|
(980 |
)% |
$(393) |
As a percentage of Lending revenue |
|
(7)% |
|
(647 |
) bp |
(0)% |
Operating lossReal Estate |
|
$(5,239) |
|
35 |
% |
$(8,011) |
As a percentage of Real Estate revenue |
|
(63)% |
|
(195 |
) bp |
(61)% |
Operating loss in 2008 increased $1.1 million from 2007, primarily due to the decrease in Operating Income Before Amortization described above, partially offset by a
$0.6 million decrease in both non-cash compensation expense and amortization of intangibles.
Income tax provision
For the three months ended March 31, 2008, Tree.com recorded a tax provision of $0.2 million despite a loss from operations, due principally to an
increase in valuation allowance on deferred tax assets. For the three months ended March 31, 2007, Tree.com recorded a tax benefit of $3.5 million on
264
a pre-tax loss of $8.6 million, which represents an effective tax rate of 41%. This tax benefit is higher than the federal statutory rate of 35% due principally to state taxes.
As of December 31, 2007 and March 31, 2008, Tree.com had unrecognized tax benefits of approximately $4.4 million. Included in unrecognized tax benefits at
March 31, 2008 is approximately $3.6 million for tax positions included in IAC's consolidated tax return filings that will remain a liability of IAC after the spin-off.
Tree.com recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There were no material accruals for interest for 2008. At March 31, 2008,
Tree.com has accrued $1.5 million for the payment of interest. There are no material accruals for penalties.
By virtue of previously filed separate company and consolidated tax returns with IAC, Tree.com is routinely under audit by federal, state, local and foreign authorities in the area of
income tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered
sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between
the reserves for tax contingencies and the amounts owed by Tree.com are recorded in the period they become known. Tree.com believes that it is reasonably possible that its unrecognized tax benefits
could decrease by approximately $2.7 million within twelve months of the current reporting date due to the reversal of deductible temporary differences which will result in a corresponding
increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits cannot be made, but are not expected to be significant.
Under the terms of the tax sharing agreement, which will be executed in connection with the spin-off, IAC will generally retain the liability related to federal and state
returns filed on a consolidated or unitary basis for all periods prior to the spin-off.
265
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2008, Tree.com had $55.0 million of cash and cash equivalents and restricted cash and cash equivalents.
Net cash used in operating activities improved by $69.0 million to $5.6 million in 2008 from $74.6 million in 2007. The improvement is primarily due to a
$64.2 million increase in loans held for sale in 2007 compared to $4.4 million in 2008 reflecting significantly higher net loan originations in 2007. Also impacting net cash used in
operations is an increase in accounts payable as Tree.com aggressively managed working capital in the first quarter of 2008.
Net cash used in investing activities in 2008 of $16.0 million primarily resulted from the payment of contingent consideration associated with the Home Loan Center acquisition and
capital expenditures of $1.5 million. Net cash used in investing activities in 2007 of $3.7 million primarily resulted from capital expenditures.
Net cash provided by financing activities in 2008 of $28.2 million was primarily due to cash transfers of $21.8 million from IAC, capital contributions of
$14.5 million from IAC and a decrease of $12.5 million in restricted cash, partially offset by payments on notes payable and capital lease obligations of $20.0 million. The cash
transfers from IAC relate to IAC's centrally managed U.S. treasury function. Net cash provided by financing activities in 2007 of $69.6 million was primarily due to net borrowings under various
lines of credit of $62.4 million at LendingTree Loans and payments on notes payable and capital lease obligations of $10.4 million, partially offset by cash transfers of
$18.0 million from IAC. The net borrowings under various lines of credit in 2007 is related to the increase in loans held for sale included within cash flow from operations.
As of March 31, 2008, LendingTree Loans had committed lines of credit totaling $100 million, of which $50 million expires on October 31, 2008, and another
$50 million is set to expire on the earlier of sixty days prior to the spin-offs or January 24, 2009, and an uncommitted line of credit of $150 million. The committed
line of credit that expires sixty days prior to the spin-offs or January 24, 2009 can be cancelled at the option of the lender without default upon sixty days notice. The
$50 million committed line of credit that expires on January 24, 2009 and the $150 million uncommitted line are provided by the same lender. The $50 million committed line
that expires on October 31, 2008 is provided by one other lender. Borrowings under these lines of credit are used to fund, and are secured by, consumer residential loans that are held for sale.
Loans under these lines of credit are repaid from proceeds from the sales of loans held for sale by LendingTree Loans. The interest rate under these lines of credit is 30-day LIBOR plus 75
to 140 basis points, but may be higher under certain circumstances. At March 31, 2008, there was $78.7 million outstanding under the committed lines of credit. Under the terms of the
committed lines of credit, LendingTree Loans is required to maintain various financial and other covenants. These financial covenants include, but are not limited to, maintaining (i) minimum
levels of tangible net worth, cash on hand with a certain lender and liquid assets, (ii) a maximum ratio of total liabilities to net worth and (iii) positive
pre-tax net income on a quarterly basis. During the first quarter of 2008, LendingTree Loans was in compliance with all covenants. Borrowings under all of LendingTree Loans' lines of
credit are non-recourse to Tree.com.
Tree.com anticipates that it will need to make capital and other expenditures in connection with the development and expansion of its overall operations.
Tree.com has considered its anticipated operating cash flows in 2008, cash and cash equivalents, current borrowing capacity under lines of credit, its expected capitalization upon
completion of the spin-off and access to capital markets and believes that these are sufficient to fund its operating needs, including debt requirements, commitments and contingencies and
capital and investing commitments for the foreseeable future. LendingTree Loans is highly dependent on the availability of credit to finance its operations. Its inability to renew or replace existing
facilities upon expiration or termination,
266
which could be impacted by continuing disruptions in the credit market, would adversely impact its results of operations and financial condition. In connection with the completion of the
spin-off, intercompany payable balances will be extinguished. It is expected that IAC will transfer to Tree.com an amount of cash that will be sufficient for its initial capitalization.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
Less Than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than 5 Years
|
|
|
(In thousands)
|
Short-term and current portion of long-term obligations |
|
$ |
78,739 |
|
$ |
78,739 |
|
$ |
|
|
$ |
|
|
$ |
|
Capital lease obligations |
|
|
15 |
|
|
15 |
|
|
|
|
|
|
|
|
|
Purchase obligations(a) |
|
|
587 |
|
|
587 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
27,724 |
|
|
7,395 |
|
|
8,723 |
|
|
5,669 |
|
|
5,937 |
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
107,065 |
|
$ |
86,736 |
|
$ |
8,723 |
|
$ |
5,669 |
|
$ |
5,937 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- The
purchase obligations primarily relate to marketing event contracts in 2008.
267
TREE.COM'S PRINCIPLES OF FINANCIAL REPORTING
Tree.com reports Operating Income Before Amortization as a supplemental measure to generally accepted accounting principles ("GAAP"). This measure is one of the
primary metrics by which Tree.com evaluates the performance of its businesses, on which its internal budgets are based and by which management is compensated. Tree.com believes that investors should
have access to the same set of tools that it uses in analyzing its results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should
not be considered a substitute for or superior to GAAP results. Tree.com provides and encourages investors to examine the reconciling adjustments between the GAAP and non-GAAP measure
which are discussed below.
Definition of Tree.com's Non-GAAP Measure
Operating Income Before Amortization is defined as operating income excluding, if applicable:
(1) non-cash compensation expense, (2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions, and
(4) one-time items. Tree.com believes this measure is useful to investors because it represents the operating results from the Tree.com Businesses, taking into account depreciation,
which Tree.com believes is an ongoing cost of doing business, but excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that
it does not take into account the impact to Tree.com's statement of operations of certain expenses, including non-cash compensation, and acquisition-related accounting. Tree.com endeavors
to compensate for the limitations of the non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling
items, including quantifying such items, to derive the non-GAAP measure.
Pro Forma Results
Tree.com will only present Operating Income Before Amortization on a pro forma basis if it views a particular transaction as significant in size or
transformational in nature. For the periods presented in this report, there are no transactions that Tree.com has included on a pro forma basis.
One-Time Items
Operating Income Before Amortization is presented before one-time items, if applicable. These items are truly one-time in nature and
non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods
presented in this report, there are no one-time items.
Non-Cash Expenses That Are Excluded From Tree.com's Non-GAAP Measure
Non-cash compensation expense consists principally of expense associated with the grants, including
unvested grants assumed in acquisitions, of restricted stock, restricted stock units and stock options. These expenses are not paid in cash, and Tree.com will include the related shares in its future
calculations of fully diluted shares outstanding. Upon vesting of restricted stock and restricted stock units and the exercise of certain stock options, the awards will be settled, at Tree.com's
discretion, on a net basis, with Tree.com remitting the required tax withholding amount from its current funds.
Amortization of intangibles is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the
intangible assets of the acquired company, such as purchase agreements, technology and customer relationships, are valued and amortized over their estimated lives. Tree.com believes that since
intangibles represent costs incurred by the acquired company to build value prior to acquisition, they were part of transaction costs.
268
RECONCILIATION OF OPERATING INCOME BEFORE AMORTIZATION
For a reconciliation of Operating Income Before Amortization to operating (loss) income for Tree.com's operating segments and to net (loss) income in total for
the years ended December 31, 2007, 2006 and 2005, see Note 8 to the consolidated financial statements.
Critical Accounting Policies and Estimates
The following disclosure is provided to supplement the descriptions of Tree.com's accounting policies contained in Note 2 to the consolidated financial
statements in regard to significant areas of judgment. Tree.com's management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements in
accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated
financial statements. They also impact the reported amount of net income during any period. Actual results could differ from those estimates. Because of the size of the financial statement elements to
which they relate, some of Tree.com's accounting policies and estimates have a more significant impact on its consolidated financial statements than others. What follows is a discussion of some of
Tree.com's more significant accounting policies and estimates.
Tree.com reviews the carrying value of all long-lived assets, primarily property and equipment and definite-lived intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), impairment is considered to have occurred whenever the carrying value of a long-lived asset exceeds the sum of the undiscounted cash
flows that is expected to result from the use and eventual disposition of the asset. The determination of cash flows is based upon assumptions that may not occur. The value of long-lived
assets that is subject to assessment for impairment in accordance with SFAS 144 is $41.3 million at December 31, 2007.
Goodwill impairment is determined using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its
carrying amount, including goodwill. In performing the first step, Tree.com determines the fair value of its reporting units by using a discounted cash flow ("DCF") analysis. Determining fair value
using a DCF analysis requires the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash
flows. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not required. If the carrying
amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is required to be performed to measure the amount of impairment, if any. The second step of the
goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
The
impairment test for indefinite-lived intangible assets involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the
indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of indefinite-lived intangible assets are
determined using a DCF valuation analysis that employs a "relief from royalty" methodology in estimating the fair value of its
269
trade
names and trademarks. Significant judgments inherent in this analysis include the determination of royalty rates, discount rates and the terminal growth rates.
Goodwill
and indefinite-lived intangible assets, primarily trade names and trademarks, are tested annually for impairment as of October 1 or earlier upon the occurrence of certain
events or substantive changes in circumstances. The annual assessment for 2007 identified impairment charges for the Lending reporting unit as more fully described above in "Results of Operations for
the Years Ended December 31, 2007, 2006 and 2005." Tree.com's reporting units are currently operating in dynamic and challenged industry segments. To illustrate the magnitude of potential
impairment charges relative to future changes in estimated fair value, had the estimated fair value of Tree.com's reporting units and their respective indefinite-lived intangible assets been
hypothetically lower by 10% as of October 1, 2007 the aggregate book value of goodwill and indefinite-lived intangible assets would have exceeded fair value by approximately $7.0 million
at Lending and $8.0 million at Real Estate. Had the estimated fair values of Tree.com's reporting units and their respective indefinite-lived intangible assets been hypothetically lower by 20%
as of October 1, 2007, the book value of goodwill and indefinite-lived intangible assets would have exceeded fair value by approximately $21.0 million at Lending and $18.0 million
at Real Estate.
Estimates of deferred income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 7, and reflect
management's assessment of actual future taxes to be paid on items reflected in the consolidated financial statements, giving consideration to both timing and the probability of realization. As of
December 31, 2007, the balance of deferred tax liabilities, net, is $30.3 million. Actual income taxes could vary from these estimates due to future changes in income tax law, state
income tax apportionment or the outcome of any review of IAC's tax returns by the IRS, as well as actual operating results of Tree.com that vary significantly from anticipated results. Effective
January 1, 2007, Tree.com adopted the provisions of FIN 48. As a result of the adoption of FIN 48, Tree.com recognizes liabilities for uncertain tax positions based on the
two-step process prescribed by the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more
likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the
probability of various possible outcomes. Tree.com considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not
accurately anticipate actual outcomes.
Loans held for sale consist primarily of residential first and second mortgage loans that are secured by residential real estate throughout the United States.
LendingTree Loans originates residential loans with the intent to sell them in the secondary market. Loans held for sale are carried at the lower of cost or market value in accordance with
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." The lower of cost or market value is determined on an individual basis for loans that have been impaired and on an
aggregate basis for loans that have not been impaired. The cost basis of loans held for sale includes the capitalized cost associated with the interest rate lock commitments, deferred origination
fees, deferred origination costs and prior to April 1, 2007 the effects of hedge accounting. The market value of loans held for sale is determined using current secondary market prices for
loans with similar coupons, maturities and credit quality. The December 31, 2007 consolidated balance sheet includes $86.8 million of loans held for sale, which is net of an associated
270
valuation allowance of $4.3 million. The valuation allowance is the amount by which the cost of loans held for sale exceeds the market value of loans held for sale.
LendingTree Loans sells loans it originates to investors on a servicing released basis without recourse so the risk of loss or default by the borrower is generally transferred to the
investor. However,
LendingTree Loans is required by these investors to make certain representations relating to credit information, loan documentation and collateral. To the extent LendingTree Loans does not comply with
such representations, or there are early payment defaults, LendingTree Loans may be required to repurchase loans or indemnify the investors for any losses from borrower defaults. As such, LendingTree
Loans records a liability for the estimated obligation related to this exposure based, in part, on historical and projected loss frequency and loss severity, the original principal amount of the loans
previously sold, the year the loans were sold, and loan type. There are four loan types used in this analysis which are determined based on the extent of the documentation received (full or limited)
and the lien position of the mortgage in the underling property (first or second position). In the case of early payment payoffs, which occurs when a borrower prepays a loan prior to the end of the
prepayment penalty period, LendingTree Loans may be required to repay all or a portion of the premium initially paid by the investor. The estimated obligation associated with early loan payoffs is
calculated based on historical loss experience by type of loan. Specific circumstances may also cause management to estimate and record additional liabilities specific to a situation based on certain
assumptions of future losses as a result of current activity. Because LendingTree Loans does not service the loans it sells, it does not maintain nor have access to the current balances and loan
performance data with respect to the individual loans previously sold to investors. As such, LendingTree Loans is unable to determine its maximum loss exposure. For the year ended December 31,
2007 LendingTree Loans increased its liability for losses on previously sold loans by approximately $15.5 million as a reduction to revenue. In 2007, $5.4 million was paid or written off
against the liability. The related liability at December 31, 2007 is $13.9 million.
Seasonality
Lending and Real Estate revenue is subject to the seasonal and cyclical trends of the U.S. housing market. On a seasonal basis, home sales typically rise during
the spring and summer months and decline during the fall and winter months. The current cyclical trends have impacted and are expected to continue to impact typical seasonal trends. Refinancing and
home equity activity is principally driven by mortgage interest rates as well as real estate values.
New Accounting Pronouncements
Refer to Note 2 to the consolidated financial statements for a description of recent accounting pronouncements.
271
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Tree.com's exposure to market rate risk for changes in interest rates relates primarily to its loans held for sale, and LendingTree Loans' lines of credit.
LendingTree Loans' mortgage banking operations expose Tree.com to interest rate risk for loans originated until those loans are sold in the secondary market
("loans held for sale"). The fair value of loans held for sale is subject to change primarily due to changes in market interest rates. LendingTree Loans hedges the changes in fair value of certain
loans held for sale primarily by entering into mortgage forward delivery contracts. Although LendingTree Loans continues to enter into derivatives for risk management purposes, effective
April 1, 2007 management determined these derivative instruments would no longer qualify for the hedge accounting provisions of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities."
When hedge accounting was discontinued, the affected loans held for sale were no longer adjusted for changes in fair value. However, the changes in fair value of the derivative
instruments continue to be recognized in current earnings as a component of revenue. For the year ended December 31, 2007 Tree.com recognized losses of $1.1 million related to the
changes in fair value of derivative instruments related to loans held for sale. For the three months ended March 31, 2008, Tree.com recognized losses of less than $0.1 million related to
the changes in fair value of derivative instruments related to loans held for sale.
In addition, LendingTree Loans provides interest rate lock commitments ("IRLCs") to fund mortgage loans at interest rates previously agreed upon with the borrower for specified periods
of time, which also expose it to interest rate risk. IRLCs are considered derivative instruments and, therefore, are recorded at fair value, with changes in fair value reflected in current period
earnings. To manage the interest rate risk associated with the IRLCs, Tree.com uses derivative instruments, including mortgage forward delivery contracts. These instruments do not qualify for hedge
accounting. The net change in the fair value of these derivatives for the year ended December 31, 2007 resulted in losses of $0.8 million
which have been recognized as a component of revenue in the accompanying consolidated statements of operations.
On January 1, 2008, Tree.com adopted the provisions of SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). Prior to the adoption of SFAS 157 the
recognition of gains and losses at the inception of a derivative contract were prohibited unless the fair value of the contract was evidenced by a quoted price in an active market. As no active market
exists for IRLCs, such day one gains and losses were not recognized until the related loan was sold. Prior to January 1, 2008, guidance also prohibited including the value of servicing the loan
in calculating the fair value of an IRLC. Such guidance was rescinded by Staff Accounting Bulletin No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings"
("SAB 109"). Accordingly, with the adoption of SFAS No. 157 and SAB 109 on January 1, 2008, the day one gains and servicing value, adjusted by the loan funding probability,
are included in the value of IRLCs. The net change in the fair value of the IRLCs and related forward delivery contracts, including the impact of day one gains and servicing value, for the three
months ended March 31, 2008 resulted in gains of $14.8 million which have been recognized as a component of revenue in the accompanying consolidated statements of operations.
The fair values of derivative financial instruments at LendingTree Loans are impacted by movements in market interest rates. Changes in the fair value of the derivative financial
instruments would substantially be offset by changes in the fair value of the items for which risk is being mitigated. As of March 31, 2008 and December 31, 2007, if market interest
rates had increased by 100 basis points, the aggregate fair value of the derivative financial instruments and the hedged items at LendingTree Loans would have increased by $0.1 million and
decreased by $0.2 million, respectively. As of March 31, 2008 and December 31, 2007, if market interest rates had decreased by 100 basis points, the aggregate fair value of the
derivative financial instruments and the hedged items at LendingTree Loans would have decreased by $0.8 million and $0.3 million, respectively.
272
Management of Tree.com
Tree.com Board of Directors and Executive Officers
The following table sets forth information as to persons who are expected to serve as Tree.com directors and executive officers following the
spin-offs. The Tree.com Board of Directors, the composition of which will comply with the independence requirements under the current standards imposed by the Marketplace Rules, is
currently expected to consist of directors.
Name
|
|
Age
|
|
Position(s)
|
Douglas Lebda |
|
38 |
|
Chairman, Chief Executive Officer and Director of Tree.com |
Scott Cammarn |
|
46 |
|
Senior Vice President and General Counsel of Tree.com |
Robert Harris |
|
48 |
|
President of Lending |
Matthew Packey |
|
40 |
|
Senior Vice President and Chief Financial Officer of Tree.com |
Bret Violette |
|
41 |
|
President of Real Estate |
Directors
Background information about those individuals who are expected to serve as directors of Tree.com appears below.
Douglas Lebda, age 38, will serve as Chairman, Chief Executive Officer and director of Tree.com upon completion of the
spin-offs and has served in such capacity for LendingTree since January 2008. Mr. Lebda has also served as President and Chief Operating Officer of IAC since the end of 2005. Prior
to assuming his current roles, Mr. Lebda served as the Chief Executive Officer of LendingTree, which he founded, since September 1998. Prior to his tenure as Chief Executive Officer of
LendingTree, Mr. Lebda served as Chairman of the Board and President of LendingTree since June 1996. Before founding LendingTree in June 1996, Mr. Lebda worked as an auditor and
consultant for PriceWaterhouseCoopers. Mr. Lebda is a member of the Board of Directors of Eastman Kodak.
Executive Officers
Background about Tree.com's executive officers who are not expected to serve as directors appears below.
Scott Cammarn, age 46, will serve as Senior Vice President and General Counsel of Tree.com upon the completion of the
spin-offs and has served in such capacity for LendingTree since May 2006. Prior to joining LendingTree, Mr. Cammarn worked for Bank of America for eleven years, during which he
served in various legal capacities, most recently as Associate General Counsel, Global Marketing and Global Corporate Affairs. Before joining Bank of America, Mr. Cammarn was a partner at the
law firm of Zeiger, Dreher & Carpenter, where he represented a number of leading consumer lending institutions.
Robert L. Harris, age 48, will serve as President of Tree.com's Lending Business upon completion of the spin-offs and has
served in such capacity for LendingTree since January 2008. Mr. Harris previously served as Chief Operating Officer of the Lending Business from May 2007 through January 2008. Mr. Harris
joined LendingTree as Vice President of Marketing in June 2000 and served as Chief
Marketing Officer of LendingTree from September 2003 through April 2007. Prior to joining LendingTree, Mr. Harris served as Managing Director, Consumer Marketing of The Coca-Cola
Company and worked at McCormick & Company, where he was responsible for leading brand marketing, new products and sales initiatives within the U.S. Consumer Products Group.
273
Matthew Packey, age 40, will serve as Senior Vice President and Chief Financial Officer of Tree.com upon
completion of the spin-offs and has served in such capacity for LendingTree since September 2007. Mr. Packey previously served as LendingTree's Chief Accounting Officer from August
2005 to September 2007 and Controller from January 2000 to August 2005. Prior to joining LendingTree, Mr. Packey served as Vice President and Controller of Broadway &
Seymour, Inc., and as a Manager at Deloitte & Touche, LLP. Mr. Packey is a certified public accountant.
Bret A. Violette, age 41, will serve as President of Tree.com's Real Estate Business and has served in such capacity for LendingTree since
April 2007. Mr. Violette previously served as Senior Vice President and General Manager of LendingTree's real estate brokerage business from June 2005. Before joining LendingTree,
Mr. Violette served as President of Weichert Lead Network, Inc. and Weichert Rental Network, Inc. from 2002 to June 2005. Prior to that time, Mr. Violette served as Chief
Financial Officer and Vice President of Business Development of YHD Foxtons, Vice President of Business Development at CMP Media Inc. and as a Group Business Director of Ziff-Davis.
Committees of the Board of Directors
Concurrent with the completion of the spin-offs, the Tree.com Board of Directors will establish the following committees, with committee membership to
be determined: the Audit Committee, the Compensation and Human Resources Committee and the Nominating Committee.
Audit Committee. The Audit Committee of the Tree.com Board of Directors will consist of three persons
and the composition of the committee will satisfy the independence requirements under the current standards imposed by the rules of the SEC and the Marketplace Rules. The Tree.com Board of Directors
will determine which member of the Audit Committee is an "audit committee financial expert," as such term is defined in applicable SEC rules.
The
Audit Committee will function pursuant to a written charter adopted by the Tree.com Board of Directors, pursuant to which it will be granted the responsibilities and authority
necessary to comply
with Rule 10A-3 of the Securities Exchange Act of 1934, as amended. The Audit Committee will be appointed by the Tree.com Board of Directors to assist the Tree.com Board with a
variety of matters, including monitoring (1) the integrity of Tree.com's financial statements, (2) the effectiveness of Tree.com's internal control over financial reporting,
(3) the qualifications and independence of Tree.com's independent registered public accounting firm, (4) the performance of Tree.com's internal audit function and independent registered
public accounting firm and (5) the compliance by Tree.com with legal and regulatory requirements.
Compensation and Human Resources Committee. The Compensation and Human Resources Committee will be
authorized to exercise all of the powers of the Tree.com Board of Directors with respect to matters pertaining to compensation and benefits, including, but not limited to, salary matters,
incentive/bonus plans, stock compensation plans, retirement programs and insurance plans. The composition of this committee will satisfy the independence requirements under the current standards
imposed by the Marketplace Rules, as well as applicable SEC and Interval Revenue Service rules.
Nominating Committee. The Nominating Committee will be responsible for identifying individuals
qualified to become members of Tree.com's Board of Directors, recommending to the Board director nominees for the annual meeting of shareholders and otherwise on an as needed basis. The composition of
this committee will satisfy the independence requirements under the current standards imposed by the Marketplace Rules.
Other Committees. In addition to the foregoing committees, the Tree.com Board of Directors, by
resolution, may from time to time establish other committees of the Tree.com Board of Directors, consisting of one or more of its directors.
274
Director Compensation
Non-Employee Director Arrangements. Each member of the Tree.com Board of Directors will
receive an annual retainer in the amount of $40,000. Each member of the Audit and Compensation and Human Resources Committees (including their respective chairs) will receive an additional annual
retainer in the amount of $10,000. Lastly, the chair of the Audit Committee will receive an additional annual chairperson retainer in the amount of $15,000.
In addition, each non-employee director will receive a grant of restricted stock units with a dollar value of $50,000 upon his or her initial election to the Tree.com Board
of Directors and annually thereafter upon re-election on the date of Tree.com's annual meeting of stockholders. The terms of these restricted stock units provide for (i) vesting in
two equal annual installments commencing on the first anniversary of the grant date, (ii) cancellation and forfeiture of unvested units in their entirety upon termination of service with the
Tree.com Board of Directors and (iii) full acceleration of vesting upon a change in control of Tree.com. Directors will be able to elect to receive their cash payments in restricted stock at a
fixed discount to the market price at the grant date. Non-employee directors are also reimbursed for all reasonable expenses incurred in connection with attendance at Tree.com Board and
Committee meetings.
The Compensation and Human Resources Committee will have primary responsibility for establishing non-employee director compensation arrangements, which are designed to
provide competitive compensation necessary to attract and retain high quality non-employee directors and to encourage ownership of Tree.com stock to further align directors' interests with
those of Tree.com's stockholders. When considering non-employee director compensation arrangements, Tree.com management will provide the Compensation and Human Resources Committee with
information regarding various types of non-employee director compensation arrangements and practices of select peer companies.
Deferred Compensation Plan for Non-Employee Directors. Under Tree.com's Deferred Compensation Plan for
Non-Employee Directors, non-employee directors will be able to defer all or a portion of their Board and Board Committee fees. Eligible directors who defer all or any portion
of these fees can elect to have such fees applied to the purchase of share units, representing the number of shares of Tree.com common stock that could have been purchased on the relevant date, or
credited to a cash fund. If any dividends are paid on Tree.com common stock, dividend equivalents will be credited on the share units. The cash fund will be credited with deemed interest at an annual
rate equal to the weighted average prime lending rate of JPMorgan Chase Bank. After a director ceases to be a member of the Tree.com Board of Directors, he or she will receive (i) with respect
to share units, such number of shares of Tree.com common stock as the share units represent and (ii) with respect to the cash fund, a cash payment in an amount equal to deferred amounts, plus
accrued interest. These payments will be made in either one lump sum or up to five installments, as previously elected by the eligible director at the time of the related deferral election.
275
Director Independence
Under the Marketplace Rules, Tree.com's Board will have a responsibility to make an affirmative determination that those members of its Board that serve as
independent directors do not have any relationships with Tree.com and its businesses that would impair their independence. In connection with these determinations, Tree.com's Board will review
information regarding transactions, relationships and arrangements involving Tree.com and its businesses and each director that it deems relevant to independence, including those required by the
Marketplace Rules. This information is obtained from director responses to a questionnaire circulated by Tree.com management, Tree.com records and publicly available information. Following these
determinations, Tree.com management will monitor those transactions, relationships and arrangements that are relevant to such determinations, as well as solicit updated information potentially
relevant to independence from internal personnel and directors, to determine whether there have been any developments that could potentially have an adverse impact on Tree.com's prior independence
determinations.
Compensation Committee Interlocks and Insider Participation
Tree.com's Board of Directors will have a Compensation and Human Resources Committee. It is expected that none of the members of this Committee will be or will
have been in the past an officer or employee of Tree.com or any of its businesses at the time of their respective service on the Committee.
Tree.com Executive Compensation
Compensation Discussion and Analysis
To date, the compensation of Tree.com's executive officers has been predominantly determined by IAC, acting in effect as Tree.com's compensation committee. IAC's
compensation process is principally driven by IAC's General Counsel, who has primary responsibility for administering compensation and making compensation recommendations, with all material decisions
approved by IAC's Chairman and Chief Executive Officer and, where appropriate, the Compensation Committee of IAC's Board of Directors (specifically with respect to all awards of IAC equity).
This Compensation Discussion and Analysis deals exclusively with historical information while Tree.com has been a part of IAC. Following the spin-off, Tree.com will have an
independent board of directors, which will in turn have a compensation committee with responsibility for establishing Tree.com's compensation philosophy and programs and determining appropriate
payments and awards to its executive officers. Because Tree.com's compensation committee has not yet been established, Tree.com cannot predict what compensation philosophies and programs will be
adopted following the spin-off, and therefore this historical report is not necessarily indicative of the practices it will follow when it is an independent public company.
In general, IAC has been responsible for establishing bonus pools and equity pools for Tree.com, and then such pools are allocated throughout Tree.com, with IAC directly establishing all
compensation elements for Tree.com's CEO, while the Tree.com CEO makes the determinations for Tree.com's other executive officers, subject to IAC's review and approval.
Neither Tree.com nor IAC has an ongoing relationship with any particular compensation consulting firm, though IAC has from time to time retained the services of consultants on specific
occasions regarding broad-based IAC compensation programs. At no time has a consultant been engaged with respect to compensation of any of Tree.com's executive officers.
Until January 2008, Mr. Lebda was an executive officer of IAC, and not of Tree.com, and as such all decisions relating to Mr. Lebda's compensation were made by the IAC
Compensation Committee with respect to IAC's performance overall, and his performance in his capacity as President and Chief Operating Officer of IAC.
276
Tree.com's executive officer compensation program is designed to increase long-term stockholder value by attracting, retaining, motivating and
rewarding leaders with the competence, character, experience and ambition necessary to enable Tree.com to meet its growth objectives.
When establishing compensation packages for a given executive, Tree.com has followed a flexible approach, and has made decisions based on a host of factors particular to a given
executive situation, including its firsthand experience with the competition for recruiting and retaining executives, negotiation and discussion with the relevant individual, competitive survey data,
internal equity considerations and other factors it deems relevant at the time.
Similarly, Tree.com has not followed an arithmetic approach to establishing compensation levels and measuring and rewarding performance for its executive officers, as these often fail to
adequately take into account the multiple factors that contribute to success at the individual and business level. In any given period, Tree.com may have multiple objectives, and these objectives, and
their relative importance, often change as the competitive and strategic landscape shifts, even within a given compensation cycle. As a result, formulaic approaches often over-compensate
or under-compensate a given performance level. Accordingly, Tree.com has historically avoided the use of strict formulas in its compensation practices and has relied primarily on a discretionary
approach.
Tree.com's compensation packages for executive officers have primarily consisted of salary, annual bonuses, long term incentives (typically equity awards),
perquisites and other benefits. Prior to making specific decisions related to any particular element of compensation, Tree.com typically reviews the total compensation of each executive, evaluating
the executive's total near and long-term compensation in the aggregate. Tree.com determines which element or combinations of compensation elements (salary, bonus or equity) can be used
most effectively to further its compensation objectives. However, all such decisions are subjective, and made on a facts and circumstances basis without any prescribed relationship between the various
elements of the total compensation package.
General. Tree.com typically negotiates a new executive officer's starting salary upon arrival, based on the executive's prior
compensation history, prior compensation levels for the particular position within Tree.com, Tree.com's location, salary levels of other executives within Tree.com, salary levels available to the
individual in alternative opportunities, reference to certain survey information and the extent to which Tree.com desires to secure the executive's services.
Once established, salaries can increase based on a number of factors, including the assumption of additional responsibilities, internal equity, periodic market checks and other factors
which demonstrate an executive's increased value to Tree.com.
Tree.com utilizes the Towers Perrin Executive Compensation Data Bank when referring to survey data in formulating its compensation packages.
2007. In 2007, Mr. C.D. Davies (who served as CEO of the Lending business as of the end of 2007, but no longer serves
as an executive of Tree.com), Mr. Violette, Mr. Harris and Mr. Packey each received salary increases in connection with the assumption of new roles within Tree.com. To reflect his
promotion to Chief Executive Officer of the company's Lending business, Mr. Davies received a salary increase from $300,000 to $450,000. Mr. Violette was promoted to President of the
company's Real Estate business in April 2007 and received a salary increase from $312,000 to $400,000. Mr. Harris was promoted to President and Chief Operating Officer of the Lending business
in May 2007 and received a salary increase from $255,000 to $325,000. Mr. Packey was promoted to Chief Financial Officer in October 2007 and received an increase from $210,000 to $241,500. All
of these increases were the result of conversations between the company and the relevant executives, and in making its
277
determinations Tree.com took into account a variety of factors, including internal pay structure, its assessment of market salaries, and, in certain instances, survey data.
2008. In connection with the employment agreement pursuant to which Mr. Lebda returned to Tree.com as its Chairman and
Chief Executive Officer (the "New Lebda Employment Agreement"), Mr. Lebda agreed to a salary of $750,000, which is the same as the salary he had been receiving as President and Chief Operating
Officer of IAC.
General. Tree.com's bonus program is designed to reward performance on an annual basis. Because of the variable nature of the
bonus program, and because in any given year bonuses have the potential to make up a significant portion of an executive's total compensation, the bonus program provides an important incentive tool to
achieve Tree.com's annual objectives.
After consultation with Tree.com management, IAC establishes the annual bonus pool for the Lending and Real Estate businesses based on its assessment of their respective performances
during the completed year. Both the Lending and Real Estate businesses have generally been measured by growth in profitability, but this is measured subjectively both in absolute terms over the prior
year and in comparison to their competitors, taking into account economic and other factors, without any pre-established targets. Additionally, consideration has sometimes been given to
achievement of various strategic objectives over the course of the year and other factors IAC and Tree.com's management deem relevant. No quantified weight has been given to any particular
consideration and there has generally been no formulaic calculation. Rather, IAC has engaged in an overall assessment of appropriate bonus levels based on a subjective interpretation of all the
relevant criteria.
IAC determines the bonus amounts for the Presidents of the Lending and Real Estate businesses, based largely on the same considerations used in establishing the bonus pools for the
businesses generally.
The Presidents of each business then establish the bonus payments to the other executive officers out of the bonus pool. Specific bonus payouts are determined based loosely on Tree.com's
actual bonus pool and the relative role and importance of each executive, with individualized adjustments in certain instances for an executive's individual performance. None of the executives at
Tree.com have target bonus opportunities.
Tree.com generally pays bonuses shortly after year-end following finalization of financial results for the prior year.
2007. Lending and Real Estate each had difficult years in extremely challenging environments, and bonuses generally reflected
these factors. In 2007, Mr. Davies and Mr. Violette each received guaranteed minimum bonuses under the terms of their employment agreements. Given disappointing financial results, IAC
determined not to make bonus payments in excess of those minimums. Mr. Davies received
a bonus of $350,000 and Mr. Violette received a bonus of $500,000. 2007 financial performance did not warrant the payment of reward bonuses, but in late 2007, Tree.com adopted a retention
program in response to lending industry turmoil. For each participating executive, a bonus amount was established, with 50% guaranteed to be paid in February 2008 and 50% mid-year 2008, in
each case based on continued employment with Tree.com. For purposes of this compensation disclosure, Tree.com has considered the 50% payout made in February 2008 to Messrs. Harris and Packey as
being bonuses paid with respect to 2007. Mr. Harris and Mr. Packey received February payouts of $75,000 and $50,000, respectively. These amounts were established based on a subjective
determination by Mr. Davies, in consultation with Mr. Lebda, of the amounts necessary to retain these individuals, given the limited amount of cash provided by IAC for the retention
program company-wide.
No bonuses were paid to IAC executive officers on account of 2007 as a result of poor performance of IAC as a whole, and consequently Mr. Lebda was not paid a bonus for 2007.
278
General. Tree.com believes that ownership shapes behavior, and that by providing a meaningful portion of an executive
officer's compensation in stock, the executive's incentives are aligned with stockholder interests in a manner that drives better performance over time. As part of IAC, that led to Tree.com's
executive officers receiving IAC equity awards on a regular basis.
In setting particular award levels, the predominant objectives are providing the recipient with effective retention incentives, appropriate reward for past performance, and incentives
for strong future performance. Appropriate levels to meet these goals may vary from year to year, and from individual to individual, based on a variety of factors.
The annual corporate performance factors relevant to setting bonus amounts that were discussed above, while taken into account, are generally less relevant in setting annual equity
awards, as the awards tend to be more forward looking, and are a longer-term retention and reward instrument than Tree.com's annual bonuses.
Awards to the Presidents of Lending and Real Estate have been made by IAC. Additionally, IAC establishes a pool for annual equity awards which the Presidents then allocate to the rest of
their businesses, including the other executive officers, subject to IAC's approval. Additionally, IAC approves any equity grants recommended to be made to Tree.com executives outside of the annual
process. Executive officers receive grants that are subjectively determined based on IAC's (or the Presidents') view of how best to allocate the equity pool for retention, reward and motivation based
on a host of subjective factors (including past contribution, retention risk, contribution potential, and market data).
Except where otherwise noted, Tree.com grants equity awards following year-end after finalization of financial results for the prior year. The meeting of the Compensation and
Human Resources Committee of the IAC Board at which the awards are made is generally scheduled months in advance and without regard to the timing of the release of earnings or other material
information.
Restricted Stock Units. Until 2008, IAC used restricted stock units, or RSUs, as its exclusive equity compensation tool for
Tree.com's executive officers. Through 2006, these awards generally vested in equal annual installments over 5 years (annual vesting RSUs), or cliff vested at the end of five years
(cliff-vesting RSUs). Annual awards were intended to provide frequent rewards and near-term retention incentives, while cliff-vesting RSUs provided more of a long-term
retention mechanism.
In February 2007, IAC implemented a new equity instrument, Growth Shares, which were RSU grants that cliff vested at the end of three years in varying amounts depending upon growth in
IAC's publicly reported metric, Adjusted Earnings Per Share, with certain modifications.
These awards were introduced throughout IAC to more closely link long-term reward with IAC's overall performance and to provide greater retentive effect by providing the
opportunity to earn greater amounts through increased IAC performance. However, in connection with the spin-off, these awards will be converted into three-year cliff-vesting
awards at the "target" value (or 50% of the shares actually granted), without variability based on performance. For information regarding the reasons behind this conversion, see "The
SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
Stock Options. In 2008, IAC used non-qualified stock options as its primary equity compensation tool throughout
IAC. The move to stock options was in part motivated by a desire to continue the shift to performance-based equity that began with the granting of Growth Shares in 2007. It was also motivated by a
belief by IAC that as individual companies, the performance of a given Spinco will have a greater correlation to its stock price than to IAC's stock price in the current conglomerated structure. Stock
Options generally vest in equal installments over four years and are intended to be granted annually.
Tree.com Equity. Mr. Lebda, Mr. Harris and Mr. Packey each received certain equity awards in Lending
Tree (Tree.com's predecessor company) at the time of IAC's acquisition of the company. In
279
the spin-off, these awards will be converted into equity awards of a subsidiary of Tree.com which will in turn own the company's operating assets. These awards will be fully vested by the end of 2008,
and subject to puts to Tree.com beginning in 2009, and calls by Tree.com beginning in 2011. In connection with his becoming President and Chief Operating Officer of IAC, Mr. Lebda agreed to
exchange a portion of his Lending Tree equity awards for 200,000 shares of IAC restricted stock, and negotiated the right to exchange another portion of these units for 300,000 shares of IAC stock in
early 2009. The Lending Tree awards are significantly out of the money, and are not expected to result in value to Mr. Lebda, Mr. Harris or Mr. Packey. Accordingly,
Mr. Lebda is expected to exercise his exchange right and receive 300,000 shares of IAC common stock in early 2009 or, if earlier, upon consummation of the spin-off.
2007. Mr. Davies received 10,659 RSUs when hired by Tree.com and also received 7,500 Growth Shares (at target) to
reflect his promotion to Chief Executive Officer of Tree.com. Mr. Harris received 2,509 RSUs and 15,056 Growth Shares (at target) in connection with the annual grant process and also received
5,738 Growth Shares (at target) related to his promotion to President and Chief Operating Officer of Tree.com. Mr. Violette received 10,000 Growth Shares (at target) in connection with his
assuming the role of President of the Real Estate business. Each of these awards were arrived at as a result of negotiations relating to the entering into of new employment agreements by the
recipients. Mr. Packey also received 5,833 Growth Shares (at target) and 2,447 annual vesting RSUs in connection with the annual grant process.
Mr. Lebda received 62,735 Growth Shares (at Target), the same amount received by the other IAC executive officers (other than the CEO).
2008. Mr. Packey received 12,000 RSUs with a five year annual vesting schedule in recognition of his promotion to
Chief Financial Officer of Tree.com. This grant was agreed upon in 2007, but not granted until 2008, and was based on the assumption of additional responsibilities, a review of competitive data,
internal equity considerations, and discussions with Mr. Packey.
Under the New Lebda Employment Agreement, Mr. Lebda was granted the right to receive, upon consummation of the spin-off, RSUs in Tree.com equal to 2% of the fully
diluted equity of the company, as well as four grants of options, each of which represented the right to acquire 2.5% of the fully diluted equity at exercise prices representing a total equity value
of the company of $250 million, $300 million, $400 million and $450 million, with possible upward adjustments based on the initial trading value in the
spin-off. Fully diluted equity will be measured at the time of the spin-off. The restricted stock units vest equally over five years, while the stock options all cliff vest at
the end of five years. The New Lebda Employment Agreement also provides that all of Mr. Lebda's outstanding IAC equity awards will vest immediately prior to the spin-off.
Tree.com plans to grant stock options to the other executive officers at the time of the spin-off, although the size of such grants have not yet been determined.
Spin-Off Adjustments. In the spin-off, equity awards denominated in IAC stock will be adjusted as
described in "Treatment of Outstanding IAC Compensatory Equity-Based Awards."
280
Presuming the spin-off transactions occur prior to February 2009, the following table reflects the effect of these adjustments on all equity awards held by Tree.com's
executive officers:
Name
|
|
RSUs that
will vest upon
completion of
spin-off
transactions (#)*
|
|
RSUs that
will be
converted
exclusively
into RSUs of
Tree.com and vest
on regular
schedule (#)
|
|
RSUs that
will be split
among the
post-transaction
companies and
vest after
February 2009
on regular
schedule (#)
|
|
Options
outstanding at
December 31,
2007all of
which will be
split among the
post-transaction
companies (#)
|
Doug Lebda |
|
192,235 |
(1) |
|
|
|
|
|
C.D. Davies |
|
|
|
13,528 |
|
2,500 |
|
|
Bret Violette |
|
39,029 |
|
6,667 |
|
3,333 |
|
|
Robert Harris |
|
19,354 |
|
17,538 |
|
22,728 |
|
10,848 |
Matt Packey |
|
1,994 |
|
16,850 |
|
3,890 |
|
|
- *
- Excludes
7,186, 2,131, 39,027, 501 and 1,525 RSUs that vested since December 31, 2007 or will vest prior to August 1, 2008 for Messrs. Lebda, Davies,
Violette, Harris and Packey, respectively.
- (1)
- In
addition, 500,000 shares of restricted stock held (or to be received by) Mr. Lebda will vest at the time of the spin-offs.
Violette Long Term Cash Bonus Plan. In connection with his agreement to serve as the President of Tree.com's Real Estate
business, the company agreed to pay a one-time bonus if the Real Estate business' 2009 revenues are at least $130 million and 2009 operating income before amortization is at least
$10 million (in which case the bonus shall be $1 million) or at least $20 million (in which case the bonus shall be $2 million). This bonus structure was put in place to
provide an incentive for Mr. Violette to grow both the business' top and bottom lines.
Tree.com believes that providing executives with severance and change of control protection is critical to allowing executives to fully value the forward looking
elements of their compensation packages, and therefore limit retention risk during uncertain times. Accordingly, Tree.com's employment agreements and equity awards generally provide for salary
continuation in the event of certain employment terminations beyond the control of the executive, as well as varying degrees of accelerated vesting in the event of a change of control of the company.
Under limited circumstances, certain Tree.com executive officers have received non-cash and non-equity compensatory benefits. The values
of these benefits are reported under the heading "Other Annual Compensation" in this filing pursuant to applicable rules. The executive officers do not participate in any deferred compensation or
retirement program other than IAC's 401(k) plan.
IAC's practice has been to structure Tree.com's compensation program in such a manner so that the compensation it pays is deductible by IAC for federal income tax
purposes. However, because Tree.com's executive officers will now be subject to the limitations on deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended, and were
not previously, certain compensatory arrangements established prior to the spin-off but that will be paid following the spin-off may not result in deductible compensation for
Tree.com.
281
Summary Compensation Table
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock Awards
($)(1)
|
|
All Other Compensation
($)
|
|
Total
($)
|
Douglas R. Lebda(2)
Chairman and CEO |
|
2007
2006 |
|
750,000
750,000 |
|
1,300,000 |
|
6,392,587
5,483,376 |
|
7,750(4
602,974 |
)
|
7,150,337
8,136,350 |
C. D. Davies(3)
Vice Chairman, Mortgage Products |
|
2007 |
|
377,885 |
|
350,000 |
|
123,105 |
|
4,689(3 |
) |
855,679 |
Bret Violette
President, Real Estate |
|
2007 |
|
375,631 |
|
500,000 |
|
1,175,887 |
|
6,750(4 |
) |
2,058,268 |
Robert Harris
Vice-chairman |
|
2007 |
|
299,423 |
|
75,000 |
|
482,163 |
|
6,750(4 |
) |
863,336 |
Matthew Packey
CFO |
|
2007 |
|
218,692 |
|
50,000 |
|
122,617 |
|
6,750(4 |
) |
398,059 |
- (1)
- Reflects
the dollar amount recognized by IAC for financial statement reporting purposes for the applicable fiscal years ended December 31, in accordance with SFAS 123R,
for IAC restricted stock units ("RSUs") awarded in and prior to the applicable year under IAC's stock and annual incentive plans. These amounts do not, therefore, represent the value of IAC equity
compensation awarded or realized in the applicable year. For further discussion of IAC's accounting for its equity compensation plans, see note 4 of IAC's audited financial statements for the
fiscal year ended December 31, 2007 included in its Annual Report on Form 10-K filed with the SEC on February 29, 2008. For information on awards made and realized in
2007, see the Grants of Plan-Based Awards and Option Exercises and Stock Vested tables below.
- (2)
- Reflects
compensation received by Mr. Lebda in his capacity as President and Chief Operating Officer of IAC.
- (3)
- Reflects
compensation received in his capacity as CEO, LendingTree.
- (4)
- Reflects
matching contributions under IAC's 401(k) plan.
Grants of Plan-Based Awards
The table below provides information regarding IAC equity awards granted to Tree.com's named executives in 2007.
|
|
|
|
Estimated Future Payouts Under
Equity Incentive Plan Awards(1)(2)
|
|
|
|
|
|
|
|
|
All other stock
awards:
number of
shares of stock
or units (#)(2)
|
|
|
Name
|
|
Grant Date
|
|
Threshold (#)
|
|
Target (#)
|
|
Maximum (#)
|
|
Grant Date
Fair Value of
Stock and Option Awards ($)(3)
|
Douglas R. Lebda |
|
2/16/07 |
|
3,488 |
|
62,735 |
|
125,470 |
|
|
|
2,499,990 |
C.D. Davies |
|
6/18/07 |
|
417 |
|
7,500 |
|
15,000 |
|
10,659 |
|
623,762 |
Bret Violette |
|
6/18/07 |
|
556 |
|
10,000 |
|
20,000 |
|
|
|
343,500 |
Robert Harris |
|
2/16/07
6/18/07 |
|
837
319 |
|
15,056
5,738 |
|
30,112
11,476 |
|
2,509
|
|
699,965
197,101 |
Matthew Packey |
|
2/16/07 |
|
324 |
|
5,833 |
|
11,666 |
|
2,447 |
|
329,958 |
- (1)
- Reflects
performance-based RSU awards which cliff vest at the end of three years in varying amounts depending upon growth in IAC's publicly reported metric, Adjusted Earnings Per
Share, with certain modifications. The threshold amount represents 5.56% of the target payout, which amount will vest upon achieving the minimum growth threshold. These awards will be converted into
three year cliff-vesting awards in the spin-offs as described under "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
- (2)
- RSU
award recipients would be credited with amounts for cash dividends paid on IAC common stock, with such additional amounts vesting concurrently with the related RSU award. For
information on the treatment of RSU awards granted to Tree.com's named executives upon a
282
termination
of employment or a change in control, see the discussion under "Potential Payments Upon Termination or Change in Control" below.
- (3)
- The
fair value of equity incentive plan awards is based on the target payout.
Outstanding Equity Awards at Fiscal Year-End
The table below provides information regarding various IAC equity awards held by Tree.com's named executives as of December 31, 2007. The market value of
all RSU and restricted stock awards is based on the closing price of IAC common stock as of December 31, 2007 ($26.92), the last trading day of 2007.
|
|
|
|
|
|
|
|
Stock Awards(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#)(4)
|
|
Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($)(4)
|
|
|
Option Awards(1)
|
|
|
|
|
|
|
Number of shares or units of stock that have not vested (#)(4)
|
|
Market
value of
shares or units
of stock that
have not
vested ($)(4)
|
Name
|
|
Number of securities underlying unexercised options (#)(2)
|
|
Option exercise price ($)
|
|
Option expiration date
|
|
|
(Exercisable)
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas R. Lebda(5) |
|
17,892
52,304
49,204
49,592
61,990
54,241
38,744
|
|
$ $ $ $ $ $ $
|
9.30
10.87
16.58
5.01
6.16
14.11
23.62
|
|
12/28/08
9/2/09
1/7/10
12/6/10
4/2/11
3/8/12
12/20/12
|
|
200,000
136,686 |
(6)
|
5,384,000
3,679,587 |
(6)
|
3,488 |
|
93,897 |
C. D. Davies |
|
|
|
|
|
|
|
|
10,659 |
|
286,940 |
|
417 |
|
11,226 |
Bret Violette |
|
|
|
|
|
|
|
|
78,056 |
|
2,101,268 |
|
556 |
|
14,968 |
Robert Harris(5) |
|
10,848 |
|
$ |
23.62 |
|
12/20/12 |
|
39,327 |
|
1,058,683 |
|
1,156 |
|
31,120 |
Matthew Packey(5) |
|
|
|
|
|
|
|
|
6,426 |
|
172,988 |
|
324 |
|
8,722 |
- (1)
- For
a discussion regarding how these equity awards will be treated in the spin-offs, see under "Treatment of Outstanding IAC Compensatory Equity-Based Awards."
- (2)
- Amounts
shown for equity incentive plan awards are based on achieving the minimum growth threshold in accordance with SEC rules.
- (3)
- On
August 9, 2005, IAC completed the separation of its travel and travel-related businesses and investments (other than Interval and TV Travel Shop) into an independent public
company (the "Expedia Spin-Off"). In connection with the Expedia Spin-Off, each then-vested option to purchase shares of IAC common stock was converted into an
option to purchase shares of IAC common stock and an option to purchase shares of Expedia common stock. Adjustments were made to the number of shares subject to each IAC and Expedia stock option to
give effect to the one-for-two reverse stock split effected in connection with the Expedia Spin-Off and to the corresponding exercise prices based on the relative
market capitalizations of IAC and Expedia at the time of the Expedia Spin-Off. The adjusted IAC and Expedia stock options otherwise have the same terms and conditions, including exercise
periods, as the corresponding vested IAC stock options outstanding immediately prior to the Expedia Spin-Off.
283
For the named executives, any value realized upon the exercise of Expedia stock options is treated for tax purposes as
compensation payable to them in their respective capacities as executive officers of Tree.com. Accordingly, information regarding Expedia stock options held by Tree.com's named executives as of
December 31, 2007 appears in the table immediately below and information regarding any exercises of Expedia stock options by such named executives is reported in the Option Exercises and Stock
Vested table below.
Name
|
|
Number of
Options (#)
|
|
Option Exercise Price ($)
|
|
Option Expiration Date
|
Douglas R. Lebda |
|
38,744 |
|
$ |
18.91 |
|
12/20/12 |
Robert Harris |
|
10,848 |
|
$ |
18.91 |
|
12/20/12 |
- (4)
- The
table below provides the following information regarding RSU awards held by Tree.com's named executives as of December 31, 2007: (i) the grant date of each award,
(ii) the number of RSUs outstanding (on an aggregate and grant-by-grant basis), (iii) the market value of RSUs outstanding as of December 31, 2007,
(iv) the vesting schedule for each award and (v) the total number of RSUs that vested or are scheduled to vest in each of the fiscal years ending December 31, 2008, 2009, 2010,
2011 and 2012.
|
|
|
|
Market
Value of
Unvested
RSUs as
of 12/31/07
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Unvested
RSUs as
of 12/31/07
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting Schedule (#)
|
Grant Date
|
|
(#)
|
|
($)
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
Douglas R. Lebda |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/8/03(a) |
|
11,255 |
|
302,985 |
|
11,255 |
|
|
|
|
|
|
|
|
|
2/4/04(b) |
|
58,982 |
|
1,587,795 |
|
|
|
58,982 |
|
|
|
|
|
|
|
2/10/05(b) |
|
37,703 |
|
1,014,965 |
|
|
|
|
|
37,703 |
|
|
|
|
|
2/6/06(c) |
|
28,746 |
|
773,842 |
|
7,186 |
|
7,186 |
|
7,187 |
|
7,187 |
|
|
|
2/16/07(d) |
|
62,735 |
|
1,688,826 |
|
|
|
|
|
62,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
199,421 |
|
5,368,413 |
|
18,441 |
|
66,168 |
|
107,525 |
|
7,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C.D. Davies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/18/07(e) |
|
10,659 |
|
286,940 |
|
2,131 |
|
2,132 |
|
2,132 |
|
2,132 |
|
2,132 |
|
6/18/07(d) |
|
7,500 |
|
201,900 |
|
|
|
|
|
7,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
18,159 |
|
488,840 |
|
2,131 |
|
2,132 |
|
9,632 |
|
2,132 |
|
2,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bret Violette |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/15/05(c) |
|
78,056 |
|
2,101,268 |
|
39,027 |
|
39,029 |
|
|
|
|
|
|
|
6/18/07(d) |
|
10,000 |
|
269,200 |
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
88,056 |
|
2,370,468 |
|
39,027 |
|
39,029 |
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Harris |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/10/05(b) |
|
18,852 |
|
507,496 |
|
|
|
|
|
18,852 |
|
|
|
|
|
2/6/06(b) |
|
17,966 |
|
483,645 |
|
|
|
|
|
|
|
17,966 |
|
|
|
2/16/07(c) |
|
2,509 |
|
67,542 |
|
501 |
|
502 |
|
502 |
|
502 |
|
502 |
|
2/16/07(d) |
|
15,056 |
|
405,308 |
|
|
|
|
|
15,056 |
|
|
|
|
|
6/18/07(d) |
|
5,738 |
|
154,467 |
|
|
|
|
|
5,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
60,121 |
|
1,618,457 |
|
501 |
|
502 |
|
40,148 |
|
18,468 |
|
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew Packey |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/03(a) |
|
152 |
|
4,092 |
|
152 |
|
|
|
|
|
|
|
|
|
2/10/05(c) |
|
952 |
|
25,628 |
|
317 |
|
317 |
|
318 |
|
|
|
|
|
2/6/06(c) |
|
2,875 |
|
77,395 |
|
719 |
|
718 |
|
719 |
|
719 |
|
|
|
2/16/07(c) |
|
2,447 |
|
65,873 |
|
489 |
|
489 |
|
490 |
|
489 |
|
490 |
|
2/16/07(d) |
|
5,833 |
|
157,024 |
|
|
|
|
|
5,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
12,259 |
|
330,012 |
|
1,677 |
|
1,524 |
|
7,360 |
|
1,208 |
|
490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (a)
- These
awards vest in four equal installments, beginning on the second anniversary of the grant date, subject to continued employment.
284
- (b)
- These
awards vest in one lump sum installment on the fifth anniversary of the grant date, subject to continued employment.
- (c)
- These
awards vest in five equal annual installments on each of the first five anniversaries of the grant date, subject to continued employment.
- (d)
- Represents
the initial "target" awards. See the Grant of Plan-Based Awards table and footnote (1) thereto.
- (e)
- These
awards vest in five equal annual installments on each of the first five anniversaries of January 22, 2007, Mr. Davies' date of hire.
- (5)
- Excludes
LendingTree units held as of December 31, 2007 and, in the case of Mr. Lebda, also excludes 300,000 shares of IAC common stock receivable upon the exercise of
contractual right to exchange certain LendingTree units in early 2009 (or, if earlier, at the time of the spin-off). For information regarding these equity arrangements, see the discussion under the
"Compensation Discussion and Analysis" and "Potential Payments Upon Termination or Change in Control" sections, and the Option Exercises and Stock Vested table.
- (6)
- Reflects
shares of restricted stock received by Mr. Lebda upon the effective date of the 2006 agreement relating to his promotion to President and Chief Operating Officer of
IAC in exchange for certain of his LendingTree units.
Option Exercises and Stock Vested
The table below provides information regarding the number of shares acquired by Tree.com's named executives in 2007 upon the exercise of stock options and the
vesting of RSU awards and the related value realized, in each case, excluding the effect of any applicable taxes. The dollar value realized upon exercise of stock options represents the difference
between (i) the sale price of the shares acquired on exercise for simultaneous exercise and sale transactions and (ii) the exercise price of the stock option, multiplied by the number of
stock options that were exercised. The dollar value realized upon vesting of RSUs represents the closing price of IAC common stock on the applicable vesting date multiplied by the number of RSUs so
vesting.
|
|
Option Awards
|
|
Stock Awards
|
Name
|
|
Number of
Shares Acquired
on Exercise
(#)
|
|
Value Realized
on Exercise
($)
|
|
Number of
Shares Acquired
on Vesting
(#)
|
|
Value Realized
on Vesting
($)
|
Douglas R. Lebda(1) |
|
70,832 |
(2) |
1,318,126 |
|
18,440 |
|
582,789 |
C.D. Davies |
|
|
|
|
|
|
|
|
Bret Violette |
|
|
|
|
|
39,027 |
|
1,358,140 |
Robert Harris(1) |
|
|
|
|
|
|
|
|
Matthew Packey(1) |
|
|
|
|
|
1,134 |
|
43,693 |
- (1)
- In
addition, 1.42, 1.4, and 0.15 LendingTree units held by Messrs. Lebda, Harris and Packey, respectively, vested in 2007, which number represents less than 1% of the total
outstanding common units of LendingTree. These awards were granted to certain LendingTree employees at the time of its acquisition by IAC in 2003, became fully vested in February 2008, and are subject
to put and call rights beginning in 2009. This table also excludes, in the case of Mr. Lebda, LendingTree units held by him that are subject to the 2009 exchange right, as discussed under
Compensation Discussion and Analysis. These units are significantly out of the money and are not expected to result in any value.
- (2)
- Includes
49,204 Expedia shares acquired upon the exercise of Expedia stock options received in connection with the Expedia Spin-Off.
285
Potential Payments Upon Termination or Change in Control
Pursuant to the terms of IAC's (and, following the spin-off, Tree.com's) equity compensation plans and the award agreements thereunder, upon a change
of control the named executive officers are generally entitled to accelerated vesting of (i) equity awards made prior to 2006 and (ii) equity awards made thereafter if, following such
change in control, their employment is terminated by the Company for any reason other than death, disability or cause (as defined in the relevant employment agreement), or by the executive for good
reason (as defined in the relevant plan or employment agreement) (a "Qualifying Termination").
Cash. Upon a Qualifying Termination, Mr. Lebda and Mr. Violette shall be entitled to salary continuation for
the remainder of the terms of their employment agreements, provided Mr. Lebda shall not receive such continuation for more than three years. Mr. Harris would receive salary continuation
for twelve months following a Qualifying Termination of Mr. Violet would also be entitled to a pro rated portion of his long-term cash bonus plan if any such payout is ultimately
earned and his remaining guaranteed bonuses of $500,000 payable in July of 2008 and 2009.
Equity. Upon a Qualifying Termination, Mr. Lebda will receive full acceleration of his equity awards outstanding
immediately following the spin-off, Mr. Violette will receive full acceleration
of any unvested RSUs he received in 2005, and Mr. Harris will receive acceleration of a portion of the cliff-vesting RSU awards granted in 2005 and 2006 equal to 20% of each such award for each
full year of service from the date of grant to the date of termination.
Obligations. The amounts payable upon a Qualifying Termination are all subject to the execution of a general release and to
compliance with confidentiality, non-compete, non-solicitation of employees and non-solicitation of customer covenants set forth in the relevant employment
agreements. Salary continuation payments will be offset by the amount of any compensation earned by an executive from other employment during the severance payment period.
The amounts shown in the table assume that the termination or change in control was effective as of December 31, 2007 and that the price of IAC common stock on which certain
calculations are based was the closing price of $26.92 on The Nasdaq Stock Market on that date. These amounts are estimates of the incremental amounts that would have been paid out to the executive
upon such terminations/change in control, and do not take into account equity grants made, and contractual
286
obligations entered into, after December 31, 2007. The actual amounts to be paid out can only be determined at the time the event actually occurs.
Name and Benefit
|
|
Termination without cause
|
|
Resignation for good reason
|
|
Death or Disability
|
|
Change in Control of IAC
|
|
Termination w/o cause or for good reason in connection with Change in Control
|
Douglas Lebda(1) |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
750,000 |
|
750,000 |
|
|
|
|
|
750,000 |
RSUs (vesting accelerated) |
|
13,762,985 |
|
13,762,985 |
|
9,130,860 |
|
10,752,413 |
|
16,225,654 |
Total estimated value |
|
14,512,985 |
|
14,512,985 |
|
9,130,860 |
|
10,752,413 |
|
16,975,654 |
C.D. Davies(2) |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
450,000 |
|
|
|
|
|
|
|
450,000 |
RSUs (vesting accelerated) |
|
|
|
|
|
|
|
|
|
488,840 |
Total estimated value |
|
450,000 |
|
|
|
|
|
|
|
938,840 |
Bret Violette |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
800,000 |
|
800,000 |
|
|
|
|
|
800,000 |
Guaranteed Bonus |
|
1,000,000 |
|
1,000,000 |
|
|
|
|
|
1,000,000 |
RSUs (vesting accelerated) |
|
2,101,268 |
|
2,101,268 |
|
|
|
2,101,268 |
|
2,370,468 |
Total estimated value |
|
3,901,268 |
|
3,901,268 |
|
|
|
2,101,268 |
|
4,170,468 |
Robert Harris(1) |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
325,000 |
|
325,000 |
|
|
|
|
|
325,000 |
RSUs (vesting accelerated) |
|
299,700 |
|
299,700 |
|
|
|
507,496 |
|
1,618,457 |
Total estimated value |
|
624,700 |
|
624,700 |
|
|
|
507,496 |
|
1,943,457 |
Matthew Packey(1) |
|
|
|
|
|
|
|
|
|
|
Cash Severance (salary) |
|
|
|
|
|
|
|
|
|
|
RSUs (vesting accelerated) |
|
2,073 |
|
|
|
1,669 |
|
29,720 |
|
330,012 |
Total estimated value |
|
2,073 |
|
|
|
1,669 |
|
29,720 |
|
330,012 |
- (1)
- Excludes,
in all cases, LendingTree units held at December 31, 2007 (and, in the case of Mr. Lebda, that would accelerate upon the events set forth above), given that
the value of these units as of that date was zero.
- (2)
- One
year's salary also payable upon a change in control of LendingTree.
287
Tree.com Security Ownership of Certain Beneficial Owners and Management
As of the date hereof, all of Tree.com's outstanding shares of common stock are owned by IAC. After the distribution, IAC will no longer own any shares of
Tree.com common stock. The following table presents information relating to the expected beneficial ownership of shares of Tree.com common stock, assuming completion of the distribution as if it
occurred on [ ] , 2008, by (i) each individual or entity expected to own beneficially more than
5% of the outstanding shares of Tree.com common
stock, (ii) each director of Tree.com assuming that there are 278,735,546 shares of common stock and Class B common stock of IAC outstanding and a distribution ratio of
one-thirtieth of a share of Tree common stock for every share of IAC common stock and/or Class B common stock, (iii) the Chief Executive Officer, the Chief Financial Officer
and the other three named executive officers in the Tree.com summary compensation table (see "Tree.com Executive Compensation") and (iv) all of Tree.com's executive officers and directors as a
group.
Unless otherwise indicated, beneficial owners listed here may be contacted at Tree.com's corporate headquarters at 11115 Rushmore Drive, Charlotte, North Carolina 28277. For each listed
person, the number of shares of Tree.com common stock and percent of such class listed assumes the conversion or exercise of any Tree.com equity securities owned by such person that are or will become
convertible or exercisable, and the exercise of stock options and the vesting of restricted stock units, if any, that will vest, within 60 days of April 30, 2008, but does not assume the
conversion, exercise or vesting of any such equity securities owned by any other person.
The share amounts for each beneficial owner listed here are based on each such individual's beneficial ownership of shares of IAC common stock and/or Class B common stock as of
April 30, 2008, and assuming a distribution ratio of one thirtieth of a share of Tree.com common stock for every share of IAC common stock and/or Class B common stock. To the
extent that Tree.com directors and executive officers own shares of IAC common stock at the time of the distribution, they will participate in the distribution on the same terms as other holders of
IAC common stock. In addition, following the distribution, Tree.com expects that all IAC stock-based awards held by these individuals will be adjusted to become awards relating to common stock of all
five companies resulting from the spin-offs. Those awards that will relate to Tree.com common stock are reflected in the table below based upon the expected adjustment formula described under the
caption "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
The actual number of shares of Tree.com capital stock outstanding as of the date of the distribution may differ due, among other things, to the exercise of stock options or warrants or
the
288
vesting of restricted stock units, in each case, between April 30, 2008 and the date of the distribution and to the extent the other assumptions set forth above differ from actual developments.
|
|
Tree.com
Common Stock
|
Name and Address of Beneficial Owner
|
|
Shares
|
|
%
|
Clearbridge Advisors, LLC, et al(1)(2)
399 Park Avenue
New York, NY 10022 |
|
441,885 |
|
4.75 |
Lord Abbett & Co. LLC(2)(3)
90 Hudson Street, 11th Floor
Jersey City, N7 07302 |
|
1,306,628 |
|
14.06 |
Liberty Media Corporation(4)(5)
12300 Liberty Boulevard
Englewood, CO 80112 |
|
2,773,993 |
|
29.86 |
C. D. Davies |
|
|
|
|
Robert Harris |
|
|
|
|
Douglas Lebda |
|
|
|
|
Matthew Packey |
|
|
|
|
Bret Violette |
|
|
|
|
All executive officers and directors as a group ( persons) |
|
|
|
|
- (1)
- We
have not been able to determine the person or persons controlling the fund through publicly available information.
- (2)
- Based
upon information regarding IAC holdings reported on a Schedule 13G, as amended, which was filed with the SEC on February 14, 2008 and a distribution ratio of
one-thirtieth of a share of Tree common stock for every share of IAC common stock and/or Class B common stock.
- (3)
- We
have not been able to determine the person or persons controlling the fund through publicly available information.
- (4)
- Liberty
Media Corporation is a publicly traded corporation. According to Liberty Media Corporation's Schedule 14A, filed April 24, 2008, Liberty's chairman, John C.
Malone, controls 33% of the voting power of Liberty Media Corporation.
- (5)
- Based
on 58,796,381 shares of IAC common stock held by Liberty and 4,000,000, 15,618,230, 4,005,190 and 800,006 shares of IAC Class B common stock held by each of
BDTV Inc., BDTV II Inc., BDTV III Inc. and BDTV IV Inc., respectively and a distribution ratio of one-thirtieth of a share of Tree common
stock for every share of IAC common stock and/or Class B common stock.
289
DESCRIPTION OF CAPITAL STOCK OF THE SPINCOS
General
The following is a summary of information concerning the capital stock of each of the Spincos. The description applies to all of the Spincos unless otherwise
indicated. The summaries and descriptions below do not purport to be complete statements of the relevant provisions of the Amended and Restated Certificate of Incorporation of each of the Spincos or
its by-laws. The summary is qualified by reference to these documents, which you must read for complete information on the capital stock of a Spinco. The Amended and Restated Certificate
of Incorporation and by-laws of each Spinco are included as exhibits to its respective registration statement on Form 10.
Distributions of Securities
In the past three years, none of the Spincos have sold any securities, including sales of reacquired securities, new issues, securities issued in exchange for
property, services, or other securities, and new securities resulting from the modification of outstanding securities, that were not registered under the Securities Act of 1933, as amended.
Common Stock
Immediately following the spin-offs, the authorized capital stock of the Spincos will consist of:
HSNi: [ ] million shares of common stock, par value $0.01 per share;
ILG: [ ] million shares of common stock, par value $0.01 per share;
Ticketmaster: [ ] million shares of common stock, par value $0.01 per share;
Tree.com: [ ] million shares of common stock, par value $0.01 per share.
Shares Outstanding. Immediately following the spin-offs, each of the Spincos expects that the number of shares of common
stock that it will have issued and outstanding will be approximately:
HSNi: 55.75 million shares of common stock, par value $0.01 per share (based on a distribution ratio of one-fifth of a share of HSNi for each share of IAC common stock and
Class B common stock outstanding);
ILG: 55.75 million shares of common stock, par value $0.01 per share (based on a distribution ratio of one-fifth of a share of ILG for each share of IAC common stock and
Class B common stock outstanding);
Ticketmaster: 55.75 million shares of common stock, par value $0.01 per share (based on a distribution ratio of one-fifth of a share of Ticketmaster for each share of IAC common
stock and Class B common stock outstanding);
Tree.com: 9.29 million shares of common stock, par value $0.01 per share (based on a distribution ratio of one-thirtieth of a share of Tree.com for each share of IAC common stock
and Class B common stock outstanding).
This is based upon approximately 253,135,548 shares of IAC common stock and 25,599,998 shares of Class B common stock outstanding as of March 31, 2008.
Dividends. Subject to prior dividend rights of the holders of any preferred shares, holders of shares of common stock of a
Spinco are entitled to receive dividends when, as and if declared by its board of directors out of funds legally available for that purpose.
290
Voting Rights. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders
of shares of common stock do not have cumulative voting rights. In other words, a holder of a single share of common stock of a Spinco cannot cast more than one vote for each position to be filled on
the board of directors of the Spinco.
Other Rights. In the event of any liquidation, dissolution or winding up of a Spinco after the satisfaction in full of the
liquidation preferences of holders of any preferred shares, holders of shares of its common stock are entitled to ratable distribution of the remaining assets available for distribution to
stockholders. Shares of common stock are not subject to redemption by operation of a sinking fund or otherwise. Holders of shares of common stock are not currently entitled to preemptive rights.
Fully Paid. The issued and outstanding shares of common stock of each Spinco are fully paid and non-assessable.
This means the full purchase price for the outstanding shares of common stock has been paid and the holders of such shares will not be assessed any additional amounts for such shares. Any additional
shares of common stock that a Spinco may issue in the future will also be fully paid and non-assessable.
Preferred Stock
Each Spinco is authorized to issue up to [ ] million shares of preferred stock, par value
$[ ] per share. The board of directors of a Spinco, without further action by the holders of its common stock, may issue shares of
preferred stock. The board of directors of a Spinco is vested with the authority to fix by resolution the designations, preferences and relative, participating, optional or other special rights, and
such qualifications, limitations or restrictions thereof, including, without limitation, redemption rights, dividend rights, liquidation preferences and conversion or exchange rights of any class or
series of preferred stock, and to fix the number of classes or series of preferred stock, the number of shares constituting any such class or series and the voting powers for each class or series.
The
authority possessed by the board of directors of a Spinco to issue preferred stock could potentially be used to discourage attempts by third parties to obtain control of such Spinco
through a merger, tender offer, proxy contest or otherwise by making such attempts more difficult or more costly. A Spinco board of directors may issue preferred stock with voting rights or conversion
rights that, if exercised, could adversely affect the voting power of the holders of its common stock. There are no current agreements or understandings with respect to the issuance of preferred stock
and none of the respective boards of directors of any of the Spincos has a present intention to issue any shares of preferred stock.
Restrictions on Payment of Dividends
Each of the Spincos is incorporated in Delaware and is governed by Delaware law. Delaware law allows a corporation to pay dividends only out of surplus, as
determined under Delaware law.
Inapplicability of Section 203 of the Delaware General Corporation Law
Section 203 ("Section 203") of the Delaware General Corporation Law prohibits certain transactions between a Delaware corporation and an "interested stockholder." An
"interested stockholder" for this purpose is a stockholder who is directly or indirectly a beneficial owner of 15% or more of the outstanding voting power of a Delaware corporation. This provision
prohibits certain business combinations between an interested stockholder and a corporation for a period of three years after the date on which the stockholder became an interested stockholder,
unless: (1) the transaction which resulted in the stockholder becoming an interested stockholder is approved by the corporation's board of directors before the stockholder became an interested
stockholder, (2) the interested stockholder acquired at least 85% of the voting power of the corporation in the transaction in which
291
the stockholder became an interested stockholder, or (3) the business combination is approved by a majority of the board of directors and the affirmative vote of the holders of
two-thirds of the outstanding voting power not owned by the interested stockholder at or subsequent to the time that the stockholder became an interested stockholder. These restrictions do
not apply if, among other things, the corporation's certificate of incorporation contains a provision expressly electing not to be governed by Section 203. The Spincos have opted out of the
provisions of Section 203. Consequently, the Spincos will not be subject to Section 203 following the spin-offs.
Anti-takeover Effects of the Certificate of Incorporation and By-laws of a Spinco and Delaware Law
Some provisions of the Amended and Restated Certificate of Incorporation and by-laws of a Spinco and certain provisions of Delaware law could make the
following more difficult:
-
- acquisition
of a Spinco by means of a tender offer;
-
- acquisition
of a Spinco by means of a proxy contest or otherwise; or
-
- removal
of incumbent officers and directors of a Spinco.
Size of Board and Vacancies
The Amended and Restated Certificate of Incorporation and by-laws of each Spinco provide that the number of directors on that company's board will be
fixed exclusively by its board of directors. Newly created directorships resulting from any increase in the authorized number of directors will be filled by a majority of the directors then in office,
provided that a majority of the entire board of directors, or a quorum, is present and any vacancies in the board of directors resulting from death, resignation, retirement, disqualification, removal
from office or other cause will be filled generally by the majority vote of the remaining directors in office, even if less than a quorum is present.
Elimination of Stockholder Action by Written Consent
The Amended and Restated certificate of incorporation and by-laws expressly eliminate the right of Spinco stockholders to act by written consent.
Stockholder action must take place at the annual or a special meeting of Spinco stockholders.
Stockholder Meetings
Under the Amended and Restated Certificate of Incorporation and by-laws of each of the Spincos, stockholders are not entitled to call special meetings
of its stockholders; only a majority of the board of directors or other specified individuals may call such meetings.
Requirements for Advance Notification of Stockholder Nominations and Proposals
The Amended and Restated by-laws of each Spinco establish advance notice procedures with respect to stockholder proposals and nomination of candidates
for election as directors other than nominations made by or at the direction of the Spinco Board or a committee of the Board. In particular, stockholders must notify the relevant Spinco's corporate
secretary in writing prior to the meeting at which the matters are to be acted upon or directors are to be elected. The notice must contain the information specified in the Spinco's Amended and
Restated by-laws. To be timely, the notice must be received at the Spinco's principal executive office not later than 45 or more than 75 days prior to the first anniversary of the
date on which the Spinco first mailed its proxy materials for the preceding year's annual meeting of stockholders. However, if the date of the annual meeting is advanced more than 30 days prior
to or delayed by more than 30 days after the anniversary of the preceding year's annual meeting, notice by the stockholder, to be timely, must be delivered no later than the close of business
on the later of the 90th day prior to such annual meeting or the 10th day
292
following the day on which public announcement of the date of such meeting is first made. Moreover, in the event that the number of directors to be elected to the board of directors of the Spinco is
increased and there is no public announcement by the Spinco naming all of the nominees for director or specifying the size of the increased board of directors at least 55 days prior to the
first anniversary of the date on which the Spinco first mailed its proxy materials for the preceding year's annual meeting of stockholders, the stockholder's notice will be considered timely, but only
with respect to nominees for any new positions created by such increase, if it is delivered to the corporate secretary at the principal executive offices of the Spinco not later than the close of
business on the 10th day following the day on which such public announcement is first made by the Spinco.]
Undesignated Preferred Stock
The authorization in the Amended and Restated Certificate of Incorporation of each Spinco of undesignated preferred stock makes it possible for the Spinco Board
to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of the Spinco. The provision in the Spinco Amended and Restated
Certificates of Incorporation
authorizing such preferred stock may have the effect of deferring hostile takeovers or delaying changes of control of Spinco management.
NASDAQ Listing
Each of the Spincos has applied to list its shares of common stock on NASDAQ. HSNi expects that its shares will trade under the ticker symbol
"[HSNI]." ILG expects that its shares will trade under the ticker symbol "[IILG]." Ticketmaster expects that its shares will trade under the ticker
symbol "[TKTM]." Tree.com expects that its shares will trade under the ticker symbol "[TREE]."
Limitation on Liability of Directors and Indemnification of Directors and Officers
Section 145 of the DGCL provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, in which such person is made a party by reason of the fact that the person is or was a director, officer, employee or agent of the corporation (other than an action by or in the
right of the corporationa "derivative action"), if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including attorneys' fees) incurred in connection with the defense or settlement of such action, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that
may be granted by a corporation's by-laws, disinterested director vote, stockholder vote, agreement or otherwise.
The
Amended and Restated Certificate of Incorporation of each Spinco provides that no director shall be liable to the Spinco or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption from liability or limitation on liability is not permitted under the DGCL, as now in effect or as amended. Currently,
Section 102(b)(7) of the DGCL requires that liability be imposed for the following:
-
- any
breach of the director's duty of loyalty to the Spinco or its stockholders;
-
- any
act or omission not in good faith or which involved intentional misconduct or a knowing violation of law;
293
-
- unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; and
-
- any
transaction from which the director derived an improper personal benefit.
The
Amended and Restated Certificate of Incorporation and by-laws of each Spinco provide that, to the fullest extent authorized or permitted by the DGCL, as now in effect or
as amended, the Spinco will indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that
such person, or a person of whom he or she is the legal representative, is or was a director or officer of the Spinco, or by reason of the fact that a director or officer of the Spinco is or was
serving, at its request, as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee
benefit plans maintained or sponsored by the Spinco. A Spinco will indemnify such persons against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action if such person acted in good faith and in a manner reasonably believed to be in the best interests of the Spinco and, with respect to any criminal
proceeding, had no reason to believe such person's conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses
(including attorneys' fees) incurred in connection with the defense or settlement of such actions, and court approval is required before there can be any indemnification where the person seeking
indemnification has been found liable to the Spinco. Any amendment of this provision will not reduce the indemnification obligations of the Spinco relating to actions taken before an amendment.
Each
Spinco intends to obtain policies that insure its directors and officers and those of its subsidiaries against certain liabilities they may incur in their capacity as directors and
officers. Under these policies, the insurer, on behalf of the Spinco, may also pay amounts for which such Spinco has granted indemnification to the directors or officers.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Agreements with Liberty Media Corporation
In May 2008, in connection with the settlement of litigation relating to the proposed spin-offs, IAC entered into a "Spinco Agreement" with Liberty
Media Corporation and affiliates of Liberty that hold shares of IAC common stock and/or Class B common stock (together with Liberty, the "Liberty Parties"), among others. At the time of the
spin-offs, each Spinco will assume from IAC all of those rights and obligations under the Spinco Agreement providing for post-spin-off governance arrangements at
the Spincos. As of April 30, 2008, Liberty may be deemed to beneficially own (within the meaning of Rule 13d-3 under the Exchange Act) 83,219,807 shares of IAC common stock
that consists of shares of common stock and Class B common stock. Such shares constitute 29.9% of the outstanding shares of IAC common stock. Immediately following the spin-offs, it
is expected that Liberty will beneficially own shares of common stock in each of the Spincos representing approximately 29.9% of the outstanding common stock of each of the Spincos. The following
summary describes the material terms of those governance arrangements and related matters and is qualified by reference to the full Spinco Agreement, which has been filed as an exhibit to each of the
Form 10 registration statements of the Spincos. The Spinco Agreement also requires each Spinco to enter into a registration rights agreement with the Liberty Parties at the time of the
spin-offs, as described below.
294
The Spinco Agreement generally provides that so long as Liberty beneficially owns securities of a Spinco representing at least 20% of the total voting power of
the Spinco's equity securities, Liberty has the right to nominate up to 20% of the directors serving on the Spinco Board of Directors (rounded up to the nearest whole number). Any director nominated
by Liberty must be reasonably acceptable to a majority of the directors on the Spinco's Board who were not nominated by Liberty. All but one of Liberty's nominees serving on the Spinco Board of
directors must qualify as "independent" under applicable stock exchange rules. In addition, the Nominating and/or Governance committee of the Spinco Board may include only "Qualified Directors,"
namely directors other than any who were nominated by Liberty, are officers or employees of the Spinco or were not nominated by the Nominating and/or Governance Committee of the Spinco's Board in
their initial election to the Board and for whose election any Liberty Party voted shares.
Until
the second anniversary of the spin-off of a Spinco, the Liberty Parties agreed to vote all of the equity securities of a Spinco beneficially owned by them in favor of
the election of the full slate of director nominees recommended to stockholders by the Spinco Board of Directors so long as the slate includes the director-candidates that Liberty has the right to
nominate.
The Liberty Parties have agreed in the Spinco Agreement not to acquire beneficial ownership of any equity securities of a Spinco (with specified exceptions)
unless:
-
- the
acquisition was approved by a majority of the Qualified Directors;
-
- the
acquisition is permitted under the provisions described in "Competing Offers" below; or
-
- after
giving effect to the acquisition, Liberty's ownership percentage of the equity securities of the Spinco, based on voting power, would not exceed the Applicable
Percentage.
The
"Applicable Percentage" initially is Liberty's ownership percentage upon the spin-off of a Spinco, based on voting power (expected to be approximately 30%), plus 5%, but
in no event more than 35%. Following a spin-off, the Applicable Percentage for the Spinco will be reduced for specified transfers of equity securities of the Spinco by the Liberty Parties.
During the first two years following the spin-off of a Spinco, acquisitions by the Liberty Parties are further limited to specified extraordinary transactions and, otherwise, to
acquisitions representing no more than one-third of the Spinco Common Stock received by the Liberty Parties in the spin-off.
Until the second anniversary of the spin-off, unless a majority of the Qualified Directors consent or to the extent permitted by the provisions
described under "Acquisition Restrictions" or "Competing Offers" or in certain other limited circumstances, no Liberty Party may:
-
- offer
to acquire beneficial ownership of any equity securities of such Spinco;
-
- initiate
or propose any stockholder proposal or seek or propose to influence, advise, change or control the management, Board of Directors, governing instruments or policies
or affairs of such Spinco;
-
- offer,
seek or propose, collaborate on or encourage any merger or other extraordinary transaction;
-
- subject
any equity securities of such Spinco to a voting agreement;
295
-
- make
a request to amend any of the provisions described under "Acquisition Restrictions", "Standstill Restrictions" or "Competing Offers";
-
- make
any public disclosure, or take any action which could reasonably be expected to require such Spinco to make any public disclosure, with respect to any of the provisions
described under "Standstill Restrictions"; or
-
- enter
into any discussions, negotiations, arrangements or understandings with any third party with respect to any of the provisions described under "Standstill
Restrictions".
Transfer Restrictions
Unless a majority of the Qualified Directors consent, the Spinco Agreement prohibits transfers by the Liberty Parties of any equity securities of a Spinco to any
person except for certain transfers, including:
-
- transfers
under Rule 144 under the Securities Act of 1933 (or, if Rule 144 is not applicable, in "broker transactions");
-
- transfers
pursuant to a third party tender or exchange offer or in connection with any merger or other business combination, which merger or business combination has been
approved by the Spinco;
-
- transfers
in a public offering in a manner designed to result in a wide distribution, provided that no such transfer is made, to the knowledge of the Liberty Parties, to any
person whose ownership percentage (based on voting power) of the Spinco's equity securities, giving effect to the transfer, would exceed 15%;
-
- a
transfer of all of the equity securities of the Spinco beneficially owned by the Liberty Parties and their affiliates in a single transaction if the transferee's ownership
percentage (based on
voting power), after giving effect to the transfer, would not exceed the Applicable Percentage and only if the transferee assumes all of the rights and obligations (subject to limited exceptions) of
the Liberty Parties under the Spinco Agreement relating to the Spinco;
-
- specified
transfers in connection with changes in the beneficial ownership of the ultimate parent company of a Liberty Party or a distribution of the equity interests of a
Liberty Party or certain similar events; and
-
- specified
transfers relating to certain hedging transactions or stock lending transactions in respect of the Liberty Parties' equity securities in the Spinco, subject to
specified restrictions.
During
the first two years following the applicable spin-off, transfers otherwise permitted by the first and third bullets above will be prohibited, and transfers otherwise
permitted by the fourth and sixth bullets above in respect of which IAC and the Spinco do not make certain determinations with respect to the transferee will be prohibited, unless such transfers
represent no more than one-third of the Spinco Common Stock received by the Liberty Parties in the spin-off.
During the period when Liberty continues to have the right to nominate directors to a Spinco's Board of Directors, if the Spinco's Board of Directors determines
to pursue certain types of transactions on a negotiated basis (either through an "auction" or with a single bidder), Liberty is granted certain rights to compete with the bidder or bidders, including
the right to receive certain notices and information, subject to specified conditions and limitations. In connection with any such transaction that the Spinco is negotiating with a single bidder, the
Spinco's Board must consider any
296
offer
for a transaction made in good faith by Liberty but is not obligated to accept any such offer or to enter into negotiations with Liberty.
If
a third party (x) commences a tender or exchange offer for at least 35% of the capital stock of the Spinco other than pursuant to an agreement with the Spinco or
(y) publicly discloses that its ownership percentage (based on voting power) exceeds 20% and the Spinco's Board fails to take certain actions to block such third party from acquiring an
ownership percentage of the Spinco (based on voting power)
exceeding the Applicable Percentage, the Liberty Parties generally will be relieved of the obligations described under "Standstill Restrictions" and "Acquisition Restrictions" above to the extent
reasonably necessary to permit Liberty to commence and consummate a competing offer. If Liberty's ownership percentage (based on voting power) as a result of the consummation of a competing offer in
response to a tender or exchange offer described in (x) above exceeds 50%, any consent or approval requirements of the Qualified Directors in the Spinco Agreement will be terminated, and,
following the later of the second anniversary of the applicable spin-off and the date that Liberty's ownership percentage (based on voting power) exceeds 50%, the obligations described
under "Acquisition Restrictions" will be terminated.
Following the spin-off of a Spinco, amendments to the Spinco Agreement and determinations required to be made thereunder (including approval of
transactions between a Liberty Party and the Spinco that would be reportable under the proxy rules) will require the approval of the Qualified Directors.
As indicated above under "Spinco Agreement", each Spinco will grant to Liberty the registration rights described below at the time of its spin-off.
Under
the registration rights agreement, the Liberty Parties and their permitted transferees (the "Holders") will be entitled to three demand registration rights (and unlimited piggyback
registration rights) in respect of the shares of Spinco common stock received by the Liberty Parties as a result of the Spinco's spin-off and other shares of Spinco common stock acquired
by the Liberty Parties consistent with the Spinco Agreement (collectively, the "Registrable Shares"). The Holders will be permitted to exercise their registration rights in connection with certain
hedging transactions that they may enter into in respect of the Registrable Shares.
The
Spinco will be obligated to indemnify the Holders, and each selling Holder will be obligated to indemnify the Spinco, against specified liabilities in connection with misstatements
or omissions in any registration statement.
Relationships Among IAC and the Spincos
Following the spin-offs, the relationships among IAC and the Spincos will be governed by a number of agreements. These agreements include, among
others:
-
- a
Separation and Distribution Agreement;
-
- a
Tax Sharing Agreement;
-
- an
Employee Matters Agreement; and
-
- a
Transition Services Agreement (collectively, the "Spin-Off Agreements").
297
The
Spin-Off Agreements will be filed as exhibits to the respective registration statement on Form 10 of each of the Spincos, of which this information statement is a
part, and the summaries of each such agreement are qualified by reference to the full text of the applicable agreement.
The Separation and Distribution Agreement will set forth the arrangements among IAC and each of the Spincos regarding the principal transactions necessary to
separate each of the Spincos from IAC, as
well as govern certain aspects of the relationship of a Spinco with IAC and other Spincos after the completion of the spin-offs.
Each
Spinco will agree to indemnify, defend and hold harmless (and to cause the other members of its respective group to indemnify, defend and hold harmless), under the Separation and
Distribution Agreement, IAC and each of the other Spincos, and each of their respective current and former directors, officers and employees, from and against any losses arising out of any breach by
such indemnifying companies of the Spin-Off Agreements, any failure by such indemnifying company to assume and perform any of the liabilities allocated to such company and any liabilities
relating to the indemnifying company's financial and business information included in filings made with the SEC in connection with the spin-offs. IAC will agree to indemnify, defend and
hold harmless each of the Spincos, and each of their respective current and former directors, officers and employees, from and against losses arising out of any breach by IAC of the
Spin-Off Agreements, and any failure by IAC to perform its obligations under the Separation and Distribution Agreement or any Spin-Off Agreement.
In
addition, the Separation and Distribution Agreement will also govern insurance and related reimbursement arrangements, provision and retention of records, access to information and
confidentiality, cooperation with respect to governmental filings and third party consents and access to property.
The Tax Sharing Agreement governs the respective rights, responsibilities and obligations of IAC and each Spinco after the spin-off of such Spinco
with respect to taxes for periods ending on or before the spin-off of such Spinco. In general, pursuant to the Tax Sharing Agreement, IAC will prepare and file the consolidated federal
income tax return, and any other tax returns that include IAC (or any of its subsidiaries) and a Spinco (or any of its subsidiaries) for all taxable periods ending on or prior to, or including, the
distribution date of such Spinco with the appropriate tax authorities, and, except as otherwise set forth below, IAC will pay any taxes relating thereto to the relevant tax authority (including any
taxes attributable to an audit adjustment with respect to such returns; provided that IAC will not be responsible for audit adjustments relating to the business of a Spinco (or any of its
subsidiaries) with respect to pre-spin off periods if such Spinco fails to fully cooperate with IAC in the conduct of such audit). Each Spinco will prepare and file all tax returns that
include solely such Spinco and/or its subsidiaries and any separate company tax returns for such Spinco and/or its subsidiaries for all taxable periods ending on or prior to, or including, the
distribution date of such Spinco, and will pay all taxes due with respect to such tax returns (including any taxes attributable to an audit adjustment with respect to such returns). In the event an
adjustment with respect to a pre-spin off period for which IAC is responsible results in a tax benefit to a Spinco in a post-spin off period, such Spinco will be required to
pay such tax benefit to IAC. In general, IAC controls all audits and administrative matters and other tax proceedings relating to the consolidated federal income tax return of the IAC group and any
other tax returns for which the IAC group is responsible.
Under the Tax Sharing Agreement a Spinco generally (i) may not take (or fail to take) any action that would cause any representation, information or covenant contained in the
separation documents or the documents relating to the IRS private letter ruling and the tax opinion regarding the spin-off of
298
such Spinco to be untrue, (ii) may not take (or fail to take) any other action that would cause the spin-off of such Spinco to lose its tax free status, (iii) may not sell,
issue, redeem or otherwise acquire any of its equity securities (or equity securities of members of its group), except in certain specified transactions for a period of 25 months following the
spin-off of such Spinco and (iv) may not, other than in the ordinary course of business, sell or otherwise dispose of a substantial portion of its assets, liquidate, merge or
consolidate with any other person for a period of 25 months following the spin-off. Tree.com will not be subject to certain of the restrictions applicable to the other Spincos
during the 25-month period following the spin-off of each such other Spinco. During the 25-month period, a Spinco may take certain actions prohibited by these
covenants if (i) it obtains IAC's prior written consent, (ii) it provides IAC with a supplemental IRS private letter ruling or an unqualified opinion of tax counsel to the effect that such
actions will not affect the tax free nature of the spin-off of such Spinco, in each case satisfactory to IAC in its sole discretion, or (iii) IAC obtains a supplemental private letter
ruling at such Spinco's request. In addition, with respect to actions or transactions involving acquisitions of Spinco stock entered into at least 18 months after the distribution of such
Spinco, such Spinco will be permitted to proceed with such transaction if it delivers an unconditional officer's certificate establishing facts evidencing that such acquisition satisfies the
requirements of a specified safe harbor set forth in applicable U.S. Treasury Regulations, and IAC, after due diligence, is satisfied with the accuracy of such certification.
Notwithstanding
the receipt of any such supplemental IRS ruling, tax opinion or officer's certificate, each Spinco must indemnify IAC and each other Spinco for any taxes and related
losses resulting from (i) any act or failure to act by such Spinco described in the covenants above, (ii) any acquisition of equity securities or assets of such Spinco or any member of
its group, and (iii) any breach by such Spinco or any member of its group of any representation or covenant contained in the separation documents or the documents relating to the IRS private
letter ruling or tax opinion concerning the spin-off of such Spinco.
Under U.S. federal income tax law, IAC and the Spincos are severally liable for all of IAC's federal income taxes attributable to periods prior to and including the current taxable year
of IAC, which ends on December 31, 2008. Thus, if IAC failed to pay the federal income taxes attributable to it under the Tax Sharing Agreement for periods prior to and including the current
taxable year of IAC, the Spincos would be severally liable for such taxes. In the event a Spinco is required to make a payment in respect of a spin-off related tax liability of the IAC consolidated
federal income tax return group under these rules for which such Spinco is not responsible under the Tax Sharing Agreement and full indemnification cannot be obtained from the Spinco responsible for
such payment under the Tax Sharing Agreement, IAC will indemnify the Spinco that was required to make the payment from and against the portion of such liability for which full indemnification cannot
be obtained from the Spinco responsible for such payment under the Tax Sharing Agreement.
The Tax Sharing Agreement also contains provisions regarding the apportionment of tax attributes of the IAC consolidated federal income tax return group, the allocation of deductions
with respect to compensatory equity interests, cooperation, and other customary matters. In general, tax deductions arising by reason of exercises of options to acquire IAC or Spinco stock, vesting of
"restricted" IAC or Spinco stock, or settlement of restricted stock units with respect to IAC or Spinco stock held by any person will be claimed by the party that employs such person at the time of
exercise, vesting or settlement, as applicable (or in the case of a former employee, the party that last employed such person). With respect to compensatory equity awards that are accelerated by
reason of the spin-offs, (i) in the case of certain individuals that will be Spinco employees following the spin-offs, IAC will be treated as the employing party with respect to such individuals, and
(ii) in the case of all other individuals that will be Spinco employees following the spin-offs, IAC will be entitled to receive payments from the Spinco employing such individuals in respect of any
tax benefits realized by such Spinco as a result of any tax deductions with respect to such equity awards.
299
The employee matters agreement covers a wide range of compensation and benefit issues related to the spin-offs. In general, under the employee matters
agreement:
-
- IAC
will assume or retain (i) all liabilities with respect to IAC employees, former IAC employees (excluding any former employees of the Spincos) and their dependents
and beneficiaries under all IAC employee benefit plans, and (ii) all liabilities with respect to the employment or termination of employment of all IAC employees, former IAC employees
(excluding any former employees of the Spincos) and their dependents and beneficiaries.
-
- Each
Spinco will assume or retain (i) all liabilities under its employee benefit plans, and (ii) all liabilities with respect to the employment or termination
of employment of all such Spinco's employees, former employees and their dependents and beneficiaries.
Subject
to a transition period through the end of 2008 with respect to health and welfare benefits, after the spin-offs, the Spincos no longer will participate in IAC's
employee benefit plans, but will have established their own employee benefit plans that are currently expected to be substantially
similar to the plans sponsored by IAC prior to the spin-offs. Through the end of 2008, IAC will continue to provide health and welfare benefits to employees of the Spincos and each Spinco
will bear the cost of this coverage with respect to its employees. Assets and liabilities from the IAC Retirement Savings Plan relating to Spinco employees and former employees will be transferred to
the applicable, newly established Spinco Retirement Savings Plan as soon as practicable following the spin-offs. For a description of the treatment of outstanding IAC equity awards
pursuant to the employee matters agreement, see "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards."
Pursuant to a transition services agreement among IAC and the Spincos, each of IAC and the Spincos currently expect that some combination of the following
services, among others, will be provided by/to the parties (and/or their respective businesses) as set forth below on an interim, transitional basis following completion of the spin-offs:
-
- assistance
with certain legal, finance, internal audit, human resources, insurance and tax affairs, including assistance with certain public company functions, from IAC to
the Spincos;
-
- continued
coverage/participation for employees of the Spincos under IAC health and welfare plans on the same basis as immediately prior to the distribution;
-
- the
leasing/subleasing of office and/or data center space by IAC and its businesses to various Spincos (and vice versa);
-
- assistance
with the implementation and hosting of certain software applications by/from IAC and its businesses for various Spincos (and vice versa);
-
- call
center and customer relations services by Ticketmaster to IAC's Reserve America business and Tree.com;
-
- payroll
processing services by Ticketmaster to certain IAC businesses and an ILG business and by HSNi to IAC;
-
- tax
compliance services by HSNi to ILG and accounting services by Ticketmaster to IAC; and
-
- such
other services as to which any Spinco(s) and IAC may agree.
The
charges for these services will be on a cost plus fixed percentage or hourly rate basis to be agreed upon prior to the completion of the spin-offs. In general, the
services to be provided by/to the parties (and/or their respective businesses) will begin on the date of the completion of the spin-offs and will cover a period generally not expected to
exceed 12 months following the spin-offs. Any party may terminate the agreement with respect to one or more particular services being received by it upon such notice as will be
provided for in the transition services agreement.
300
Each of the Spincos currently, and for the foreseeable future, expect to provide certain services to each other pursuant to certain of commercial relationships
with IAC and/or other Spincos. Additionally, in connection with the spin-offs, each Spinco is expected to enter or has entered into various commercial agreements, primarily in the form of
leases and distribution and services agreements, between their subsidiaries, on the one hand, and subsidiaries of IAC and/or one or more other Spincos, on the other hand, many of which will
memorialize (in most material respects) pre-existing arrangements in effect prior to the spin-offs and which are intended to reflect arm's length terms and none of which is
expected to constitute a material contract to the applicable Spinco. Below is a brief description of such agreements that, individually or together with similar agreements, involve revenues to either
of IAC or a Spinco in excess of $120,000. Distribution agreements generally involve the payment of fees (usually on a fixed-per-transaction, revenue sharing or commission
basis) from the party seeking distribution of the product or service to the party that is providing the distribution.
HSNi. Certain subsidiaries of HSNi distribute their respective products and services via arrangements
with certain subsidiaries of IAC and/or other Spincos (and vice versa). For example:
-
- HSNi
sells merchandise on behalf of Shoebuy through HSN and various Cornerstone brands; and
-
- IAC's
EPI business makes certain promotional offers available to consumers who purchase merchandise from HSNi businesses.
Aggregate
revenues earned in respect of commercial agreements between HSNi and IAC by HSNi subsidiaries from businesses that IAC will own following the distribution were approximately
$320,000 in 2007. Aggregate payments made by HSNi subsidiaries to IAC subsidiaries in respect of these commercial agreements were approximately $1.8 million in 2007.
ILG. Certain subsidiaries of ILG distribute their respective products and services via arrangements
with certain subsidiaries of IAC and/or other Spincos (and vice versa). For example, IAC's EPI business makes its Entertainment Book and online content available to ILG for inclusion as a membership
benefit in the Interval Network, as well as certain promotional offers, discounts and programs for use in ILG travel club programs.
Aggregate
revenues earned in respect of commercial agreements between ILG and IAC by ILG subsidiaries from businesses that IAC will own following the distribution were not material in
2007. Aggregate payments made by ILG subsidiaries to IAC subsidiaries in respect of these agreements were approximately $2.1 million in 2007.
Ticketmaster. Certain subsidiaries of Ticketmaster (i) distribute their respective products
and services via arrangements with certain subsidiaries of IAC and/or other Spincos (and vice versa), (ii) provide certain subsidiaries of IAC and/or other Spincos with various services (and
vice versa) and/or (iii) lease office space from IAC. For example:
-
- EPI
makes certain promotional offers available to consumers who purchase tickets on Ticketmaster websites;
-
- Ticketmaster
leases its corporate headquarters in California, as well as office space for its New York City operations at IAC's headquarters, from IAC; and
-
- IAC's
Advertising Solutions business acts as a sales agent for Ticketmaster in connection with the sale of advertising on www.ticketmaster.com and websites of other Ticketmaster businesses.
Aggregate
revenues earned in respect of commercial agreements between Ticketmaster and IAC by Ticketmaster subsidiaries from businesses that IAC will own following the distribution were
301
approximately
$12.2 million in 2007. Aggregate payments made by Ticketmaster subsidiaries to IAC and its subsidiaries in respect of commercial agreements were approximately $4.2 million
in 2007.
Tree.com. Certain subsidiaries of Tree.com (i) distribute their respective products and
services via arrangements with certain subsidiaries of IAC and/or other Spincos (and vice versa), (ii) provide certain subsidiaries of IAC and/or other Spincos with various services (and vice
versa) and/or (iii) lease office space from IAC. For example:
-
- Tree.com
licenses certain real estate information to IAC's Ask.com business for use in connection with real estate related search results;
-
- IAC's
Ask.com and Citysearch businesses provide search engine marketing services and advertising to Tree.com businesses; and
-
- Tree.com
leases office space for its Chairman at IAC's headquarters, which arrangements commenced in 2008.
Aggregate
revenues earned in respect of commercial agreements between Tree.com and IAC by Tree.com subsidiaries from businesses that IAC will own following the distribution were
approximately $300,000 in 2007. Aggregate payments made by Tree.com subsidiaries to IAC subsidiaries in respect of these commercial agreements were approximately $400,000 in 2007.
Certain Other Relationships and Related Person Transactions
The Spincos are currently subject to the policies and procedures of IAC regarding the review and approval of related person transactions. Immediately prior to the
spin-offs, each of the Spincos will adopt a formal written policy governing the review and approval of related person transactions. It is expected that the policies implemented by each Spinco will
require the management of such Spinco to determine whether any proposed transaction, arrangement or relationship with a related person fell within the definition of "transaction" set forth in
Item 404(a) of Regulation S-K under the Securities Act of 1933, as amended, and if so, will require management to submit such transaction to the Audit Committee of such
Spinco for approval. Such Audit Committee, in considering whether to approve related person transactions, would then consider all facts and circumstances that it deemed relevant. The disclosure below
describes related person transactions involving certain of the Spincos and related parties of IAC prior to the spin-offs, as well as certain relationships involving Spincos and their
respective related parties. The terms "related person" and "transaction" have the meanings set forth in Item 404(a) of Regulations S-K under the Securities Act of 1933, as
amended.
HSNi works with High Fashion Garments, Inc. ("HFG") and a number of other third parties to develop new product lines and source manufacturers for existing
product lines in the ordinary course of business. The brother-in-law of HSNi's Chief Executive Officer is an employee of HFG, in which capacity he assisted with the development
and manufacturing of three product lines for HSN, and his spouse is a consultant for HFG, in which capacity she assisted with the design and development of a product line for HSN. While HSN purchased
merchandise from HFG that was developed, manufactured and/or designed with assistance from these individuals in 2007 and 2006, no amounts were paid by either of HFG or HSN to these individuals in
connection with such sales. The arrangements between HFG and the brother-in-law do not provide for the payment of any amounts relating to these purchases, and while the
arrangements between HFG and the sister-in-law do provide for the payment of commissions, the relevant targets were not met.
In
2007, an HSNi subsidiary made payments to a subsidiary of Warner Music Group in the aggregate amount of approximately $380,000 for music products. Warner Music Group is a related
302
party
of IAC because Mr. Edgar Bronfman, a member of the IAC Board of Directors, is the Chief Executive Officer of Warner Music Group.
In 2007, an ILG subsidiary made payments to Arise Virtual Solutions in the aggregate amount of approximately $3.2 million for call center services. Arise
Virtual Solutions is a related party of IAC because it is a portfolio company of Accretive LLC, of which Mr. Edgar Bronfman, a member of the IAC Board of Directors, is a partner.
In
2007, ILG received payments from Expedia subsidiaries in the aggregate amount of approximately $380,000, which amount represents commissions payable to ILG in connection with the
booking of travel accommodations from certain Expedia travel suppliers through an existing affiliate distribution relationship. IAC and Expedia are related parties because they are under common
control.
In 2007, a Ticketmaster subsidiary received payments from an Expedia subsidiary in the aggregate amount of approximately $3.0 million for call center
services. IAC and Expedia are related parties because they are under common control.
303
SPINCO STOCK AND ANNUAL INCENTIVE PLANS
Introduction
Prior to the completion of the spin-offs, each Spinco expects to adopt a Stock and Annual Incentive Plan. The purpose of these plans will be to assist
the Spincos in attracting, retaining and motivating officers and employees, and to provide them with the ability to provide incentives more directly linked to the profitability of their respective
businesses and increases in stockholder value. In addition, these plans are expected to provide for the assumption of awards pursuant to the adjustment of awards granted under current plans of IAC and
its subsidiaries. See "The SeparationTreatment of Outstanding IAC Compensatory Equity-Based Awards." As of the end of Ticketmaster's most recently completed fiscal year, there were no
compensation plans under which equity securities of Ticketmaster were authorized for issuance. Each of HSNi, ILG and Tree.com was incorporated in 2008 and has not yet completed its first fiscal year.
Description
Each Stock and Annual Incentive Plan is expected to contain important features that are summarized below. The description below is a generic description that will
apply to the Stock and Annual Incentive Plan adopted by each Spinco.
Administration
The Stock and Annual Incentive Plan will be administered by the Compensation and Human Resources Committee or such other committee of the Board as the Spinco
Board of Directors may from time to time designate (the "Committee"). Among other things, the Committee will have the authority to select individuals to whom awards may be granted, to determine the
type of award as well as the number of shares of Spinco common stock to be covered by each award, and to determine the terms and conditions of any such awards.
Eligibility
In addition to individuals who hold outstanding adjusted awards, persons who serve or agree to serve as officers, employees, non-employee directors or
consultants of Spinco and its subsidiaries and affiliates will be eligible to be granted awards under the Stock and Annual Incentive Plan (other than adjusted awards that are assumed in connection
with the spin-offs).
Shares Subject to the Plan
The Stock and Annual Incentive Plan will authorize the issuance of up to [ ] shares of Spinco
common stock pursuant to new awards under the plan, plus shares to be granted pursuant to the assumption of outstanding adjusted awards. No single participant may be granted awards covering in excess
of [ ] shares of Spinco common stock over the life of the Stock and Annual Incentive Plan.
The
shares of Spinco common stock subject to grant under the Stock and Annual Incentive Plan are to be made available from authorized but unissued shares or from treasury shares, as
determined from time to time by the Spinco Board. Other than adjusted awards, to the extent that any award is forfeited, or any option or stock appreciation right terminates, expires or lapses without
being exercised, or any award is settled for cash, the shares of Spinco common stock subject to such awards not delivered as a result thereof will again be available for awards under the plan. If the
exercise price of any option and/or the tax withholding obligations relating to any award are satisfied by delivering shares of Spinco common stock (by either actual delivery or by attestation), only
the number of shares of Spinco common stock issued net of the shares of Spinco common stock delivered or attested to will be deemed delivered for purposes of the limits in the plan. To the extent any
shares of Spinco common
304
stock
subject to an award are withheld to satisfy the exercise price (in the case of an option) and/or the tax withholding obligations relating to such award, such shares of Spinco common stock will
not generally be deemed to have been delivered for purposes of the limits set forth in the plan.
In
the event of certain extraordinary corporate transactions, the Committee or the Spinco Board will be able to make such substitutions or adjustments as it deems appropriate and
equitable to (1) the aggregate number and kind of shares or other securities reserved for issuance and delivery under the plan, (2) the various maximum limitations set forth in the plan,
(3) the number and kind of shares or other securities subject to outstanding awards; and (4) the exercise price of outstanding options and stock appreciation rights.
As
indicated above, several types of stock grants can be made under the Stock and Annual Incentive Plan. A summary of these grants is set forth below. The Stock and Annual Incentive Plan
will govern options and restricted stock units that convert from existing IAC options and IAC restricted stock units in connection with the spin-offs, as well as other award grants made
following the spin-offs pursuant to such plans. Notwithstanding the foregoing, the terms that govern IAC options and IAC restricted stock units that convert into options, and restricted
stock units of the various Spincos in connection with the spin-offs, will govern such options and restricted stock units to the extent inconsistent with the terms described below.
Stock Options and Stock Appreciation Rights
Stock options granted under the Stock and Annual Incentive Plan may either be incentive stock options or nonqualified stock options. Stock appreciation rights
granted under the plan may either be granted alone or in tandem with a stock option. The exercise price of options and stock appreciation rights cannot be less than 100% of the fair market value of
the stock underlying the options or stock appreciation rights on the date of grant. Optionees may pay the exercise price in cash or, if approved by the Committee, in Spinco common stock (valued at its
fair market value on the date of exercise) or a combination thereof, or by "cashless exercise" through a broker or by withholding shares otherwise receivable on exercise. The term of options and stock
appreciation rights shall be as determined by the
Committee, but an ISO may not have a term longer than ten years from the date of grant. The Committee will determine the vesting and exercise schedule of options and stock appreciation rights, and the
extent to which they will be exercisable after the award holder's employment terminates. Generally, unvested options and stock appreciation rights terminate upon the termination of employment, and
vested options and stock appreciation rights will remain exercisable for one year after the award holder's death, disability or retirement, and 90 days after the award holder's termination for
any other reason. Vested options and stock appreciation rights will also terminate upon the optionee's termination for cause (as defined in the plan). Stock options and stock appreciation rights are
transferable only by will or by the laws of descent and distribution, or pursuant to a qualified domestic relations order or in the case of nonqualified stock options or stock appreciation rights, as
otherwise expressly permitted by the Committee including, if so permitted, pursuant to a transfer to the participant's family members, to a charitable organization, whether directly or indirectly or
by means of a trust or partnership or otherwise.
Restricted Stock
Restricted stock may be granted with such restriction periods as the Committee may designate. The Committee may provide at the time of grant that the vesting of
restricted stock will be contingent upon the achievement of applicable performance goals and/or continued service. In the case of performance-based awards that are intended to qualify under
Section 162(m)(4) of the Internal Revenue Code of 1986, as amended, (i) such goals will be based on the attainment of one or any combination of the following: specified levels of
earnings per share from continuing operations, net profit after tax, EBITDA, EBITA, gross profit, cash generation, unit volume, market share, sales, asset quality, earnings per share, operating
income, revenues, return on assets, return on operating assets,
305
return
on equity, profits, total shareholder return (measured in terms of stock price appreciation and/or dividend growth), cost saving levels, marketing-spending efficiency, core
non-interest income, change in working capital, return on capital and/or stock price, with respect to the Spinco or any subsidiary, division or department of such Spinco. Such performance
goals also may be based upon the attaining of specified levels of Spinco, subsidiary, affiliate or divisional performance under one or more of the measures described above relative to the performance
of other entities, divisions or subsidiaries. Performance goals based on the foregoing factors are hereinafter referred to as "Spinco Performance Goals." The terms and conditions of restricted stock
awards (including any applicable Spinco Performance Goals) need not be the same with respect to each participant. During the restriction period, the Committee may require that the stock certificates
evidencing restricted shares be held by Spinco. Restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered, and is forfeited upon termination of employment, unless
otherwise provided by the Committee. Other than such restrictions on transfer and any other restrictions the Committee may impose, the participant will have all the rights of a stockholder with
respect to the restricted stock award.
Restricted Stock Units
The Committee may grant restricted stock units payable in cash or shares of Spinco common stock, conditioned upon continued service and/or the attainment of
Spinco Performance Goals determined by the Committee. The terms and conditions of restricted stock unit awards (including any Spinco Performance Goals) need not be the same with respect to each
participant.
Other Stock-Based Awards
Other awards of Spinco common stock and other awards that are valued in whole or in part by reference to, or are otherwise based upon, Spinco common stock,
including (without limitation), unrestricted stock, dividend equivalents and convertible debentures, may be granted under the plan.
Bonus Awards
Bonus awards granted to eligible employees of Spinco and its subsidiaries and affiliates under the Stock and Annual Incentive Plan shall be based upon the
attainment of the Spinco Performance Goals established by the Committee for the plan year or such shorter performance period as may be established by the Committee. Bonus amounts earned by any
individual shall be limited to $[ ] million for any plan year, pro rated (if so determined by the Committee) for any shorter
performance period. Bonus amounts will be paid in cash or, in the discretion of Spinco, in Spinco common stock, as soon as practicable following the end of the plan year. The Committee may reduce or
eliminate a participant's bonus award in any year notwithstanding the achievement of Spinco Performance Goals.
Change in Control
In the event of a Change of Control (as defined in the applicable Stock and Annual Incentive Plan), the Committee shall have the discretion to determine the
treatment of awards granted under the Stock and Annual Incentive Plan, including providing for the acceleration of such awards upon the occurrence of the Change of Control and/or upon a qualifying
termination of employment (e.g., without cause or for good reason) following the Change of Control.
Amendment and Discontinuance
The Stock and Annual Incentive Plan may be amended, altered or discontinued by the Spinco Board, but no amendment, alteration or discontinuance may impair the
rights of an optionee under an option or a recipient of an SAR, restricted stock award, restricted stock unit award or bonus award previously granted without the optionee's or recipient's consent.
Amendments to each Stock and Annual Incentive Plan will require stockholder approval to the extent such approval is required by law or agreement.
306
WHERE YOU CAN FIND MORE INFORMATION
Each of the Spincos has filed a registration statement on Form 10 with the SEC with respect to the shares of its common stock that IAC stockholders will
receive in the spin-offs. This information statement, which is a part of each such registration statement, does not include all of the information that you can find in each such registration statement
or the exhibits to each such the registration statement. For additional information relating to each of the Spincos and the spin-offs, reference is made to the registration statements and the exhibits
to the registration statements. Statements contained in this information statement as to the contents of any contract or document are not necessarily complete and, if the contract or document is filed
as an exhibit to a registration statement, is qualified in all respects by reference to the relevant exhibit.
After
the spin-offs, each of the Spincos will file annual, quarterly and current reports, proxy statements and other information with the SEC. The registration statements are, and any of
these future filings with the SEC will be, available to the public over the Internet on the SEC's website at www.sec.gov. You may read and copy any filed document at the SEC's public reference rooms
in Washington, D.C. at 100 F Street, N.E., Washington, D.C. 20549 and at the SEC's regional offices in New York at 233 Broadway, New York, New York 10279 and in Chicago at Citicorp Center, 500
W. Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms.
307
ANNEX A
HSN, INC. AND SUBSIDIARIES
COMBINED FINANCIAL STATEMENTS
TABLE OF CONTENTS
|
|
PAGE
|
Audited Financial Statements: |
|
|
|
Report of Independent Registered Public Accounting Firm |
|
A-2 |
|
Combined Statements of Operations for the years ended December 31, 2007, 2006 and 2005 |
|
A-3 |
|
Combined Balance Sheets as of December 31, 2007 and 2006 |
|
A-4 |
|
Combined Statements of Invested Equity for the years ended December 31, 2007, 2006 and 2005 |
|
A-5 |
|
Combined Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 |
|
A-6 |
|
Notes to Combined Financial Statements |
|
A-7 |
Schedule IIValuation and Qualifying Accounts |
|
A-32 |
Unaudited Interim Financial Statements |
|
|
|
Combined Statements of Operations for the three months ended March 31, 2008 and 2007 |
|
A-33 |
|
Combined Balance Sheets as of March 31, 2008 and December 31, 2007 |
|
A-34 |
|
Combined Statements of Invested Equity for the three months ended March 31, 2008 |
|
A-35 |
|
Combined Statements of Cash Flows for the three months ended March 31, 2008 and 2007 |
|
A-36 |
|
Notes to Unaudited Combined Financial Statements |
|
A-37 |
A-1
Report of Independent Registered Public Accounting Firm
We have audited the accompanying combined balance sheets of HSN, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related combined
statements of operations, invested equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule on
page A-33. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 combined financial position of HSN, Inc. and subsidiaries at
December 31, 2007 and 2006, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic combined financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
New
York, New York
May 5, 2008
A-2
HSN, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Revenue |
|
$ |
2,908,242 |
|
$ |
2,877,954 |
|
$ |
2,670,951 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
1,820,048 |
|
|
1,765,203 |
|
|
1,647,857 |
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
1,088,194 |
|
|
1,112,751 |
|
|
1,023,094 |
|
Selling and marketing expense |
|
|
595,911 |
|
|
584,997 |
|
|
500,877 |
|
General and administrative expense |
|
|
211,955 |
|
|
186,261 |
|
|
171,180 |
|
Production and programming expense |
|
|
59,051 |
|
|
56,800 |
|
|
55,494 |
|
Amortization of non-cash marketing |
|
|
4,442 |
|
|
|
|
|
|
|
Amortization of intangibles |
|
|
12,681 |
|
|
34,224 |
|
|
59,444 |
|
Depreciation |
|
|
34,363 |
|
|
37,273 |
|
|
40,947 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
169,791 |
|
|
213,196 |
|
|
195,152 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
252 |
|
|
586 |
|
|
345 |
|
|
Interest expense |
|
|
|
|
|
|
|
|
(992 |
) |
|
Other expense |
|
|
(256 |
) |
|
(1,040 |
) |
|
(1,118 |
) |
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(4 |
) |
|
(454 |
) |
|
(1,765 |
) |
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
169,787 |
|
|
212,742 |
|
|
193,387 |
|
Income tax provision |
|
|
(64,554 |
) |
|
(79,210 |
) |
|
(66,310 |
) |
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
105,233 |
|
|
133,532 |
|
|
127,077 |
|
Gain on sale of discontinued operations, net of tax |
|
|
30,572 |
|
|
|
|
|
73,335 |
|
Income (loss) from discontinued operations, net of tax |
|
|
28,999 |
|
|
(10,715 |
) |
|
22,809 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
164,804 |
|
$ |
122,817 |
|
$ |
223,221 |
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Combined Financial Statements are an integral part of these statements.
A-3
HSN, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
(In thousands)
|
|
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,220 |
|
$ |
53,367 |
|
Accounts receivable, net of allowance of $8,112 and $5,994, respectively |
|
|
192,609 |
|
|
158,416 |
|
Inventories |
|
|
317,411 |
|
|
313,913 |
|
Deferred income taxes |
|
|
24,606 |
|
|
22,864 |
|
Assets held for sale |
|
|
|
|
|
226,880 |
|
Prepaid expenses and other current assets |
|
|
55,182 |
|
|
53,323 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
596,028 |
|
|
828,763 |
|
Property and equipment, net |
|
|
155,805 |
|
|
143,209 |
|
Goodwill |
|
|
2,884,389 |
|
|
2,883,769 |
|
Intangible assets, net |
|
|
571,662 |
|
|
584,343 |
|
Other non-current assets |
|
|
12,747 |
|
|
18,083 |
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
4,220,631 |
|
$ |
4,458,167 |
|
|
|
|
|
|
|
LIABILITIES AND INVESTED EQUITY |
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
Accounts payable, trade |
|
$ |
260,531 |
|
$ |
250,782 |
|
Income taxes payable |
|
|
1,811 |
|
|
2,606 |
|
Liabilities held for sale |
|
|
|
|
|
64,345 |
|
Accrued expenses and other current liabilities |
|
|
186,501 |
|
|
170,438 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
448,843 |
|
|
488,171 |
|
Other long-term liabilities |
|
|
8,933 |
|
|
9,709 |
|
Deferred income taxes |
|
|
819,969 |
|
|
836,571 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
INVESTED EQUITY: |
|
|
|
|
|
|
|
Invested capital |
|
|
4,522,873 |
|
|
4,569,019 |
|
Receivables from IAC and subsidiaries |
|
|
(1,581,157 |
) |
|
(1,483,873 |
) |
Accumulated other comprehensive income |
|
|
1,170 |
|
|
38,570 |
|
|
|
|
|
|
|
|
Total invested equity |
|
|
2,942,886 |
|
|
3,123,716 |
|
|
|
|
|
|
|
TOTAL LIABILITIES AND INVESTED EQUITY |
|
$ |
4,220,631 |
|
$ |
4,458,167 |
|
|
|
|
|
|
|
The
accompanying Notes to Combined Financial Statements are an integral part of these statements.
A-4
HSN, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF INVESTED EQUITY
|
|
Total
|
|
Invested
Capital
|
|
Receivables
from IAC and
Subsidiaries
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
(In thousands)
|
|
Balance as of December 31, 2004 |
|
$ |
2,464,651 |
|
$ |
2,791,731 |
|
$ |
(358,947 |
) |
$ |
31,867 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2005 |
|
|
223,221 |
|
|
223,221 |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
(13,561 |
) |
|
|
|
|
|
|
|
(13,561 |
) |
|
Net losses on derivative contracts |
|
|
(496 |
) |
|
|
|
|
|
|
|
(496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
209,164 |
|
|
|
|
|
|
|
|
|
|
Net transfers from IAC(a) |
|
|
1,430,971 |
|
|
1,430,971 |
|
|
|
|
|
|
|
Net change in receivables from IAC and subsidiaries |
|
|
(946,426 |
) |
|
|
|
|
(946,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
3,158,360 |
|
|
4,445,923 |
|
|
(1,305,373 |
) |
|
17,810 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2006 |
|
|
122,817 |
|
|
122,817 |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
16,441 |
|
|
|
|
|
|
|
|
16,441 |
|
|
Net gains on derivative contracts |
|
|
4,319 |
|
|
|
|
|
|
|
|
4,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
143,577 |
|
|
|
|
|
|
|
|
|
|
Net transfers from IAC |
|
|
279 |
|
|
279 |
|
|
|
|
|
|
|
Net change in receivables from IAC and subsidiaries |
|
|
(178,500 |
) |
|
|
|
|
(178,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
|
3,123,716 |
|
|
4,569,019 |
|
|
(1,483,873 |
) |
|
38,570 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2007 |
|
|
164,804 |
|
|
164,804 |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
(35,045 |
) |
|
|
|
|
|
|
|
(35,045 |
) |
|
Net losses on derivative contracts |
|
|
(2,355 |
) |
|
|
|
|
|
|
|
(2,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
127,404 |
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of FIN 48 |
|
|
(225 |
) |
|
(225 |
) |
|
|
|
|
|
|
Net transfers to IAC (principally transfer of investment and contingent value right)(b) |
|
|
(210,725 |
) |
|
(210,725 |
) |
|
|
|
|
|
|
Net change in receivables from IAC and subsidiaries |
|
|
(97,284 |
) |
|
|
|
|
(97,284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
2,942,886 |
|
$ |
4,522,873 |
|
$ |
(1,581,157 |
) |
$ |
1,170 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- Consists
principally of a capital contribution made in connection with restructuring steps implemented in order for IAC to spin-off its travel related businesses and
funding for the acquisition of Cornerstone Brands. See Note 3 for a further discussion of the acquisition of Cornerstone Brands.
- (b)
- See
Note 15 for a further discussion of these transfers.
The
accompanying Notes to Combined Financial Statements are an integral part of these statements.
A-5
HSN, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities attributable to continuing operations: |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
164,804 |
|
$ |
122,817 |
|
$ |
223,221 |
|
Less: (income) loss from discontinued operations, net of tax |
|
|
(59,571 |
) |
|
10,715 |
|
|
(96,144 |
) |
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
105,233 |
|
|
133,532 |
|
|
127,077 |
|
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities attributable to continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles |
|
|
12,681 |
|
|
34,224 |
|
|
59,444 |
|
|
Depreciation |
|
|
34,363 |
|
|
37,273 |
|
|
40,947 |
|
|
Non-cash compensation expense |
|
|
12,160 |
|
|
11,746 |
|
|
13,725 |
|
|
Amortization of cable and satellite distribution fees |
|
|
4,866 |
|
|
29,565 |
|
|
70,401 |
|
|
Amortization of non-cash marketing |
|
|
4,442 |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
(11,803 |
) |
|
(15,282 |
) |
|
(38,945 |
) |
|
Excess tax benefits from stock-based awards |
|
|
|
|
|
|
|
|
49,889 |
|
|
Bad debt expense |
|
|
14,598 |
|
|
10,734 |
|
|
10,793 |
|
|
Inventory carrying value adjustment |
|
|
9,100 |
|
|
6,164 |
|
|
(833 |
) |
|
Increase in cable and satellite distribution fees |
|
|
|
|
|
(16,876 |
) |
|
(24,011 |
) |
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(53,130 |
) |
|
(15,382 |
) |
|
(28,206 |
) |
|
Inventories |
|
|
(12,598 |
) |
|
(29,579 |
) |
|
9,491 |
|
|
Prepaid expenses and other current assets |
|
|
(2,212 |
) |
|
(1,459 |
) |
|
4,325 |
|
|
Accounts payable and other current liabilities |
|
|
29,001 |
|
|
(16,138 |
) |
|
(20,073 |
) |
|
Income taxes payable |
|
|
(9,799 |
) |
|
1,016 |
|
|
(74,365 |
) |
Other, net |
|
|
682 |
|
|
(1,833 |
) |
|
396 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities attributable to continuing operations |
|
|
137,584 |
|
|
167,705 |
|
|
200,055 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities attributable to continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
Transfers to IAC |
|
|
(91,560 |
) |
|
(188,269 |
) |
|
(803,768 |
) |
|
Acquisitions, net of cash acquired |
|
|
(935 |
) |
|
(338 |
) |
|
(704,531 |
) |
|
Capital expenditures |
|
|
(48,714 |
) |
|
(35,985 |
) |
|
(36,037 |
) |
|
Other, net |
|
|
1,048 |
|
|
164 |
|
|
4,475 |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities attributable to continuing operations |
|
|
(140,161 |
) |
|
(224,428 |
) |
|
(1,539,861 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities attributable to continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
Capital contributions from IAC |
|
|
|
|
|
|
|
|
1,429,660 |
|
|
Principal payments on long-term obligations |
|
|
|
|
|
|
|
|
(36,876 |
) |
|
Excess tax benefits from stock-based awards |
|
|
2,401 |
|
|
2,269 |
|
|
|
|
|
Other, net |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities attributable to continuing operations |
|
|
2,391 |
|
|
2,269 |
|
|
1,392,784 |
|
|
|
|
|
|
|
|
|
Total cash (used in) provided by continuing operations |
|
|
(186 |
) |
|
(54,454 |
) |
|
52,978 |
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities attributable to discontinued operations |
|
|
(8,956 |
) |
|
(27,931 |
) |
|
2,881 |
|
Net cash (used in) provided by investing activities attributable to discontinued operations |
|
|
(965 |
) |
|
(8,526 |
) |
|
180,406 |
|
Net cash used in financing activities attributable to discontinued operations |
|
|
(38,571 |
) |
|
(1,748 |
) |
|
(167,210 |
) |
|
|
|
|
|
|
|
|
Total cash (used in) provided by discontinued operations |
|
|
(48,492 |
) |
|
(38,205 |
) |
|
16,077 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
1,531 |
|
|
7,788 |
|
|
(17,138 |
) |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(47,147 |
) |
|
(84,871 |
) |
|
51,917 |
|
Cash and cash equivalents at beginning of period |
|
|
53,367 |
|
|
138,238 |
|
|
86,321 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
6,220 |
|
$ |
53,367 |
|
$ |
138,238 |
|
|
|
|
|
|
|
|
|
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
A-6
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying HSN, Inc. ("HSNi") as one of those five companies. In these combined financial statements, we refer to the separation transaction herein as the "spin-off." In connection with
the spin-off, HSNi was incorporated as a Delaware corporation in May 2008. HSNi currently does not have any material assets or liabilities, nor does it engage in any business or other
activities and, other than in connection with the spin-off, will not acquire or incur any material assets or liabilities, nor will it engage in any business or other activities. Upon
completion of the spin-off, HSNi will primarily consist of HSN and Cornerstone, the businesses that formerly comprised IAC's Retailing segment. HSN consists of the HSN television network
and HSN.com, and Cornerstone includes the Cornerstone Brands portfolio of leading print catalogs and related websites, as well as a limited number of
retail stores. HSNi will not include the equity investment in Jupiter Shop Channel, the investment in Arcandor AG and the related contingent value right. The businesses to be operated by HSNi
following the spin-off are referred to herein as the "HSNi Businesses." HSNi will also include the entities described below in "Discontinued Operations."
Basis of Presentation
The historical combined financial statements of HSNi and its subsidiaries reflect the contribution or other transfer to HSNi of all of the subsidiaries and assets
and the assumption by HSNi of all of the liabilities relating to the HSNi Businesses in connection with the spin-off and the allocation to HSNi of certain IAC corporate expenses relating
to the HSNi Businesses. Accordingly, the historical combined financial statements of HSNi reflect the historical financial position, results of operations and cash flows of the HSNi Businesses since
their respective dates of acquisition by IAC, based on the historical consolidated financial statements and accounting records of IAC and using the historical results of operations and historical
bases of the assets and liabilities of the HSNi Businesses with the exception of accounting for income taxes. For purposes of these financial statements, income taxes have been computed for HSNi on an
as if stand-alone, separate tax return basis. These financial statements are prepared on a combined, rather than a consolidated, basis because they exclude certain investments and assets that were
owned, either directly or indirectly, by legal entities that comprise the HSNi Businesses. The ownership of these investments and assets will be retained by IAC after the spin-off. These
combined financial statements present IAC's and its subsidiaries net investment in the HSNi Businesses as invested equity in lieu of shareholders' equity. Intercompany transactions and accounts have
been eliminated.
In
the opinion of HSNi's management, the assumptions underlying the historical combined financial statements of HSNi are reasonable. However, this financial information does not
necessarily reflect what the historical financial position, results of operations and cash flows of HSNi would have been had HSNi been a stand-alone company during the periods presented.
Company Overview
HSNi markets and sells a wide range of third party and private label merchandise directly to consumers through (i) television home shopping programming
broadcast on the HSN television network, (ii) catalogs, which consist primarily of the Cornerstone Brands portfolio of leading print catalogs which includes Frontgate, Garnet Hill, Ballard
Designs, Improvements, Smith & Noble, The Territory Ahead and TravelSmith and (iii) websites, which consist primarily of HSN.com and
branded websites operated by Cornerstone Brands. HSNi's television home shopping business and related
A-7
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)
internet
commerce is referred to herein as "HSN" and all catalog operations, including related internet commerce, are collectively referred to herein as "Cornerstone."
HSN
offerings primarily consist of jewelry, apparel & accessories, health & beauty and home & other. Merchandise offered by Cornerstone primarily consists of home
furnishings (including indoor/outdoor furniture, window treatments and other home related goods) and apparel & accessories.
Discontinued Operations
Discontinued operations consist of HSNi Businesses that engaged in television retailing and other forms of television-based commerce in Europe, primarily in
Germany and the United Kingdom. Discontinued operations in Germany consist of EUVÍA, a group of companies that were primarily engaged in television game-based entertainment
and commerce; and Home Shopping Europe GmbH & Co. KG, and its affiliated station HSE24 ("HSE"), a television and internet retailer. Discontinued operations in the United Kingdom
consist of Quiz TV Limited a television game-based entertainment network and iBuy, a television and internet auction formatted retailer.
During
the second quarter of 2005, HSNi sold its 48.6% ownership interest in EUVÍA. During the second quarter of 2006, Quiz TV Limited ceased operations and during the
fourth quarter of 2006, iBuy was classified as held for sale. Additionally, in the second quarter of 2007, both iBuy's assets and HSNi's German TV and internet retailer, HSE, were sold. Accordingly,
discontinued operations in the accompanying combined statements of operations and cash flows include EUVÍA and HSE through June 2, 2005 and June 19, 2007, respectively.
The assets of HSE are included in "Assets held for sale" and the liabilities of HSE are included in "Liabilities held for sale" in the accompanying combined balance sheet at December 31, 2006.
Quiz TV Limited and iBuy are presented as discontinued operations in the accompanying combined balance sheets and combined statements of operations and cash flows for all periods presented. See
Note 10 for a further description of discontinued operations.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue primarily consists of merchandise sales and is reduced by incentive discounts and sales returns to arrive at net sales. In accordance with Staff
Accounting Bulletin 104, revenue is recorded when delivery to the customer has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and rewards of
ownership, which is generally on the date of shipment. HSNi's sales policy allows customers to return merchandise for a full refund or exchange, subject in some cases to restocking fees and exceptions
for certain merchandise. Allowances for returned merchandise and other adjustments (including reimbursed shipping and handling costs) are provided based upon past experience. HSNi believes that actual
returns of product sales have not materially varied from estimates in any of the periods presented. HSNi's estimated return rates were 18.4% in 2007, 17.7% in 2006 and 16.5% in 2005. Sales taxes
collected are not included in revenue.
Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are recorded as revenue. The costs associated with shipping goods to customers are recorded as cost of sales.
A-8
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market instruments.
Accounts Receivable
Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. HSN provides extended payment terms to its customers
known as Flexpay. Flexpay is offered on certain products sold by HSN. Revenue is recorded when delivery to the customer has occurred, at which time HSN collects the first payment, sales tax and all
shipping and handling fees. Subsequent collections are due from customers in 30-day increments payable automatically by credit or debit card. HSN offers Flexpay programs ranging from two
to six interest-free payments. Flexpay receivables consist of outstanding balances owed by customers, less a reserve for uncollectible balances. The balance of Flexpay receivables, net of
allowance, at December 31, 2007 and 2006 was $149.9 million and $119.1 million, respectively. Flexpay sales were 54%, 48% and 48% of total HSN's net merchandise sales for the
years ended December 31, 2007, 2006 and 2005, respectively.
Accounts
receivable outstanding longer than the contractual payment terms are considered past due. HSNi determines its allowance by considering a number of factors, including the length
of time accounts receivable are past due, HSNi's previous loss history and the condition of the general economy. HSNi writes off accounts receivable when they become uncollectible.
Inventories
Inventories, which primarily consist of finished goods, are valued at the lower of cost or market, with the cost being determined based upon the
first-in, first-out method. Cost includes inbound freight and duties and, in the case of HSN, certain allocable general and administrative costs, including certain warehouse
costs. Inventories include approximately $4.9 million and $5.0 million of these allocable general and administrative overhead costs at December 31, 2007 and 2006, respectively,
and approximately $17.8 million, $19.8 million and $19.4 million of such costs were included in "General and administrative expense" in the accompanying combined statements of
operations for the years ended December 31, 2007, 2006 and 2005, respectively. Market is determined on the basis of net realizable value, giving consideration to obsolescence and other factors.
Property and Equipment
Property and equipment, including significant improvements, are recorded at cost. Repairs and maintenance and any gains or losses on dispositions are included in
operations.
Depreciation
is recorded on a straight-line basis to allocate the cost of depreciable assets to operations over their estimated service lives.
Asset Category
|
|
Depreciation Period
|
Computer equipment and capitalized software |
|
3 to 6 Years |
Buildings and leasehold improvements |
|
3 to 39 Years |
Furniture and other equipment |
|
3 to 10 Years |
In
accordance with American Institute of Certified Public Accountants' Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," HSNi capitalizes certain qualified costs incurred in connection with the development of internal use
A-9
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
software.
Capitalization of internal use software costs begins when the preliminary project stage is completed, management with the relevant authority authorizes and commits to the funding of the
software project, and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalized internal use software is depreciated on a
straight-line basis over the estimated useful life of the software, not to exceed three years. Capitalized internal software costs, net of accumulated depreciation, totaled
$24.1 million and $16.6 million at December 31, 2007 and 2006, respectively, and are included in "Property and equipment, net" in the accompanying combined balance sheets.
Goodwill and Indefinite-Lived Intangible Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill
acquired in business combinations is assigned to the reporting units that are expected to benefit from the combination as of the acquisition date.
Goodwill
impairment is determined using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its carrying amount, including
goodwill. In performing the first step, HSNi determines the fair value of its reporting units by using a discounted cash flow ("DCF") analysis. Determining fair value using a DCF analysis requires the
exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. If the fair value of a
reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not required. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test is required to be performed to measure the amount of impairment, if any. The second step of the goodwill impairment test
compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount
equal to that excess.
The
impairment test for indefinite-lived intangible assets involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the
indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of indefinite-lived intangible assets are
determined using a DCF valuation analysis that employs a "relief from royalty" methodology in estimating the fair value of its trade names and trademarks. Significant judgments inherent in this
analysis include the determination of royalty rates, discount rates and the terminal growth rates.
Goodwill
and indefinite-lived intangible assets, primarily trade names and trademarks, are tested annually for impairment as of October 1 or earlier upon the occurrence of certain
events or substantive changes in circumstances. HSNi's 2007 annual impairment assessment did not identify an impairment. HSNi's reporting units are currently operating in dynamic and challenged
industry segments. To illustrate the magnitude of potential impairment charges relative to future changes in estimated fair value, had the estimated fair value of HSNi's reporting units and their
respective indefinite-lived intangible assets been hypothetically lower by 10% as of October 1, 2007 the aggregate book value of goodwill and indefinite-lived intangible assets would have
exceeded fair value by approximately $166.0 million at HSN and $74.0 million at Cornerstone. Had the estimated fair values of HSNi's reporting units and their respective indefinite-lived
intangible assets been hypothetically lower by 20%
A-10
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
as
of October 1, 2007, the book value of goodwill and indefinite lived-intangible assets would have exceeded fair value by approximately $441.0 million at HSN and $156.0 million
at Cornerstone.
Long-Lived Assets and Intangible Assets with Definite Lives
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"),
long-lived assets, including property and equipment and intangible assets with definite lives, are tested for recoverability whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. If the carrying amount is deemed to not be recoverable, an impairment loss is recorded as the amount by which the carrying amount of the long-lived
asset exceeds its fair value. Amortization of definite lived intangible assets is recorded on a straight-line basis over their estimated lives.
Cable and Satellite Distribution Fees
Cable and satellite distribution fees relate to fees paid in connection with annual or multi-year cable and satellite contracts for carriage of HSN's
programming. Fees that are paid upfront are amortized on a straight-line basis over the terms of the respective contracts. Unpaid fees are accrued.
Cable
and satellite distribution fees and amortization totalled $91.8 million, $88.7 million and $70.4 million for the years ended December 31, 2007, 2006 and
2005, respectively, and are included in "Selling and marketing expense" in the accompanying combined statements of operations. Prepaid cable and satellite distribution fees were $5.7 million
and $2.4 million at December 31, 2007 and 2006,
respectively, and are included in "Prepaid expenses and other current assets" in the accompanying combined balance sheets. The long-term portions of upfront payments relating to
multi-year cable and satellite contracts were $11.6 million and $16.2 million at December 31, 2007 and 2006, respectively, and are included in "Other
non-current assets" in the accompanying combined balance sheets. Accrued cable and satellite distribution fees were $32.6 million and $21.0 million at December 31,
2007 and 2006, respectively, and are included in "Accrued expenses and other current liabilities" in the accompanying combined balance sheets.
Advertising
Advertising costs principally represent offline costs, including catalog production and distribution costs, and online advertising costs. Advertising costs are
expensed in the period incurred, except for Cornerstone's direct costs of producing and distributing its catalogs, which are capitalized. These capitalized costs are amortized over the expected future
revenue stream, which is generally three months from the date catalogs are mailed. Such capitalized costs totaled $26.8 million and $27.8 million at of December 31, 2007 and 2006,
respectively, and are included in "Prepaid expenses and other current assets" in the accompanying combined balance sheets. Of these amounts, $18.6 million and $19.4 million at
December 31, 2007 and 2006, respectively, related to catalogs that had not yet been mailed. Advertising expense was $282.5 million, $278.1 million and $224.3 million for
the years ended December 31, 2007, 2006 and 2005, respectively.
A-11
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Amortization of Non-Cash Marketing
Amortization of non-cash marketing consists of non-cash marketing and advertising provided to HSNi by IAC. The non-cash
marketing was secured by IAC from Universal Television as part of the transaction pursuant to which Vivendi Universal Entertainment LLLP ("VUE") was created, and the subsequent transaction by which
IAC sold its partnership interests in VUE. HSNi used the non-cash advertising for television advertising on various NBC Universal network and cable channels without any cash cost.
Income Taxes
HSNi accounts for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely
than not that the deferred tax asset will not be realized. HSNi records interest on potential tax contingencies as a component of income tax expense and records interest net of any applicable related
income tax benefit.
Effective
January 1, 2007, HSNi adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109" ("FIN 48"). As a result of the adoption of FIN 48, HSNi recognizes liabilities for uncertain tax positions based on
the two-step process prescribed by the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is
more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon ultimate settlement.
Foreign Currency Translation and Transaction Gains and Losses
The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency. Local
currency assets and liabilities are translated at the rates of exchange as of the balance sheet date, and local currency revenue and expenses are translated at average rates of exchange during the
period. Resulting translation gains or losses are included as a component of accumulated other comprehensive income (loss), a separate component of invested equity. Transaction gains and losses
arising from transactions denominated in a currency other than the functional currency of the entity are included in the combined statements of operations.
Foreign
currency transaction gains and losses arose from entities that are presented in these statements as discontinued operations and, accordingly, are included in "Income from
discontinued operations, net of tax" in the accompanying combined statements of operations.
Stock-Based Compensation
Effective January 1, 2006, HSNi adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the
modified prospective transition method and therefore has not restated results for prior periods. See Note 4 for a further description of the impact of the adoption of SFAS 123R and Staff
Accounting Bulletin No. 107 ("SAB 107").
A-12
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Estimates
HSNi's management is required to make certain estimates and assumptions during the preparation of the combined financial statements in accordance with U.S.
generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of
the combined financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
Significant
estimates underlying the accompanying combined financial statements include: the determination of the lower of cost or market adjustment for inventory; sales returns and
other revenue allowances; the allowance for doubtful accounts; the recoverability of long-lived assets; the recovery of goodwill and intangible assets; the determination of deferred income
taxes, including related valuation allowances; and assumptions related to the determination of stock-based compensation.
Certain Risks and Concentrations
HSNi's business is subject to certain risks and concentrations including dependence on third-party technology providers, exposure to risks associated with online
commerce security and credit card fraud. HSNi also depends on third-party service providers for processing certain fulfillment services.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting
Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. SFAS No. 160 will be applied
prospectively, except as it relates to disclosures, for which the effects will be applied retrospectively for all periods presented. Early adoption is not permitted. HSNi is currently assessing the
impact of SFAS No. 160 on its combined financial position, results of operations and cash flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces FASB Statement No. 141. SFAS No. 141R
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest
in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS
No. 141R applies prospectively to business combinations in fiscal years beginning after December 15, 2008. Early adoption is not permitted. HSNi is currently assessing the potential
impact, if any, of the adoption of SFAS No. 141R on its combined financial position, results of operations and cash flows.
A-13
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 3BUSINESS ACQUISITIONS
On April 1, 2005, HSNi completed its acquisition of Cornerstone Brands, a portfolio of leading print catalogs and online retailing sites that sell home
products and leisure and casual apparel, for approximately $715 million, principally in cash. The acquisition was funded by IAC and such funding has
been recorded as a transfer from IAC within the statement of invested equity. Cornerstone Brands is included in HSNi's Cornerstone reporting segment. HSNi performed valuations of identifiable
intangible assets acquired. This valuation identified $309.1 million of intangible assets other than goodwill. The goodwill recognized amounted to $456.4 million. The trade names
acquired were identified as indefinite-lived intangible assets and $269.4 million was allocated to these assets. Intangibles with definite lives included customer lists ($31.4 million),
existing technology ($4.1 million), vendor and supply agreements ($3.0 million) and intellectual property ($1.2 million) and are being amortized over a weighted-average period of
4.5 years. None of the amount allocated to goodwill is tax deductible. The purchase price paid for Cornerstone Brands was based on historical as well as expected performance metrics. HSNi
viewed Cornerstone Brands' revenue, operating income, Operating Income Before Amortization, net income and cash flow as its most important valuation metrics. HSNi agreed to a purchase price that
resulted in recognition of a significant amount of goodwill for a number of reasons including: Cornerstone Brands' market position and brands; Cornerstone Brands' business model which complements the
business model of HSNi; growth opportunities in the markets in which Cornerstone Brands operates; and Cornerstone Brands' distinctly unique, proprietary and exclusive product lines which should enable
HSNi to grow. As a result, a significant portion of the purchase price was based on the expected financial performance of Cornerstone Brands, and not the asset value on the books of Cornerstone Brands
at the time of the acquisition.
Pro Forma Results
The following unaudited pro forma condensed combined financial information for the year ended December 31, 2005, is presented to show the results of HSNi
to give effect to the acquisition of Cornerstone Brands completed on April 1, 2005 as if the transaction had occurred on January 1, 2005. The pro forma results include certain
adjustments, including increased amortization related to intangible assets and compensation expense, and are not necessarily indicative of what the results would have been had the transaction actually
occurred on the aforementioned date.
|
|
Year Ended December 31, 2005
|
|
|
(In thousands)
|
Revenue |
|
$ |
2,852,550 |
Net income |
|
|
221,695 |
NOTE 4SFAS 123R AND STOCK-BASED COMPENSATION
The equity awards described below principally relate to awards to HSNi employees that were granted under various IAC stock and annual incentive plans.
Effective
January 1, 2006, HSNi adopted SFAS 123R using the modified prospective transition method and has applied the classification provisions of SAB 107 regarding
the SEC's interpretation of SFAS 123R and the valuation of share-based payments for public companies in its adoption of SFAS 123R.
The
adoption of SFAS 123R did not impact the amount of stock-based compensation expense recorded in the accompanying combined statements of operations as HSNi had previously
adopted the
A-14
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 4SFAS 123R AND STOCK-BASED COMPENSATION (Continued)
expense
recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). On August 9, 2005, HSNi began recognizing expense for all stock-based
compensation instruments granted prior to January 1, 2003 due to the modification of all such instruments in connection with the Expedia spin-off.
Prior
to the adoption of SFAS 123R, the entire tax benefit from stock-based compensation was reported as a component of operating cash flows. Upon the adoption of
SFAS 123R, tax benefits resulting from tax deductions in excess of the stock-based compensation expense recognized in the combined statement of operations are reported as a component of
financing cash flows. For the years ended December 31, 2007 and 2006, excess tax benefits from stock-based compensation of $2.4 million and $2.3 million, respectively, are
included as a component of financing cash flows. For the year ended December 31, 2005, excess tax benefits from stock-based compensation of $49.9 million is included as a component of
operating cash flows.
Non-cash
stock-based compensation expense related to equity awards is included in the following line items in the accompanying combined statements of operations for the years
ended December 31, 2007, 2006 and 2005 (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cost of sales |
|
$ |
937 |
|
$ |
755 |
|
$ |
524 |
|
Selling and marketing expense |
|
|
1,025 |
|
|
1,117 |
|
|
1,143 |
|
General and administrative expense |
|
|
10,189 |
|
|
9,867 |
|
|
12,057 |
|
Production and programming expense |
|
|
9 |
|
|
7 |
|
|
1 |
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation expense before income taxes |
|
|
12,160 |
|
|
11,746 |
|
|
13,725 |
|
Income tax benefit |
|
|
(4,434 |
) |
|
(4,017 |
) |
|
(4,322 |
) |
|
|
|
|
|
|
|
|
Non-cash stock-based compensation expense after income taxes |
|
$ |
7,726 |
|
$ |
7,729 |
|
$ |
9,403 |
|
|
|
|
|
|
|
|
|
The
form of awards granted to HSNi employees are principally restricted stock units ("RSUs") and performance stock units ("PSUs"). RSUs and PSUs are awards in the form of phantom shares
or units, denominated in a hypothetical equivalent number of shares of IAC common stock and with the value of each award equal to the fair value of IAC common stock at the date of grant. RSUs may be
settled in cash, stock or both, as determined by IAC's Compensation Committee at the time of grant. All outstanding award agreements provide for settlement, upon vesting, in stock for U.S. employees
and in cash for non-U.S. employees. Each RSU, PSU and restricted stock grant is subject to service-based vesting, where a specific period of continued employment must pass before an award
vests, and certain grants also include performance-based vesting, where certain performance targets set at the time of grant must be achieved before an award vests. HSNi recognizes expense for all
RSU, PSU and restricted stock for which vesting is considered probable. For RSUs and restricted stock grants to U.S. employees, the accounting charge is measured at the grant date as the fair value of
IAC common stock and expensed ratably as non-cash compensation over the vesting term. For PSU grants to U.S. employees, the expense is measured at the grant date as the fair value of IAC
common stock and expensed as non-cash compensation when the performance targets are considered probable of being achieved. The expense associated with RSU and PSU awards to
non-U.S. employees is initially measured at fair value at the grant date and expensed ratably over the vesting term, subject to mark-to-market adjustments for
changes in the price of IAC common stock, as compensation expense
A-15
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 4SFAS 123R AND STOCK-BASED COMPENSATION (Continued)
within
general and administrative expense. The expense related to awards to international employees totaled $0.1 million, $0.2 million and $0.1 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Cash payments related to awards to international employees totaled $0.2 million, $0.2 million and $0.1 million for the years
ended December 31, 2007, 2006 and 2005, respectively.
The
amount of stock-based compensation expense recognized in the combined statement of operations is reduced by estimated forfeitures, as the amount recorded is based on awards
ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods if the actual forfeiture rate differs
from the estimated rate.
In
connection with the Expedia spin-off, all of HSNi's outstanding share-based compensation were modified. Accordingly, on August 9, 2005, HSNi recorded a
pre-tax modification charge of $3.5 million related to the treatment of vested stock options. In conjunction with the Expedia spin-off and the adoption of
SFAS 123R, HSNi conducted an assessment of certain assumptions used in determining the expense related to stock-based compensation which was completed in the third quarter of 2005. The
cumulative effect of a change in HSNi's estimate related to the number of stock-based awards that were expected to vest resulted in a reduction in stock-based compensation expense of
$0.7 million. The after-tax effect of this change in estimate on net income was $0.4 million.
As
of December 31, 2007, there was approximately $23.0 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards. This
cost is expected to be recognized over a weighted-average period of approximately 2.7 years. At December 31, 2007 there were less than 0.1 million awards outstanding to
non-U.S. employees.
In connection with the acquisition of Cornerstone Brands by IAC in 2005 certain members of Cornerstone's Brands management were granted restricted common equity in Cornerstone Brands.
These awards were granted on April 1, 2005 and were initially measured at fair value, which is being amortized to expense over the vesting period. These awards vest ratably over four years, or
earlier based upon the occurrence of certain prescribed events. The awards vest in non-voting restricted common shares of Cornerstone Brands.
These shares are subject to a put right by the holders, which is not exercisable until the first quarter of 2010 and annually thereafter, and a call right by IAC, which is not
exercisable until the first quarter of 2012 and annually thereafter. The value of these shares upon exercise of the put or call is equal to their fair market value, determined by negotiation or
arbitration, reduced by the accreted value of the preferred interest that was taken by IAC upon the purchase of Cornerstone Brands. The initial value of the preferred interest was equal to the
acquisition price of Cornerstone Brands. The preferred interest accretes value at a 15% annual rate. Upon exercise of the put or call the consideration is payable in IAC shares or cash or a
combination thereof at IAC's option. As of December 31, 2007, these awards are significantly out of the money and are not expected to result in any value. Prior to the separation, this put and
call arrangement will be modified so that the consideration payable in IAC's shares will be replaced with HSNi shares.
The unrecognized compensation cost related to these equity awards is $0.3 million at December 31, 2007.
A-16
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands):
|
|
December 31,
|
|
|
2007
|
|
2006
|
Goodwill |
|
$ |
2,884,389 |
|
$ |
2,883,769 |
Intangible assets with indefinite lives |
|
|
554,848 |
|
|
556,348 |
Intangible assets with definite lives, net |
|
|
16,814 |
|
|
27,995 |
|
|
|
|
|
|
Total goodwill and intangible assets, net |
|
$ |
3,456,051 |
|
$ |
3,468,112 |
|
|
|
|
|
Intangible
assets with indefinite lives relate principally to trade names and trademarks acquired in various acquisitions. At December 31, 2007, intangible assets with definite
lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted-Average
Amortization Life
(Years)
|
Distribution agreements |
|
$ |
159,268 |
|
$ |
(159,268 |
) |
$ |
|
|
4.1 |
Customer lists |
|
|
36,773 |
|
|
(22,468 |
) |
|
14,305 |
|
4.7 |
Merchandise agreements |
|
|
33,257 |
|
|
(33,257 |
) |
|
|
|
4.7 |
Technology |
|
|
28,007 |
|
|
(27,665 |
) |
|
342 |
|
3.9 |
Other |
|
|
7,409 |
|
|
(5,242 |
) |
|
2,167 |
|
8.5 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
264,714 |
|
$ |
(247,900 |
) |
$ |
16,814 |
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006, intangible assets with definite lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted-Average
Amortization Life
(Years)
|
Distribution agreements |
|
$ |
159,268 |
|
$ |
(159,268 |
) |
$ |
|
|
4.1 |
Customer lists |
|
|
36,773 |
|
|
(16,013 |
) |
|
20,760 |
|
4.7 |
Merchandise agreements |
|
|
33,257 |
|
|
(30,865 |
) |
|
2,392 |
|
4.7 |
Technology |
|
|
28,007 |
|
|
(26,298 |
) |
|
1,709 |
|
3.9 |
Other |
|
|
7,409 |
|
|
(4,275 |
) |
|
3,134 |
|
8.5 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
264,714 |
|
$ |
(236,719 |
) |
$ |
27,995 |
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets with definite lives is computed on a straight-line basis and, based on December 31, 2007 balances, such amortization for the next
four years is estimated to be as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
7,463 |
2009 |
|
|
6,844 |
2010 |
|
|
2,132 |
2011 |
|
|
375 |
|
|
|
|
|
$ |
16,814 |
|
|
|
A-17
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5GOODWILL AND INTANGIBLE ASSETS (Continued)
The
following table presents the balance of goodwill by segment, including the changes in carrying amount of goodwill, for the year ended December 31, 2007 (in thousands):
|
|
Balance as of
January 1, 2007
|
|
Additions
|
|
(Deductions)
|
|
Balance as of
December 31, 2007
|
HSN |
|
$ |
2,390,330 |
|
$ |
|
|
$ |
(133 |
) |
$ |
2,390,197 |
Cornerstone |
|
|
493,439 |
|
|
865 |
|
|
(112 |
) |
|
494,192 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,883,769 |
|
$ |
865 |
|
$ |
(245 |
) |
$ |
2,884,389 |
|
|
|
|
|
|
|
|
|
The
following table presents the balance of goodwill by segment, including the changes in carrying amount of goodwill, for the year ended December 31, 2006 (in thousands):
|
|
Balance as of January 1, 2006
|
|
Additions
|
|
(Deductions)
|
|
Balance as of December 31, 2006
|
HSN |
|
$ |
2,390,326 |
|
$ |
4 |
|
$ |
|
|
$ |
2,390,330 |
Cornerstone |
|
|
499,908 |
|
|
|
|
|
(6,469 |
) |
|
493,439 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,890,234 |
|
$ |
4 |
|
$ |
(6,469 |
) |
$ |
2,883,769 |
|
|
|
|
|
|
|
|
|
Deductions
principally relate to a reduction in acquired tax liabilities and the income tax benefit realized pursuant to the exercise of stock options assumed in a business acquisition
that were vested at the transaction date and are treated as a reduction in goodwill when the income tax deductions are realized.
NOTE 6PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Capitalized software |
|
$ |
169,709 |
|
$ |
159,170 |
|
Computer and broadcast equipment |
|
|
81,821 |
|
|
73,600 |
|
Buildings and leasehold improvements |
|
|
72,815 |
|
|
65,098 |
|
Furniture and other equipment |
|
|
58,058 |
|
|
51,487 |
|
Projects in progress |
|
|
19,572 |
|
|
18,773 |
|
Land |
|
|
11,778 |
|
|
11,617 |
|
|
|
|
|
|
|
|
|
|
413,753 |
|
|
379,745 |
|
Less: accumulated depreciation and amortization |
|
|
(257,948 |
) |
|
(236,536 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
155,805 |
|
$ |
143,209 |
|
|
|
|
|
|
|
A-18
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 7ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
December 31,
|
|
|
2007
|
|
2006
|
Accrued sales returns |
|
$ |
37,596 |
|
$ |
35,942 |
Accrued cable and satellite distribution fees |
|
|
32,637 |
|
|
20,968 |
Accrued fulfillment expenses |
|
|
25,624 |
|
|
21,945 |
Accrued compensation and benefits |
|
|
15,502 |
|
|
17,544 |
Other accrued expenses and current liabilities |
|
|
75,142 |
|
|
74,039 |
|
|
|
|
|
|
Total accrued expenses and other current liabilities |
|
$ |
186,501 |
|
$ |
170,438 |
|
|
|
|
|
NOTE 8INCOME TAXES
HSNi is a member of IAC's consolidated federal and state tax returns. In all periods presented, current and deferred tax expense has been computed for HSNi on a
separate return basis. HSNi's share of IAC's consolidated federal and state tax return liabilities have been reflected within cash flows from operating activities in the accompanying combined
statements of cash flows.
The
components of the provision for income taxes attributable to continuing operations are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Current income tax provision: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
68,969 |
|
$ |
85,370 |
|
$ |
93,678 |
|
State |
|
|
7,388 |
|
|
9,122 |
|
|
11,577 |
|
|
|
|
|
|
|
|
|
Current income tax provision |
|
|
76,357 |
|
|
94,492 |
|
|
105,255 |
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit) provision: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(10,683 |
) |
|
(13,423 |
) |
|
(24,844 |
) |
State |
|
|
(1,120 |
) |
|
(1,859 |
) |
|
(14,101 |
) |
|
|
|
|
|
|
|
|
Deferred income tax (benefit) |
|
|
(11,803 |
) |
|
(15,282 |
) |
|
(38,945 |
) |
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
64,554 |
|
$ |
79,210 |
|
$ |
66,310 |
|
|
|
|
|
|
|
|
|
Current
income taxes payable has been reduced by $2.4 million, $2.3 million and $49.9 million for the years ended December 31, 2007, 2006 and 2005,
respectively, for tax deductions attributable to stock-
based compensation. The related income tax benefits of this stock-based compensation were recorded as amounts charged or credited to invested capital or a reduction in goodwill.
The
tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006
are presented below (in
A-19
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 8INCOME TAXES (Continued)
thousands).
The valuation allowance is related to items for which it is more likely than not that the tax benefit will not be realized.
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
Provision for accrued expenses |
|
$ |
35,631 |
|
$ |
25,838 |
|
Inventories |
|
|
14,916 |
|
|
10,628 |
|
Investments in nonconsolidated subsidiaries |
|
|
6,665 |
|
|
7,224 |
|
Stock-based compensation |
|
|
5,451 |
|
|
4,953 |
|
Other |
|
|
2,997 |
|
|
821 |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
65,660 |
|
|
49,464 |
|
Less valuation allowance |
|
|
(6,222 |
) |
|
(6,222 |
) |
|
|
|
|
|
|
Net deferred tax assets |
|
|
59,438 |
|
|
43,242 |
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Intangible and other assets |
|
|
(840,938 |
) |
|
(844,042 |
) |
Prepaid expenses |
|
|
(10,805 |
) |
|
(9,276 |
) |
Property and equipment |
|
|
(3,058 |
) |
|
(3,631 |
) |
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(854,801 |
) |
|
(856,949 |
) |
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(795,363 |
) |
$ |
(813,707 |
) |
|
|
|
|
|
|
At December 31, 2007, HSNi did not have any significant net operating loss carryforwards. At December 31, 2007, HSNi had a valuation allowance of approximately
$6.2 million primarily related to unrealized capital losses for which it is more likely than not that the tax benefit will not be realized. There was no change in the valuation allowance for
the year ended December 31, 2007.
A
reconciliation of the income tax provision to the amounts computed by applying the statutory federal income tax rate to earnings from continuing operations before income taxes and
minority interest is shown as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Income tax provision at the federal statutory rate of 35% |
|
$ |
59,425 |
|
$ |
74,460 |
|
$ |
67,684 |
|
State income taxes, net of effect of federal tax benefit |
|
|
4,182 |
|
|
4,721 |
|
|
6,031 |
|
Change in state effective tax rate |
|
|
|
|
|
|
|
|
(7,672 |
) |
Other, net |
|
|
947 |
|
|
29 |
|
|
267 |
|
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
64,554 |
|
$ |
79,210 |
|
$ |
66,310 |
|
|
|
|
|
|
|
|
|
HSNi
adopted the provisions of FIN 48 effective January 1, 2007. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial statements. FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The cumulative effect of the adoption resulted in a decrease of $0.2 million to invested capital. A
A-20
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 8INCOME TAXES (Continued)
reconciliation
of the beginning and ending amount of unrecognized tax benefits, excluding interest, is as follows (in thousands):
Balance at January 1, 2007 |
|
$ |
4,316 |
Additions based on tax positions related to the current year |
|
|
2,298 |
Additions for tax positions of prior years |
|
|
2,330 |
Reductions for tax positions of prior years |
|
|
|
Settlements |
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
8,944 |
|
|
|
As
of January 1, 2007 and December 31, 2007, the unrecognized tax benefits, including interest, were $5.2 million and $11.7 million, respectively. Included in
unrecognized tax benefits at December 31, 2007 is approximately $8.8 million for tax positions included in IAC's consolidated tax return filings. Included within "Receivables from IAC
and subsidiaries" in the accompanying combined balance sheet at
December 31, 2007 is approximately $11.6 million of unrecognized tax benefits and related interest that will remain a liability of IAC after the spin-off. Also included in
unrecognized tax benefits at December 31, 2007 is approximately $8.8 million for tax positions which the ultimate deductibility is highly certain but for which there is uncertainty about
the timing of such deductibility.
HSNi
recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. Included in income tax expense from continuing operations for the year
ended December 31, 2007 is $1.2 million, net of related deferred taxes of $0.7 million, for interest on unrecognized tax benefits. At January 1, 2007 and
December 31, 2007 HSNi has accrued $0.9 million and $2.8 million, respectively for the payment of interest. There are no material accruals for penalties.
By
virtue of previously filed separate company and consolidated tax returns with IAC, HSNi is routinely under audit by federal, state, local and foreign authorities in the area of income
tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient
to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the
reserves for tax contingencies and the amounts owed by HSNi are recorded in the period they become known.
The
Internal Revenue Service ("IRS") is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of
HSNi. The statute of limitations for these years has been extended to December 31, 2008. Various IAC consolidated tax returns filed with state, local and foreign jurisdictions are currently
under examination, the most significant of which are Florida, New York state and New York City, for various tax years after December 31, 2001. These examinations are expected to be completed by
late 2008.
HSNi
believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $2.3 million within twelve months of the current reporting date due
to the reversal of deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits cannot be
made, but are not expected to be significant.
A-21
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 9SEGMENT INFORMATION
The overall concept that HSNi employs in determining its operating segments and related financial information is to present them in a manner consistent with how
the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of
products or services offered or the target market. HSNi has two operating segments, HSN and Cornerstone. Entities included in discontinued operations, as described in Note 1 and further in
Note 10, are excluded from the below schedules except for the schedule of assets.
HSNi's
primary metric is Operating Income Before Amortization, which is defined as operating income excluding, if applicable: (1) non-cash compensation expense and
amortization of non-cash marketing, (2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions and (4) one-time
items. HSNi believes this measure is useful to investors because it represents the combined operating results from HSNi's segments, taking into account depreciation, which it believes is an ongoing
cost of doing business, but excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the
impact to HSNi's statement of operations of certain expenses, including non-cash compensation, amortization of non-cash marketing and acquisition-related accounting.
The
following tables reconcile Operating Income Before Amortization to operating income for HSNi's reporting segments and to net income in total (in thousands):
|
|
Year Ended December 31, 2007
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization
of Non-Cash
Marketing
|
|
Amortization of
Intangibles
|
|
Operating
Income
|
|
HSN |
|
$ |
148,303 |
|
$ |
(6,411 |
) |
$ |
(4,442 |
) |
$ |
(2,584 |
) |
$ |
134,866 |
|
Cornerstone |
|
|
50,771 |
|
|
(5,749 |
) |
|
|
|
|
(10,097 |
) |
|
34,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
199,074 |
|
$ |
(12,160 |
) |
$ |
(4,442 |
) |
$ |
(12,681 |
) |
|
169,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
169,787 |
|
Income tax provision |
|
|
(64,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
105,233 |
|
Gain on sale of discontinued operations, net of tax |
|
|
30,572 |
|
Income from discontinued operations, net of tax |
|
|
28,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
164,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-22
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 9SEGMENT INFORMATION (Continued)
|
|
Year Ended December 31, 2006
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization of
Intangibles
|
|
Operating
Income
|
|
HSN |
|
$ |
193,139 |
|
$ |
(4,733 |
) |
$ |
(24,502 |
) |
$ |
163,904 |
|
Cornerstone |
|
|
66,027 |
|
|
(7,013 |
) |
|
(9,722 |
) |
|
49,292 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
259,166 |
|
$ |
(11,746 |
) |
$ |
(34,224 |
) |
|
213,196 |
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
212,742 |
|
Income tax provision |
|
|
(79,210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
133,532 |
|
Loss from discontinued operations, net of tax |
|
|
(10,715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
122,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization of
Intangibles
|
|
Operating
Income
|
|
HSN |
|
$ |
220,013 |
|
$ |
(8,110 |
) |
$ |
(52,109 |
) |
$ |
159,794 |
|
Cornerstone |
|
|
48,308 |
|
|
(5,615 |
) |
|
(7,335 |
) |
|
35,358 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
268,321 |
|
$ |
(13,725 |
) |
$ |
(59,444 |
) |
|
195,152 |
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(1,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
193,387 |
|
Income tax provision |
|
|
(66,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
127,077 |
|
Gain on sale of discontinued operations, net of tax |
|
|
73,335 |
|
Income from discontinued operations, net of tax |
|
|
22,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
223,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
HSN |
|
$ |
1,892,582 |
|
$ |
1,884,650 |
|
$ |
1,887,661 |
|
Cornerstone |
|
|
1,016,091 |
|
|
994,621 |
|
|
783,743 |
|
Inter-segment elimination |
|
|
(431 |
) |
|
(1,317 |
) |
|
(453 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,908,242 |
|
$ |
2,877,954 |
|
$ |
2,670,951 |
|
|
|
|
|
|
|
|
|
HSNi does not report revenue from external customers for each product or each group of similar products as it is impracticable to do so.
A-23
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 9SEGMENT INFORMATION (Continued)
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Assets: |
|
|
|
|
|
|
HSN |
|
$ |
3,205,428 |
|
$ |
3,195,255 |
Cornerstone |
|
|
1,011,923 |
|
|
981,976 |
Discontinued operations |
|
|
3,280 |
|
|
280,936 |
|
|
|
|
|
|
Total |
|
$ |
4,220,631 |
|
$ |
4,458,167 |
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Depreciation and amortization of intangibles and cable and satellite distribution fees: |
|
|
|
|
|
|
|
|
|
HSN |
|
$ |
32,855 |
|
$ |
83,150 |
|
$ |
157,726 |
Cornerstone |
|
|
19,055 |
|
|
17,912 |
|
|
13,066 |
|
|
|
|
|
|
|
|
Total |
|
$ |
51,910 |
|
$ |
101,062 |
|
$ |
170,792 |
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
HSN |
|
$ |
34,288 |
|
$ |
23,415 |
|
$ |
25,998 |
Cornerstone |
|
|
14,426 |
|
|
12,570 |
|
|
10,039 |
|
|
|
|
|
|
|
|
Total |
|
$ |
48,714 |
|
$ |
35,985 |
|
$ |
36,037 |
|
|
|
|
|
|
|
HSNi
maintains operations principally in the United States. Geographic information about the United States and international territories is presented below:
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Revenue |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
2,907,053 |
|
$ |
2,876,840 |
|
$ |
2,668,779 |
|
All other countries |
|
|
1,189 |
|
|
1,114 |
|
|
2,172 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,908,242 |
|
$ |
2,877,954 |
|
$ |
2,670,951 |
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Long-lived assets (excluding goodwill and intangible assets): |
|
|
|
|
|
|
|
United States |
|
$ |
167,444 |
|
$ |
159,413 |
|
All other countries |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
167,444 |
|
$ |
159,413 |
|
|
|
|
|
A-24
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 10DISCONTINUED OPERATIONS
During the second quarter of 2006, Quiz TV Limited ceased operations. During the fourth quarter of 2006, iBuy was classified as held for sale and its assets were
subsequently sold during the second quarter of 2007. Additionally, on June 19, 2007, HSNi sold HSE for approximately $216.5 million, which resulted in a pre-tax gain of
$45.7 million and an after-tax gain of $30.6 million. The pre-tax gain included $22.8 million of foreign currency translation gains that were recognized
into earnings at the time of the sale. In June 2005, HSNi sold its 48.6% ownership in EUVÍA for approximately $204.0 million, which resulted in a pre-tax gain of
$127.1 million and an after-tax gain of $73.3 million. Accordingly, discontinued operations
in the accompanying combined statements of operations include Quiz TV Limited, iBuy and HSE for all periods presented and EUVÍA through June 2, 2005.
The
net revenue and net income (loss), net of the effect of any minority interest, for the aforementioned discontinued operations for the applicable periods were as follows (in
thousands):
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net revenue |
|
$ |
192,701 |
|
$ |
387,281 |
|
$ |
408,871 |
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
$ |
28,786 |
|
$ |
(9,511 |
) |
$ |
43,099 |
|
Income tax benefit (provision) |
|
|
213 |
|
|
(1,204 |
) |
|
(14,362 |
) |
Minority interest in income of consolidated subsidiaries |
|
|
|
|
|
|
|
|
(5,928 |
) |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
28,999 |
|
$ |
(10,715 |
) |
$ |
22,809 |
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net of tax, in 2007 primarily includes the income of HSE. Loss from discontinued operations, net of tax, in 2006 primarily includes the losses of
iBuy and Quiz TV Limited, partially offset by the income of HSE. Income from discontinued operations, net of tax, in 2005 primarily includes the income of HSE and EUVÍA.
The
assets and liabilities of HSE at December 31, 2006 have been classified in the accompanying combined balance sheet as "Assets held for sale" and "Liabilities held for sale."
Such net assets held for sale consist of the following (in thousands):
|
|
December 31,
2006
|
|
Current assets |
|
$ |
81,834 |
|
Goodwill |
|
|
122,721 |
|
Other non-current assets |
|
|
22,325 |
|
|
|
|
|
Total assets held for sale |
|
|
226,880 |
|
|
|
|
|
Current liabilities |
|
|
(56,353 |
) |
Other long term liabilities |
|
|
(7,992 |
) |
|
|
|
|
Total liabilities held for sale |
|
|
(64,345 |
) |
|
|
|
|
Total net assets held for sale |
|
$ |
162,535 |
|
|
|
|
|
Cash
flows from discontinued operations are presented separately in the accompanying combined statements of cash flows. HSNi does not expect future cash flows associated with existing
discontinued operations to be material.
A-25
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 11DERIVATIVE INSTRUMENTS
During the second quarter of 2003, one of HSNi's foreign subsidiaries entered into a five-year foreign exchange forward contract with a notional
amount of $38.6 million, which was used to hedge against the change in value of a liability denominated in a currency other than the subsidiary's functional currency. This derivative contract
was designated as a cash flow hedge for accounting purposes and foreign exchange remeasurement gains and losses related to the contract and liability were recognized each period in the statement of
operations and were offsetting. In addition, the remaining effective portion of the derivative gain or loss was recorded in other comprehensive income until the derivative liability was extinguished
in June 2007 in connection with the sale of HSE. Subsequent to the sale of HSE, HSNi does not have any significant exposure to foreign currency risk and does not hold any derivative instruments at
December 31, 2007.
NOTE 12COMMITMENTS
HSNi leases satellite transponders, computers, warehouse and office space, equipment and services used in connection with its operations under various operating
leases, many of which contain escalation clauses.
Future
minimum payments under operating lease agreements are as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
29,832 |
2009 |
|
|
25,482 |
2010 |
|
|
23,222 |
2011 |
|
|
17,218 |
2012 |
|
|
15,302 |
Thereafter |
|
|
20,115 |
|
|
|
|
Total |
|
$ |
131,171 |
|
|
|
Expenses
charged to operations under these agreements were $29.3 million, $28.7 million and $25.1 million for the years ended December 31, 2007, 2006 and
2005, respectively.
HSNi
also has funding commitments that could potentially require its performance in the event of demands by third parties or contingent events, as follows (in thousands):
|
|
Amount of Commitment Expiration Per Period
|
|
|
Total Amounts Committed
|
|
Less Than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than 5 Years
|
Letters of credit and surety bonds |
|
$ |
25,390 |
|
$ |
25,078 |
|
$ |
|
|
$ |
312 |
|
$ |
|
Purchase obligations |
|
|
135,023 |
|
|
43,871 |
|
|
80,698 |
|
|
10,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments |
|
$ |
160,413 |
|
$ |
68,949 |
|
$ |
80,698 |
|
$ |
10,766 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The
letters of credit ("LOCs") primarily consist of trade LOCs, which are used for inventory purchases. Trade LOCs are guarantees of payment based upon the delivery of goods. The surety
bonds primarily consist of customs bonds, which relate to the import of merchandise into the United States.
A-26
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 12COMMITMENTS (Continued)
The
purchase obligations primarily relate to cable contracts and include obligations for future cable distribution and commission guarantees.
NOTE 13CONTINGENCIES
In the ordinary course of business, HSNi is a party to various lawsuits. HSNi establishes reserves for specific legal matters when it determines that the
likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not
probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against HSNi, including claims where an unfavorable outcome is
reasonably possible, will not have a material impact on the liquidity, results of operations, or financial condition of HSNi, these matters are subject to inherent uncertainties and management's view
of these matters may change in the future. HSNi also evaluates other
contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 8 for discussion related to income tax contingencies.
NOTE 14FINANCIAL INSTRUMENTS
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents |
|
$ |
6,220 |
|
$ |
6,220 |
|
$ |
53,367 |
|
$ |
53,367 |
|
Accounts receivable, net |
|
|
192,609 |
|
|
192,609 |
|
|
158,416 |
|
|
158,416 |
|
Letters of credit and surety bonds |
|
|
N/A |
|
|
(25,390 |
) |
|
N/A |
|
|
(29,537 |
) |
The
carrying amount of cash and cash equivalents reflected in the accompanying combined balance sheets approximate fair value as they are maintained at high quality financial
institutions. The majority of HSNi's receivables result from the Flexpay program, which is further described in Note 2 to the combined financial statements. These receivables approximate fair
value as they are short-term in nature and are generally settled within two to six months after the sale.
NOTE 15SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Non-Cash Transactions for 2007
On June 19, 2007, in consideration for the sale of HSE to Arcandor AG ("ARO"), formerly known as KarstadtQuelle AG, HSNi received approximately
5.5 million shares of ARO stock valued at €141 million (the "ARO Shares"), plus additional consideration in the form of a contingent value right, that has a value of up
to €54 million within three years. In accordance with the terms of the spin-off, the ARO Shares and the contingent value right were transferred to IAC in 2007. This
transfer totaled approximately $217.2 million, of which $190.1 million related to the ARO Shares and $27.1 million related to the contingent value right, and is included in "Net
transfers to IAC" in the accompanying combined statements of invested equity.
A-27
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 15SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Supplemental Disclosure of Cash Flow Information:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
Income tax payments including amounts paid to IAC for HSNi's share of IAC's consolidated tax liability |
|
$ |
84,516 |
|
$ |
94,383 |
|
$ |
130,396 |
|
|
Income tax refunds |
|
|
(761 |
) |
|
(3,176 |
) |
|
(665 |
) |
NOTE 16RELATED PARTY TRANSACTIONS
HSNi's expenses include allocations from IAC of costs associated with IAC's accounting, treasury, legal, tax, corporate support, human resources and internal
audit functions. These expenses were allocated based on the ratio of HSNi's revenue as a percentage of IAC's total revenue. Allocated costs were $8.1 million, $6.8 million and
$7.2 million in 2007, 2006 and 2005, respectively, and are included in "General and administrative expense" in the accompanying combined statements of operations. It is not practicable to
determine the amounts of these expenses that would have been incurred had HSNi operated as an unaffiliated entity. In the opinion of management, the allocation method is reasonable.
During
2007, IAC provided HSNi with non-cash advertising totaling $4.4 million. See the amortization of non-cash marketing discussion in Note 2 for
a further description of this arrangement.
In
accordance with the terms of the spin-off, HSNi transferred its investment in ARO stock and related derivative asset to IAC. See Note 15 for a further description
of this transfer.
The
portion of the interest expense reflected in the combined statements of operations that is intercompany in nature was $1.7 million, $2.4 million and $1.8 million
for the years ended December 31, 2007, 2006 and 2005, respectively. This intercompany interest expense, which is included in discontinued operations, arose from the transfer of cash from IAC to
HSNi that occurred in connection with IAC's treasury operations.
An
analysis of HSNi's receivables from IAC and subsidiaries is as follows (in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Receivables from IAC and subsidiaries, beginning of year |
|
$ |
1,483,873 |
|
$ |
1,305,373 |
|
$ |
358,947 |
|
Cash transfers to IAC related to its centrally managed U.S. treasury function |
|
|
193,742 |
|
|
252,587 |
|
|
1,017,439 |
|
Interest expense |
|
|
(1,728 |
) |
|
(2,428 |
) |
|
(1,793 |
) |
Employee equity instruments and associated tax withholdings |
|
|
4,408 |
|
|
4,225 |
|
|
1,598 |
|
Taxes (excludes tax withholdings associated with employee equity instruments) |
|
|
(9,788 |
) |
|
(1,269 |
) |
|
(3,486 |
) |
Goodwill |
|
|
|
|
|
(15 |
) |
|
(9,590 |
) |
Amortization of non-cash marketing |
|
|
(4,442 |
) |
|
|
|
|
|
|
Allocation of non-cash compensation expense |
|
|
(11,850 |
) |
|
(11,246 |
) |
|
(13,312 |
) |
Administrative expenses and other |
|
|
(73,058 |
) |
|
(63,354 |
) |
|
(44,430 |
) |
|
|
|
|
|
|
|
|
Receivables from IAC and subsidiaries, end of year |
|
$ |
1,581,157 |
|
$ |
1,483,873 |
|
$ |
1,305,373 |
|
|
|
|
|
|
|
|
|
A-28
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 16RELATED PARTY TRANSACTIONS (Continued)
HSNi
launched a co-branded credit card program with a subsidiary of GE during 2004. Pursuant to the arrangement, HSNi received approximately $1.9 million during the
period from January 1, 2005 through June 6, 2005 in payments from the GE subsidiary, primarily in the form of revenue share payments in respect of purchases made pursuant to the
co-branded card and sales and marketing support for the program. As a result of the sale of IAC's common and preferred interests in VUE on June 7, 2005, GE and its subsidiaries are
no longer related parties.
In
2007, a subsidiary of HSNi made payments to a subsidiary of Warner Music Group in the aggregate amount of approximately $0.4 million for music products. Warner Music Group is a
related party of IAC because Mr. Edgar Bronfman, a member of the IAC Board of Directors, is the Chief Executive Officer of Warner Music Group.
Relationship Between IAC and HSNi after the spin-off
For purposes of governing certain of the ongoing relationships between HSNi and IAC at and after the spin-off, and to provide for an orderly
transition, HSNi and IAC are expected to enter into a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement (the "Spin-Off
Agreements"), among other agreements.
Separation Agreement
The separation agreement is expected to provide generally that (i) immediately prior to the spin-off, IAC will contribute or otherwise transfer
to HSNi all of the subsidiaries and assets comprising the HSNi Businesses, (ii) HSNi will assume all of the liabilities related to the HSNi Businesses, (iii) each party will indemnify
the other and its respective affiliates, current and former directors, officers and employees for any losses arising out of any breach of any of the Spin-Off Agreements and
(iv) HSNi will indemnify IAC for its failure to assume and perform any assumed liabilities and any liabilities relating to HSNi financial and business information included in the SEC
documentation filed with respect to the spin-off, as well as such other terms as to which IAC and HSNi mutually agree.
Tax Sharing Agreement
The tax sharing agreement will govern the respective rights, responsibilities and obligations of IAC and HSNi after the spin-off with respect to taxes
for the periods ending on or before the spin-off. Generally, IAC will pay taxes with respect to HSNi income included on its consolidated, unitary or combined federal or state tax returns,
including audit adjustments with respect thereto. Other pre-distribution taxes that are attributable to the HSNi Businesses including taxes reported on separately filed and all foreign
returns and audit adjustments with respect thereto, will be borne solely by HSNi. The tax sharing agreement is expected to contain certain customary restrictive covenants that generally prohibit HSNi
(absent a supplemental IRS ruling or an unqualified opinion of counsel to the contrary, in each case, in a form and substance satisfactory acceptable to IAC in its sole discretion) from taking actions
that could jeopardize the tax free nature of the spin-off. HSNi is expected to agree to indemnify IAC for any taxes and related losses resulting from its non-compliance with
these restrictive covenants, as well as for the breach of certain representations in the Spin-Off Agreements and other documentation relating to the tax-free nature of the
spin-off.
A-29
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 16RELATED PARTY TRANSACTIONS (Continued)
Employee Matters Agreement
The employee matters agreement will generally provide that HSNi will be responsible for, among other obligations, all employment and benefit-related obligations
and liabilities related to its employees immediately prior to the spin-off (and their dependents and beneficiaries) and former
employees who most recently worked for the HSNi Businesses. This agreement is also expected to provide that assets and liabilities from the IAC Retirement Savings Plan of HSNi employees will be
transferred to a newly established HSNi Retirement Savings Plan as soon as practicable following the spin-off.
Transition Services Agreement
Under the transition services agreement, beginning on the date of the completion of the spin-off, IAC will provide to HSNi on an interim, transitional
basis, various services, which are expected to relate primarily to public company and operational matters, and such other services as to which IAC and HSNi mutually agree. The agreed upon charges for
these services will generally allow IAC to recover fully the allocated costs of providing the services, plus all out-of-pocket costs and expenses. HSNi may terminate the
agreement with respect to one or more particular services upon prior written notice.
Commercial Agreements
IAC and HSNi currently, and for the foreseeable future, expect to provide certain services to each other pursuant to certain commercial relationships. In
connection with the spin-off, IAC and HSNi will enter into a number of commercial agreements between subsidiaries of IAC, on the one hand, and subsidiaries of HSNi, on the other hand, many
of which will memorialize (in most material respects) pre-existing arrangements in effect prior to the spin-off and all of which are intended to reflect arm's length terms. In
addition, IAC and HSNi believe that such agreements, whether taken individually or in the aggregate, do not constitute a material contract to either IAC or HSNi.
Aggregate
revenue earned with respect to these commercial agreements by the HSNi Businesses was not material in 2007, 2006 and 2005. HSNi Businesses incurred approximately
$1.8 million, $1.3 million and $0.3 million in 2007, 2006 and 2005, respectively, in expenses related to these commercial agreements with IAC subsidiaries.
NOTE 17COMPREHENSIVE INCOME
Accumulated other comprehensive income, net of tax, is comprised of (in thousands):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Foreign currency translation |
|
$ |
1,170 |
|
$ |
36,215 |
|
$ |
19,774 |
|
Net gains (losses) on derivative contracts |
|
|
|
|
|
2,355 |
|
|
(1,964 |
) |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
1,170 |
|
$ |
38,570 |
|
$ |
17,810 |
|
|
|
|
|
|
|
|
|
A-30
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 18BENEFIT PLANS
During the three years ended December 31, 2007, HSNi either participated in a retirement savings plan sponsored by IAC or had a retirement savings plan in
the United States that was qualified under Section 401(k) of the Internal Revenue Code. Subsequent to the spin-off, the net assets available for benefits of the employees of HSNi
are expected to be transferred from the IAC plan to a newly created HSNi plan. Under the IAC plan, participating employees may contribute up to 16% of their pretax earnings, but not more than
statutory limits. HSNi's match under the IAC plan is fifty cents for each dollar a participant contributes in this plan, with a maximum contribution of 3% of a participant's eligible earnings.
Matching contributions for all plans were approximately $4.4 million, $4.1 million and $3.1 million in 2007, 2006, and 2005, respectively. The increase in matching contributions
in 2006 is primarily related to the acquisition of Cornerstone Brands in 2005. Matching contributions are invested in the same manner as each participant's voluntary contributions in the investment
options provided under the plan. Investment options in the plan include IAC common stock, but neither participant nor matching contributions are required to be invested in IAC common stock.
NOTE 19QUARTERLY RESULTS (UNAUDITED)
|
|
Quarter Ended March 31,
|
|
Quarter Ended June 30,(a)
|
|
Quarter Ended September 30,
|
|
Quarter Ended December 31,
|
|
|
(In thousands)
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
666,705 |
|
$ |
681,506 |
|
$ |
680,763 |
|
$ |
879,268 |
Gross margin |
|
|
247,999 |
|
|
260,032 |
|
|
256,295 |
|
|
323,868 |
Operating income |
|
|
30,147 |
|
|
29,763 |
|
|
36,428 |
|
|
73,453 |
Earnings from continuing operations |
|
|
18,652 |
|
|
18,420 |
|
|
22,590 |
|
|
45,571 |
(Loss) income from discontinued operations, net of tax |
|
|
(1,566 |
) |
|
56,186 |
|
|
(5,934 |
) |
|
10,885 |
Net income |
|
|
17,086 |
|
|
74,606 |
|
|
16,656 |
|
|
56,456 |
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
665,587 |
|
$ |
682,349 |
|
$ |
671,753 |
|
$ |
858,265 |
Gross margin |
|
|
254,846 |
|
|
271,479 |
|
|
258,190 |
|
|
328,236 |
Operating income |
|
|
38,670 |
|
|
45,053 |
|
|
48,724 |
|
|
80,749 |
Earnings from continuing operations |
|
|
24,263 |
|
|
28,176 |
|
|
30,489 |
|
|
50,604 |
Income (loss) from discontinued operations, net of tax |
|
|
469 |
|
|
(7,934 |
) |
|
(3,963 |
) |
|
713 |
Net income |
|
|
24,732 |
|
|
20,242 |
|
|
26,526 |
|
|
51,317 |
- (a)
- The
second quarter of 2007 includes an after-tax gain of $34.8 million related to the sale of HSE, IAC's former Retailing International segment.
A-31
Schedule II
HSN, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Description
|
|
Balance at
Beginning of
Period
|
|
Charges to
Earnings
|
|
Charges to Other
Accounts
|
|
Deductions
|
|
Balance at
End of Period
|
|
|
(In thousands)
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
5,994 |
|
$ |
14,598 |
|
$ |
(23 |
) |
$ |
(12,457) |
(1) |
$ |
8,112 |
Sales returns accrual |
|
|
35,942 |
|
|
592,679 |
|
|
|
|
|
(591,025 |
) |
|
37,596 |
Deferred tax valuation allowance |
|
|
6,222 |
|
|
|
|
|
|
|
|
|
|
|
6,222 |
Other reserves |
|
|
971 |
|
|
|
|
|
|
|
|
|
|
|
331 |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
8,329 |
|
$ |
10,734 |
|
$ |
(147 |
) |
$ |
(12,922) |
(1) |
$ |
5,994 |
Sales returns accrual |
|
|
34,462 |
|
|
559,990 |
|
|
|
|
|
(558,510 |
) |
|
35,942 |
Deferred tax valuation allowance |
|
|
6,222 |
|
|
|
|
|
|
|
|
|
|
|
6,222 |
Other reserves |
|
|
1,271 |
|
|
|
|
|
|
|
|
|
|
|
971 |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
10,194 |
|
$ |
10,793 |
|
$ |
2,120 |
(2) |
$ |
(14,778) |
(1) |
$ |
8,329 |
Sales returns accrual |
|
|
25,760 |
|
|
488,510 |
|
|
4,997 |
(2) |
|
(484,805 |
) |
|
34,462 |
Deferred tax valuation allowance |
|
|
6,222 |
|
|
|
|
|
|
|
|
|
|
|
6,222 |
Other reserves |
|
|
2,188 |
|
|
|
|
|
|
|
|
|
|
|
1,271 |
- (1)
- Write-off
of uncollectible accounts receivable.
- (2)
- Amounts
are primarily related to the acquisition of Cornerstone Brands in 2005.
A-32
HSN, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Revenue |
|
$ |
676,886 |
|
$ |
666,705 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
441,402 |
|
|
418,706 |
|
|
|
|
|
|
|
|
Gross margin |
|
|
235,484 |
|
|
247,999 |
|
Selling and marketing expense |
|
|
136,750 |
|
|
136,453 |
|
General and administrative expense |
|
|
54,374 |
|
|
53,966 |
|
Production and programming expense |
|
|
14,343 |
|
|
14,880 |
|
Amortization of non-cash marketing |
|
|
3,715 |
|
|
|
|
Amortization of intangibles |
|
|
2,198 |
|
|
4,085 |
|
Depreciation |
|
|
9,026 |
|
|
8,468 |
|
|
|
|
|
|
|
|
Operating income |
|
|
15,078 |
|
|
30,147 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
15 |
|
|
69 |
|
|
Other expense |
|
|
|
|
|
(108 |
) |
|
|
|
|
|
|
Total other income (expense), net |
|
|
15 |
|
|
(39 |
) |
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
15,093 |
|
|
30,108 |
|
Income tax provision |
|
|
(5,687 |
) |
|
(11,456 |
) |
|
|
|
|
|
|
Earnings from continuing operations |
|
|
9,406 |
|
|
18,652 |
|
Loss from discontinued operations, net of tax |
|
|
(1,060 |
) |
|
(1,566 |
) |
|
|
|
|
|
|
Net income |
|
$ |
8,346 |
|
$ |
17,086 |
|
|
|
|
|
|
|
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
A-33
HSN, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
|
|
(In thousands)
|
|
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
8,017 |
|
$ |
6,220 |
|
Accounts receivable, net of allowance of $9,194 and $8,112, respectively |
|
|
159,048 |
|
|
192,609 |
|
Inventories |
|
|
335,806 |
|
|
317,411 |
|
Deferred income taxes |
|
|
24,221 |
|
|
24,606 |
|
Prepaid expenses and other current assets |
|
|
55,713 |
|
|
55,182 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
582,805 |
|
|
596,028 |
|
Property and equipment, net |
|
|
152,168 |
|
|
155,805 |
|
Goodwill |
|
|
2,884,389 |
|
|
2,884,389 |
|
Intangible assets, net |
|
|
569,464 |
|
|
571,662 |
|
Other non-current assets |
|
|
11,503 |
|
|
12,747 |
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
4,200,329 |
|
$ |
4,220,631 |
|
|
|
|
|
|
|
LIABILITIES AND INVESTED EQUITY |
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
Accounts payable, trade |
|
$ |
220,684 |
|
$ |
260,531 |
|
Income taxes payable |
|
|
666 |
|
|
1,811 |
|
Accrued expenses and other current liabilities |
|
|
161,220 |
|
|
186,501 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
382,570 |
|
|
448,843 |
|
Other long-term liabilities |
|
|
8,832 |
|
|
8,933 |
|
Deferred income taxes |
|
|
822,556 |
|
|
819,969 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
INVESTED EQUITY: |
|
|
|
|
|
|
|
Invested capital |
|
|
4,530,799 |
|
|
4,522,873 |
|
Receivables from IAC and subsidiaries |
|
|
(1,545,670 |
) |
|
(1,581,157 |
) |
Accumulated other comprehensive income |
|
|
1,242 |
|
|
1,170 |
|
|
|
|
|
|
|
|
Total invested equity |
|
|
2,986,371 |
|
|
2,942,886 |
|
|
|
|
|
|
|
TOTAL LIABILITIES AND INVESTED EQUITY |
|
$ |
4,200,329 |
|
$ |
4,220,631 |
|
|
|
|
|
|
|
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
A-34
HSN, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF INVESTED EQUITY
(Unaudited)
|
|
Total
|
|
Invested Capital
|
|
Receivables from IAC and Subsidiaries
|
|
Accumulated Other Comprehensive Income
|
|
|
(In thousands)
|
Balance as of December 31, 2007 |
|
$ |
2,942,886 |
|
$ |
4,522,873 |
|
$ |
(1,581,157 |
) |
$ |
1,170 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the three months ended March 31, 2008 |
|
|
8,346 |
|
|
8,346 |
|
|
|
|
|
|
|
Foreign currency translation |
|
|
72 |
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
8,418 |
|
|
|
|
|
|
|
|
|
Net transfers to IAC |
|
|
(420 |
) |
|
(420 |
) |
|
|
|
|
|
Net change in receivables from IAC and subsidiaries |
|
|
35,487 |
|
|
|
|
|
35,487 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2008 |
|
$ |
2,986,371 |
|
$ |
4,530,799 |
|
$ |
(1,545,670 |
) |
$ |
1,242 |
|
|
|
|
|
|
|
|
|
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
A-35
HSN, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities attributable to continuing operations: |
|
|
|
|
|
|
|
Net income |
|
$ |
8,346 |
|
$ |
17,086 |
|
Less: loss from discontinued operations, net of tax |
|
|
1,060 |
|
|
1,566 |
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
9,406 |
|
|
18,652 |
|
Adjustments to reconcile earnings from continuing operations to net cash used in operating activities attributable to continuing operations: |
|
|
|
|
|
|
|
|
Amortization of intangibles |
|
|
2,198 |
|
|
4,085 |
|
|
Depreciation |
|
|
9,026 |
|
|
8,468 |
|
|
Non-cash compensation expense |
|
|
3,040 |
|
|
3,035 |
|
|
Amortization of cable and satellite distribution fees |
|
|
1,120 |
|
|
1,241 |
|
|
Amortization of non-cash marketing |
|
|
3,715 |
|
|
|
|
|
Deferred income taxes |
|
|
2,972 |
|
|
(2,095 |
) |
|
Bad debt expense |
|
|
4,596 |
|
|
2,389 |
|
|
Inventory carrying value adjustment |
|
|
(3,831 |
) |
|
2,588 |
|
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
28,964 |
|
|
20,215 |
|
|
Inventories |
|
|
(14,564 |
) |
|
(30,577 |
) |
|
Prepaid expenses and other current assets |
|
|
(525 |
) |
|
(11,272 |
) |
|
Accounts payable and other current liabilities |
|
|
(65,744 |
) |
|
(56,839 |
) |
|
Income taxes payable |
|
|
(1,604 |
) |
|
(194 |
) |
Other, net |
|
|
446 |
|
|
1,134 |
|
|
|
|
|
|
|
Net cash used in operating activities attributable to continuing operations |
|
|
(20,785 |
) |
|
(39,170 |
) |
|
|
|
|
|
|
Cash flows from investing activities attributable to continuing operations: |
|
|
|
|
|
|
|
|
Transfers from IAC |
|
|
28,280 |
|
|
43,104 |
|
|
Capital expenditures |
|
|
(6,629 |
) |
|
(8,183 |
) |
|
Other, net |
|
|
|
|
|
67 |
|
|
|
|
|
|
|
Net cash provided by investing activities attributable to continuing operations |
|
|
21,651 |
|
|
34,988 |
|
|
|
|
|
|
|
Cash flows from financing activities attributable to continuing operations: |
|
|
|
|
|
|
|
|
Principal payments on long-term obligations |
|
|
(30 |
) |
|
|
|
|
Excess tax benefits from stock-based awards |
|
|
5 |
|
|
1,152 |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities attributable to continuing operations |
|
|
(25 |
) |
|
1,152 |
|
|
|
|
|
|
|
Total cash provided by (used in) by continuing operations |
|
|
841 |
|
|
(3,030 |
) |
|
|
|
|
|
|
Net cash provided by operating activities attributable to discontinued operations |
|
|
751 |
|
|
7,945 |
|
Net cash used in investing activities attributable to discontinued operations |
|
|
|
|
|
(1,459 |
) |
Net cash provided by financing activities attributable to discontinued operations |
|
|
925 |
|
|
4,208 |
|
|
|
|
|
|
|
Total cash provided by discontinued operations |
|
|
1,676 |
|
|
10,694 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(720 |
) |
|
1,248 |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
1,797 |
|
|
8,912 |
|
Cash and cash equivalents at beginning of period |
|
|
6,220 |
|
|
53,367 |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
8,017 |
|
$ |
62,279 |
|
|
|
|
|
|
|
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
A-36
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying HSN, Inc. ("HSNi") as one of those five companies. In these combined financial statements, we refer to the separation transaction as the "spin-off." In connection with
the spin-off, HSNi was incorporated as a Delaware corporation in May 2008. HSNi currently does not have any material assets or liabilities, nor does it engage in any business or other
activities and, other than in connection with the spin-off, will not acquire or incur any material assets or liabilities, nor will it engage in any business or other activities. Upon
completion of the spin-off, HSNi will consist of HSN and Cornerstone, the businesses that formerly comprised IAC's Retailing segment. HSN consists of the HSN television network and HSN.com, and
Cornerstone includes the Cornerstone Brands portfolio of leading print catalogs and related websites, as well as a limited number of retail
stores. HSNi will not include the equity investment in Jupiter Shop Channel, the investment in Arcandor AG and the related contingent value right. The businesses to be operated by HSNi following the
spin-off are referred to herein as the "HSNi Businesses." HSNi will also include the entities classified as discontinued operations in Note 6.
Basis of Presentation
The historical combined financial statements of HSNi and its subsidiaries reflect the contribution or other transfer to HSNi of all of the subsidiaries and assets
and the assumption by HSNi of all of the liabilities relating to the HSNi Businesses in connection with the spin-off and the allocation to HSNi of certain IAC corporate expenses relating
to the HSNi Businesses. Accordingly, the historical combined financial statements of HSNi reflect the historical financial position, results of operations and cash flows of the HSNi Businesses since
their respective dates of acquisition by IAC, based on the historical consolidated financial statements and accounting records of IAC and using the historical results of operations and historical
bases of the assets and liabilities of the HSNi Businesses with the exception of accounting for income taxes. For purposes of these financial statements, income taxes have been computed for HSNi on an
as if stand-alone, separate tax return basis. These financial statements are prepared on a combined, rather than a consolidated, basis because they exclude certain investments and assets that were
owned, either directly or indirectly, by legal entities that comprise the HSNi Businesses. The ownership of these investments and assets will be retained by IAC after the spin-off. These
combined financial statements present IAC's and its subsidiaries net investment in the HSNi Businesses as invested equity in lieu of shareholders' equity. Intercompany transactions and accounts have
been eliminated.
In the opinion of HSNi's management, the assumptions underlying the historical combined financial statements of HSNi are reasonable. However, this financial information does not
necessarily reflect what the historical financial position, results of operations and cash flows of HSNi would have been had HSNi been a stand-alone company during the periods presented.
The accompanying unaudited combined financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with
the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of HSNi's management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim
results are not
A-37
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 1ORGANIZATION (Continued)
necessarily indicative of the results that may be expected for a full year. The accompanying unaudited combined financial statements should be read in conjunction with HSNi's audited combined
financial statements and notes thereto for the year ended December 31, 2007.
Company Overview
HSNi markets and sells a wide range of third party and private label merchandise directly to consumers through (i) television home shopping programming
broadcast on the HSN television network, (ii) catalogs, which consist primarily of the Cornerstone Brands portfolio of leading print catalogs which includes Frontgate, Garnet Hill, Ballard
Designs, Improvements, Smith & Noble, The Territory Ahead and TravelSmith and (iii) websites, which consist primarily of HSN.com and
branded websites operated by Cornerstone Brands. HSNi's television home shopping business and related internet commerce is referred to herein as "HSN" and all catalog operations, including related
internet commerce, are collectively referred to herein as "Cornerstone."
HSN offerings primarily consist of jewelry, apparel & accessories, health & beauty and home & other. Merchandise offered by Cornerstone primarily consists of home
furnishings (including indoor/outdoor furniture, window treatments and other home related goods) and apparel & accessories.
NOTE 2SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
HSNi's management is required to make certain estimates and assumptions during the preparation of the combined financial statements in accordance with U.S.
generally accepted accounting principles. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of
the combined financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying combined financial statements include: the determination of the lower of cost or market adjustment for inventory; sales returns and
other revenue allowances; the allowance for doubtful accounts; the recoverability of long-lived assets; the recovery of goodwill and intangible assets; the determination of deferred income
taxes, including related valuation allowances; and assumptions related to the determination of stock-based compensation.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statementsan amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and
the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008.
SFAS No. 160 will be applied prospectively, except as it relates to disclosures, for
A-38
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SIGNIFICANT ACCOUNTING POLICIES (Continued)
which the effects will be applied retrospectively for all periods presented. Early adoption is not permitted. HSNi is currently assessing the impact of SFAS No. 160 on its combined financial
position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces FASB Statement No. 141. SFAS No. 141R
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest
in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the
nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations in fiscal years beginning after December 15, 2008. Early adoption
is not permitted. HSNi is currently assessing the impact of the adoption of SFAS No. 141R on its combined financial position, results of operations and cash flows.
NOTE 3GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands):
|
|
March 31, 2008
|
|
December 31, 2007
|
Goodwill |
|
$ |
2,884,389 |
|
$ |
2,884,389 |
Intangible assets with indefinite lives |
|
|
554,848 |
|
|
554,848 |
Intangible assets with definite lives, net |
|
|
14,616 |
|
|
16,814 |
|
|
|
|
|
|
Total goodwill and intangible assets, net |
|
$ |
3,453,853 |
|
$ |
3,456,051 |
|
|
|
|
|
Intangible assets with indefinite lives relate principally to trade names and trademarks acquired in various acquisitions. At March 31, 2008, intangible assets with definite lives
relate to the following (in thousands):
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
Weighted
Average Amortization Life (Years)
|
Distribution agreements |
|
$ |
159,268 |
|
$ |
(159,268 |
) |
$ |
|
|
4.1 |
Customer lists |
|
|
36,773 |
|
|
(24,082 |
) |
|
12,691 |
|
4.7 |
Merchandise agreements |
|
|
33,257 |
|
|
(33,257 |
) |
|
|
|
4.7 |
Technology |
|
|
28,007 |
|
|
(28,007 |
) |
|
|
|
3.9 |
Other |
|
|
7,409 |
|
|
(5,484 |
) |
|
1,925 |
|
8.5 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
264,714 |
|
$ |
(250,098 |
) |
$ |
14,616 |
|
|
|
|
|
|
|
|
|
|
|
A-39
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 3GOODWILL AND INTANGIBLE ASSETS (Continued)
At December 31, 2007, intangible assets with definite lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
Weighted
Average Amortization Life (Years)
|
Distribution agreements |
|
$ |
159,268 |
|
$ |
(159,268 |
) |
$ |
|
|
4.1 |
Customer lists |
|
|
36,773 |
|
|
(22,468 |
) |
|
14,305 |
|
4.7 |
Merchandise agreements |
|
|
33,257 |
|
|
(33,257 |
) |
|
|
|
4.7 |
Technology |
|
|
28,007 |
|
|
(27,665 |
) |
|
342 |
|
3.9 |
Other |
|
|
7,409 |
|
|
(5,242 |
) |
|
2,167 |
|
8.5 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
264,714 |
|
$ |
(247,900 |
) |
$ |
16,814 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on December 31, 2007 balances, such amortization for the next
four years is estimated to be as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
7,463 |
2009 |
|
|
6,844 |
2010 |
|
|
2,132 |
2011 |
|
|
375 |
|
|
|
|
|
$ |
16,814 |
|
|
|
NOTE 4PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
|
March 31, 2008
|
|
December 31, 2007
|
|
Capitalized software |
|
$ |
174,407 |
|
$ |
169,709 |
|
Computer and broadcast equipment |
|
|
83,100 |
|
|
81,821 |
|
Buildings and leasehold improvements |
|
|
75,530 |
|
|
72,815 |
|
Furniture and other equipment |
|
|
59,789 |
|
|
58,058 |
|
Projects in progress |
|
|
13,873 |
|
|
19,572 |
|
Land |
|
|
11,778 |
|
|
11,778 |
|
|
|
|
|
|
|
|
|
|
418,477 |
|
|
413,753 |
|
Less: accumulated depreciation and amortization |
|
|
(266,309 |
) |
|
(257,948 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
152,168 |
|
$ |
155,805 |
|
|
|
|
|
|
|
NOTE 5SEGMENT INFORMATION
The overall concept that HSNi employs in determining its operating segments and related financial information is to present them in a manner consistent with how
the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment
A-40
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5SEGMENT INFORMATION (Continued)
management, and the focus of the businesses with regards to the types of products or services offered or the target market. HSNi has two operating segments, HSN and Cornerstone. Entities included in
discontinued operations, as described in Note 6, are excluded from the schedules below.
HSNi's primary metric is Operating Income Before Amortization, which is defined as operating income excluding, if applicable: (1) non-cash compensation expense and
amortization of non-cash marketing, (2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions, and
(4) one-time items. HSNi believes this measure is useful to investors because it represents the combined operating results from HSNi's segments, taking into account depreciation,
which it believes is an ongoing cost of doing business, but excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it
does not take into account the impact to HSNi's statement of operations of certain expenses, including non-cash compensation, amortization of non-cash marketing and
acquisition-related accounting.
The following tables reconcile Operating Income Before Amortization to operating income for HSNi's operating segments and to net income in total (in thousands):
|
|
For the Three Months Ended March 31, 2008:
|
|
|
|
Operating Income Before Amortization
|
|
Non-Cash Compensation Expense
|
|
Amortization of Non-Cash Marketing
|
|
Amortization of Intangibles
|
|
Operating Income (Loss)
|
|
HSN |
|
$ |
29,935 |
|
$ |
(1,586 |
) |
$ |
(3,715 |
) |
$ |
(143 |
) |
$ |
24,491 |
|
Cornerstone |
|
|
(5,904 |
) |
|
(1,454 |
) |
|
|
|
|
(2,055 |
) |
|
(9,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
24,031 |
|
$ |
(3,040 |
) |
$ |
(3,715 |
) |
$ |
(2,198 |
) |
|
15,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
15,093 |
|
Income tax provision |
|
|
(5,687 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
9,406 |
|
Loss from discontinued operations, net of tax |
|
|
(1,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-41
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5SEGMENT INFORMATION (Continued)
|
|
For the Three Months Ended March 31, 2007:
|
|
|
|
Operating Income Before Amortization
|
|
Non-Cash Compensation Expense
|
|
Amortization of Intangibles
|
|
Operating Income
|
|
HSN |
|
$ |
30,271 |
|
$ |
(1,169 |
) |
$ |
(1,654 |
) |
$ |
27,448 |
|
Cornerstone |
|
|
6,996 |
|
|
(1,866 |
) |
|
(2,431 |
) |
|
2,699 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,267 |
|
$ |
(3,035 |
) |
$ |
(4,085 |
) |
|
30,147 |
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
30,108 |
|
Income tax provision |
|
|
(11,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
18,652 |
|
Loss from discontinued operations, net of tax |
|
|
(1,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense in the tables above is included in the following line items in the accompanying consolidated statements of operations for the three months ended
March 31, 2008 and 2007 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
Cost of sales |
|
$ |
236 |
|
$ |
231 |
Selling and marketing expense |
|
|
258 |
|
|
253 |
General and administrative expense |
|
|
2,544 |
|
|
2,549 |
Production and programming expense |
|
|
2 |
|
|
2 |
|
|
|
|
|
Non-cash compensation expense |
|
$ |
3,040 |
|
$ |
3,035 |
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Revenue: |
|
|
|
|
|
|
|
|
HSN |
|
$ |
478,973 |
|
$ |
454,053 |
|
|
Cornerstone |
|
|
197,954 |
|
|
212,775 |
|
|
Inter-segment elimination |
|
|
(41 |
) |
|
(123 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
676,886 |
|
$ |
666,705 |
|
|
|
|
|
|
|
HSNi does not report revenue from external customers for each product or each group of similar products as it is impracticable to do so.
A-42
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5SEGMENT INFORMATION (Continued)
HSNi maintains operations principally in the United States. Geographic information about the United States and international territories is presented below (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
Revenue: |
|
|
|
|
|
|
|
United States |
|
$ |
676,522 |
|
$ |
666,457 |
|
All Other countries |
|
|
364 |
|
|
248 |
|
|
|
|
|
|
Total |
|
$ |
676,886 |
|
$ |
666,705 |
|
|
|
|
|
|
|
March 31, 2008
|
|
December 31, 2007
|
Long-lived assets (excluding goodwill and intangible assets): |
|
|
|
|
|
|
|
United States |
|
$ |
162,687 |
|
$ |
167,444 |
|
All Other countries |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
162,687 |
|
$ |
167,444 |
|
|
|
|
|
NOTE 6DISCONTINUED OPERATIONS
On June 19, 2007, HSNi sold Home Shopping Europe GMbH & Co. KG, and its affiliated station HSE24 ("HSE"). Accordingly, HSE is presented as a
discontinued operation in the statement of operations for the three months ended March 31, 2007. Quiz TV Limited and iBuy are also presented as discontinued operations for all periods
presented.
A-43
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 6DISCONTINUED OPERATIONS (Continued)
The net revenue and net loss for the aforementioned discontinued operations for the applicable periods were as follows (in thousands):
|
|
Three Months
Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Net revenue |
|
$ |
3 |
|
$ |
105,917 |
|
|
|
|
|
|
|
(Loss) earnings before income taxes |
|
$ |
(1,722 |
) |
$ |
898 |
|
Income tax benefit (provision) |
|
|
662 |
|
|
(2,464 |
) |
|
|
|
|
|
|
Net loss |
|
$ |
(1,060 |
) |
$ |
(1,566 |
) |
|
|
|
|
|
|
NOTE 7COMPREHENSIVE INCOME
Comprehensive income is comprised of (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Net income |
|
$ |
8,346 |
|
$ |
17,086 |
|
|
|
|
|
|
|
Foreign currency translation |
|
|
72 |
|
|
2,049 |
|
Net losses on derivative contracts |
|
|
|
|
|
(2,462 |
) |
|
|
|
|
|
|
Other comprehensive income |
|
|
72 |
|
|
(413 |
) |
|
|
|
|
|
|
Comprehensive income |
|
$ |
8,418 |
|
$ |
16,673 |
|
|
|
|
|
|
|
Accumulated other comprehensive income at March 31, 2008 and December 31, 2007 is solely related to foreign currency translation and is recorded net of tax.
NOTE 8INCOME TAXES
HSNi calculates its interim income tax provision in accordance with Accounting Principles Board Opinion No. 28 and FASB Interpretation No. 18. At
the end of each interim period, HSNi makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date earnings or loss. The
tax or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the
interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates, tax status, or judgment on the realizability of a
beginning-of-the-year deferred tax asset in future years is recognized in the interim period in which the change occurs.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income
for the year, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income
taxes may change
as new events occur, more experience is acquired, additional information is obtained or HSNi's tax environment changes. To the extent that the estimated annual effective tax rate changes during a
quarter, the effect of the change on prior quarters is included in tax expense for the current quarter.
A-44
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 8INCOME TAXES (Continued)
For the three months ended March 31, 2008 and 2007, HSNi recorded tax provisions for continuing operations of $5.7 million and $11.5 million, respectively, which
represent effective tax rates of 38%. The tax rates for the three months ended March 31, 2008 and March 31, 2007 are higher than the federal statutory rate of 35% due principally to
state taxes.
As of December 31, 2007 and March 31, 2008, HSNi had unrecognized tax benefits of approximately $8.9 million. Included in unrecognized tax benefits at
March 31, 2008 is approximately $8.8 million for tax positions included in IAC's consolidated tax return filings that will remain a liability of IAC after the spin-off. HSNi
recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. Included in income tax expense for the three months ended March 31, 2008 is
$0.1 million, net of related deferred taxes, for interest on unrecognized tax benefits. At March 31, 2008, HSNi has accrued $3.0 million for the payment of interest. There are no
material accruals for penalties.
By virtue of previously filed separate company and consolidated tax returns with IAC, HSNi is routinely under audit by federal, state, local and foreign authorities in the area of income
tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient
to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the
reserves for tax contingencies and the amounts owed by HSNi are recorded in the period they become known.
The Internal Revenue Service is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of HSNi. The
statute of limitations for these years has been extended to December 31, 2008. Various IAC consolidated tax returns filed with state, local and foreign jurisdictions are currently under
examination, the most significant of which are California, Florida, New York state and New York City, for various tax years after December 31, 2001. These examinations are expected to be
completed by late 2008.
HSNi believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $2.5 million within twelve months of the current reporting date due
to the reversal of deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits cannot be
made, but are not expected to be significant.
NOTE 9CONTINGENCIES
In the ordinary course of business, HSNi is a party to various lawsuits. HSNi establishes reserves for specific legal matters when it determines that the
likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not
probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against HSNi, including claims where an unfavorable outcome is
reasonably possible, will not have a material impact on the liquidity, results of operations, or financial condition of HSNi, these matters are subject to inherent uncertainties and management's view
of these matters may change in the future. HSNi also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See
Note 8 for discussion related to income tax contingencies.
A-45
HSN, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 10RELATED PARTY TRANSACTIONS
HSNi's expenses include allocations from IAC of costs associated with IAC's accounting, treasury, legal, tax, corporate support, human resources and internal
audit functions. These expenses were allocated based on the ratio of HSNi's revenue as a percentage of IAC's total revenue. Allocated costs were $1.8 million and $1.8 million for the
three months ended March 31, 2008 and 2007, respectively, and are included in "General and administrative expense" in the accompanying combined statements of operations. It is not practicable
to determine the amounts of these expenses that would have been
incurred had HSNi operated as an unaffiliated entity. In the opinion of management, the allocation method is reasonable.
The portion of the interest expense reflected in the combined statements of operations that is intercompany in nature was $0.9 million for the three months ended March 31,
2007. There was no interest expense that is intercompany in nature for the three months ended March 31, 2008. This intercompany interest expense, which is included in discontinued operations,
arose from the transfer of cash from IAC to HSNi that occurred in connection with IAC's treasury operations.
An analysis of HSNi's receivables from IAC and subsidiaries is as follows (in thousands):
|
|
March 31, 2008
|
|
Receivables from IAC and subsidiaries at December 31, 2007 |
|
$ |
1,581,157 |
|
Cash transfers from IAC related to its centrally managed U.S. treasury function |
|
|
(21,429 |
) |
Employee equity instruments and associated tax withholdings |
|
|
1,305 |
|
Taxes (excludes tax withholdings associated with employee equity instruments) |
|
|
662 |
|
Amortization of non-cash marketing |
|
|
(3,715 |
) |
Allocation of non-cash compensation expense |
|
|
(2,983 |
) |
Administrative expenses and other |
|
|
(9,327 |
) |
|
|
|
|
Receivables from IAC and subsidiaries at March 31, 2008 |
|
$ |
1,545,670 |
|
|
|
|
|
Relationship Between IAC and HSNi after the Spin-Off
For purposes of governing certain of the ongoing relationships between HSNi and IAC at and after the spin-off, and to provide for an orderly
transition, HSNi and IAC are expected to enter
into a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement (the "Spin-Off Agreements"), among other agreements. See HSNi's
combined financial statements for the year ended December 31, 2007 for descriptions of these agreements.
A-46
ANNEX B
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
|
|
PAGE
|
Audited Financial Statements: |
|
|
|
Report of Independent Registered Public Accounting Firm |
|
B-2 |
|
Consolidated Statements of Operations for the years ended December 31, 2007, 2006
and 2005 |
|
B-3 |
|
Consolidated Balance Sheets as of December 31, 2007 and 2006 |
|
B-4 |
|
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2007, 2006 and 2005 |
|
B-5 |
|
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006
and 2005 |
|
B-6 |
|
Notes to Consolidated Financial Statements |
|
B-7 |
Schedule IIValuation and Qualifying Accounts |
|
B-28 |
Unaudited Interim Financial Statements |
|
|
|
Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 |
|
B-29 |
|
Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 |
|
B-30 |
|
Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2008 |
|
B-31 |
|
Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 |
|
B-32 |
|
Notes to Unaudited Consolidated Financial Statements |
|
B-33 |
B-1
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Interval Leisure Group, Inc. and subsidiaries as of December 31, 2007 and 2006, and
the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial
statement schedule on page B-28. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 Interval Leisure Group, Inc. and
subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/
Ernst & Young LLP
New
York, New York
May 5, 2008
B-2
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Revenue |
|
$ |
360,407 |
|
$ |
288,646 |
|
$ |
260,843 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
100,799 |
|
|
66,293 |
|
|
60,794 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
259,608 |
|
|
222,353 |
|
|
200,049 |
|
Selling and marketing expense |
|
|
45,835 |
|
|
41,635 |
|
|
38,424 |
|
General and administrative expense |
|
|
71,913 |
|
|
61,538 |
|
|
56,213 |
|
Amortization of intangibles |
|
|
26,879 |
|
|
25,220 |
|
|
25,220 |
|
Depreciation |
|
|
8,415 |
|
|
7,832 |
|
|
7,368 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
106,566 |
|
|
86,128 |
|
|
72,824 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
10,345 |
|
|
8,914 |
|
|
6,518 |
|
|
Interest expense |
|
|
(205 |
) |
|
(357 |
) |
|
(623 |
) |
|
Other expense |
|
|
(606 |
) |
|
(774 |
) |
|
(272 |
) |
|
|
|
|
|
|
|
|
Total other income, net |
|
|
9,534 |
|
|
7,783 |
|
|
5,623 |
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
116,100 |
|
|
93,911 |
|
|
78,447 |
|
Income tax provision |
|
|
(45,032 |
) |
|
(35,868 |
) |
|
(29,204 |
) |
Minority interest in income of consolidated subsidiaries |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
71,056 |
|
$ |
58,043 |
|
$ |
49,243 |
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
B-3
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
(In thousands)
|
|
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
67,113 |
|
$ |
37,557 |
|
Restricted cash and cash equivalents |
|
|
5,817 |
|
|
293 |
|
Accounts receivable, net of allowance of $352 and $255, respectively |
|
|
15,750 |
|
|
9,301 |
|
Deferred income taxes |
|
|
28,109 |
|
|
18,417 |
|
Deferred membership costs |
|
|
13,688 |
|
|
12,440 |
|
Prepaid expenses and other current assets |
|
|
17,086 |
|
|
14,816 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
147,563 |
|
|
92,824 |
|
Property and equipment, net |
|
|
34,963 |
|
|
21,330 |
|
Goodwill |
|
|
514,308 |
|
|
473,879 |
|
Intangible assets, net |
|
|
188,895 |
|
|
153,220 |
|
Deferred membership costs |
|
|
21,217 |
|
|
18,218 |
|
Deferred income taxes |
|
|
12,549 |
|
|
7,074 |
|
Other non-current assets |
|
|
3,122 |
|
|
1,132 |
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
922,617 |
|
$ |
767,677 |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
Accounts payable, trade |
|
$ |
10,981 |
|
$ |
7,142 |
|
Deferred revenue |
|
|
97,898 |
|
|
88,157 |
|
Income taxes payable |
|
|
2,489 |
|
|
|
|
Accrued compensation and benefits |
|
|
11,635 |
|
|
7,493 |
|
Member deposits |
|
|
11,167 |
|
|
10,692 |
|
Accrued expenses and other current liabilities |
|
|
26,105 |
|
|
22,544 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
160,275 |
|
|
136,028 |
|
Other long-term liabilities |
|
|
2,286 |
|
|
1,509 |
|
Deferred revenue |
|
|
139,044 |
|
|
123,181 |
|
Deferred income taxes |
|
|
107,133 |
|
|
98,072 |
|
Minority interest |
|
|
512 |
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY: |
|
|
|
|
|
|
|
Invested capital |
|
|
726,919 |
|
|
612,532 |
|
Receivables from IAC and subsidiaries |
|
|
(436,475 |
) |
|
(355,057 |
) |
Retained earnings |
|
|
222,484 |
|
|
151,198 |
|
Accumulated other comprehensive income |
|
|
439 |
|
|
214 |
|
|
|
|
|
|
|
|
Total shareholders' equity |
|
|
513,367 |
|
|
408,887 |
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
|
$ |
922,617 |
|
$ |
767,677 |
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
B-4
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
Total
|
|
Invested
Capital
|
|
Receivables
from IAC and
Subsidiaries
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance as of December 31, 2004 |
|
$ |
467,746 |
|
$ |
607,316 |
|
$ |
(182,876 |
) |
$ |
43,912 |
|
$ |
(606 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2005 |
|
|
49,243 |
|
|
|
|
|
|
|
|
49,243 |
|
|
|
|
|
Foreign currency translation |
|
|
(1,096 |
) |
|
|
|
|
|
|
|
|
|
|
(1,096 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
48,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers from IAC |
|
|
300 |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
Net changes in receivables from IAC and subsidiaries |
|
|
(76,246 |
) |
|
|
|
|
(76,246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
439,947 |
|
|
607,616 |
|
|
(259,122 |
) |
|
93,155 |
|
|
(1,702 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2006 |
|
|
58,043 |
|
|
|
|
|
|
|
|
58,043 |
|
|
|
|
|
Foreign currency translation |
|
|
1,916 |
|
|
|
|
|
|
|
|
|
|
|
1,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
59,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers from IAC (principally the pushdown of IAC's acquisition of a minority interest in Interval) |
|
|
4,916 |
|
|
4,916 |
|
|
|
|
|
|
|
|
|
|
Net changes in receivables from IAC and subsidiaries |
|
|
(95,935 |
) |
|
|
|
|
(95,935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
|
408,887 |
|
|
612,532 |
|
|
(355,057 |
) |
|
151,198 |
|
|
214 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2007 |
|
|
71,056 |
|
|
|
|
|
|
|
|
71,056 |
|
|
|
|
|
Foreign currency translation |
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
71,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of FIN 48 |
|
|
230 |
|
|
|
|
|
|
|
|
230 |
|
|
|
|
Net transfers from IAC (principally the funding of ILG's acquisition of RQH) |
|
|
114,387 |
|
|
114,387 |
|
|
|
|
|
|
|
|
|
|
Net changes in receivables from IAC and subsidiaries |
|
|
(81,418 |
) |
|
|
|
|
(81,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
513,367 |
|
$ |
726,919 |
|
$ |
(436,475 |
) |
$ |
222,484 |
|
$ |
439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
B-5
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
71,056 |
|
$ |
58,043 |
|
$ |
49,243 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles |
|
|
26,879 |
|
|
25,220 |
|
|
25,220 |
|
|
Depreciation |
|
|
8,415 |
|
|
7,832 |
|
|
7,368 |
|
|
Non-cash compensation expense |
|
|
3,629 |
|
|
3,286 |
|
|
1,259 |
|
|
Deferred income taxes |
|
|
(6,106 |
) |
|
(7,275 |
) |
|
(9,884 |
) |
|
Excess tax benefits from stock-based awards |
|
|
|
|
|
|
|
|
25 |
|
|
Minority interest in income of consolidated subsidiaries |
|
|
12 |
|
|
|
|
|
|
|
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,552 |
) |
|
228 |
|
|
(760 |
) |
|
Prepaid expenses and other current assets |
|
|
(2,222 |
) |
|
185 |
|
|
(796 |
) |
|
Accounts payable and other current liabilities |
|
|
6,741 |
|
|
2,490 |
|
|
3,078 |
|
|
Income taxes payable |
|
|
3,015 |
|
|
1,184 |
|
|
1,042 |
|
|
Deferred revenue |
|
|
18,134 |
|
|
15,118 |
|
|
18,461 |
|
Other, net |
|
|
(421 |
) |
|
76 |
|
|
775 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
125,580 |
|
|
106,387 |
|
|
95,031 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Transfers to IAC |
|
|
(84,520 |
) |
|
(103,565 |
) |
|
(80,129 |
) |
|
Acquisitions, net of cash acquired |
|
|
(114,071 |
) |
|
|
|
|
|
|
|
Capital expenditures |
|
|
(10,319 |
) |
|
(6,682 |
) |
|
(8,966 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(208,910 |
) |
|
(110,247 |
) |
|
(89,095 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Capital contributions from IAC |
|
|
114,071 |
|
|
|
|
|
|
|
|
Principal payments on short-term obligations |
|
|
(215 |
) |
|
|
|
|
|
|
|
Excess tax benefits from stock-based awards |
|
|
259 |
|
|
328 |
|
|
|
|
|
Other, net |
|
|
(1,923 |
) |
|
137 |
|
|
(33 |
) |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
112,192 |
|
|
465 |
|
|
(33 |
) |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
694 |
|
|
4,509 |
|
|
(3,270 |
) |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
29,556 |
|
|
1,114 |
|
|
2,633 |
|
Cash and cash equivalents at beginning of period |
|
|
37,557 |
|
|
36,443 |
|
|
33,810 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
67,113 |
|
$ |
37,557 |
|
$ |
36,443 |
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
B-6
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying Interval Leisure Group, Inc. ("ILG") as one of those five companies. In these consolidated financial statements, we refer to the separation transaction herein as the
"spin-off." In connection with the spin-off, ILG was incorporated as a Delaware corporation in May 2008. ILG currently does not have any material assets or liabilities, nor
does it engage in any business or other activities and, other than in connection with the spin-off, will not acquire or incur any material assets or liabilities, nor will it engage in any
business or other activities. Upon completion of the spin-off, ILG will consist of Interval and ResortQuest Hawaii and ResortQuest Real Estate of Hawaii, collectively referred to herein as
"RQH", which was acquired on May 31, 2007, the businesses that formerly comprised IAC's Interval segment. The businesses to be operated by ILG following the spin-off are referred to
herein as the "ILG Businesses."
Basis of Presentation
The historical consolidated financial statements of ILG and its subsidiaries reflect the contribution or other transfer to ILG of all of the subsidiaries and
assets and the assumption by ILG of all of the liabilities relating to the ILG Businesses in connection with the spin-off and the allocation to ILG of certain IAC corporate expenses
relating to the ILG Businesses. Accordingly, the historical consolidated financial statements of ILG reflect the historical financial position, results of operations and cash flows of the ILG
Businesses since their respective dates of acquisition by IAC, based on the historical consolidated financial statements and accounting records of IAC and using the historical results of operations
and historical bases of the assets and liabilities of the ILG Businesses with the exception of accounting for income taxes. For purposes of these financial statements, income taxes have been computed
for ILG on an as if stand-alone, separate tax return basis. Intercompany transactions and accounts have been eliminated.
In
the opinion of ILG's management, the assumptions underlying the historical consolidated financial statements of ILG are reasonable. However, this financial information does not
necessarily reflect what the historical financial position, results of operations and cash flows of ILG would have been had ILG been a stand-alone company during the periods presented.
Company Overview
ILG
is a leading provider of membership services, primarily to the vacation ownership industry, through Interval. With the acquisition of RQH in May 2007, ILG also entered the vacation
rental and property management services industry.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue, net of sales incentives, from Interval membership fees is deferred and recognized over the terms of the applicable memberships ranging from one to five
years, on a straight-line basis. Generally, memberships are cancelable and refundable on a pro-rata basis. Direct costs of acquiring members and direct costs of sales related
to deferred membership revenue are also deferred and amortized on a straight-line basis over the terms of the applicable memberships. Revenue from vacation
B-7
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
transactions
is recognized when Interval provides confirmation of the vacation, at which time the fee is nonrefundable.
RQH
revenue primarily consists of property management fees and service fees. Property management fees, which are generally a percentage (ranging from 1% to 25%) of the rental price of
the vacation property, are generated when the property is rented. The management fee rate is based upon the type of services provided to the property owner and the type of rental unit managed. RQH's
proportionate share of the rental price of the property is recognized over the rental period. RQH also provides, or arranges through third parties, certain services for property owners or guests
including reservations, housekeeping, long-distance telephone, beach equipment rental and pool cleaning. Service fee revenue is recognized when the service is provided by RQH. Services
provided by third parties are generally billed directly to property owners or guests and are not included in the accompanying consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash, money market instruments and time deposits with maturities of less than 91 days.
Restricted Cash
Restricted cash primarily includes amounts held in trust and lock box accounts in connection with certain transactions with RQH's managed properties.
Accounts Receivable
Accounts receivable are stated at amounts due from customers, principally resort developers and members, net of an allowance for doubtful accounts. Accounts
receivable outstanding longer than the contractual payment terms are considered past due. ILG determines its allowance by considering a number of factors, including the length of time accounts
receivable are past due, ILG's previous loss history, the specific customer's current ability to pay its obligation to ILG and the condition of the general economy. ILG writes off accounts receivable
when they become uncollectible.
Property and Equipment
Property and equipment, including significant improvements, are recorded at cost. Repairs and maintenance and any gains or losses on dispositions are included in
operations.
Depreciation
is recorded on a straight-line basis to allocate the cost of depreciable assets to operations over their estimated service lives.
Asset Category
|
|
Depreciation Period
|
Computer equipment |
|
3 to 8 Years |
Capitalized software |
|
3 to 5 Years |
Buildings and leasehold improvements |
|
1 to 40 Years |
Furniture and other equipment |
|
3 to 10 Years |
B-8
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In
accordance with American Institute of Certified Public Accountants' Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," Interval capitalizes certain qualified costs incurred in connection with the development of internal use software. Capitalization of internal use software costs begins when
the preliminary project stage is completed, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable that the project will be completed
and the software will be used to perform the function intended. Capitalized internal software costs, net of accumulated depreciation, totaled $12.9 million and $11.0 million at
December 31, 2007 and 2006, respectively, and are included in "Property and equipment, net" in the accompanying consolidated balance sheets.
Goodwill and Indefinite-Lived Intangible Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill
acquired in business combinations is assigned to the reporting unit that is expected to benefit from the combination as of the acquisition date. ILG tests goodwill and indefinite-lived intangible
assets for impairment annually as of October 1, or more frequently if events or changes in circumstances indicate that the assets might be impaired. If the carrying amount of a reporting unit's
goodwill exceeds its implied fair value, an impairment loss equal to the excess is recorded. If the carrying amount of an indefinite-lived intangible asset exceeds its estimated fair value, an
impairment loss equal to the excess is recorded.
Long-Lived Assets and Intangible Assets with Definite Lives
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"),
long-lived assets, including property and equipment and intangible assets with definite lives, are tested for recoverability whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. If the carrying amount is deemed to not be recoverable, an impairment loss is recorded as the amount by which the carrying amount of the long-lived
asset exceeds its fair value. Amortization of definite lived intangible assets is recorded on a straight-line basis over their estimated lives.
Advertising
Advertising costs are expensed in the period incurred and principally represent printing and postage costs of directories and magazines, promotions, trade shows
and agency fees. Advertising expense was $18.6 million, $19.1 million and $18.6 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Income Taxes
ILG
accounts for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided on
B-9
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
deferred
tax assets if it is determined that it is more likely than not that the deferred tax asset will not be realized. ILG records interest on potential tax contingencies as a component of income
tax expense and records interest net of any applicable related income tax benefit.
Effective
January 1, 2007, ILG adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109" ("FIN 48"). As a result of the adoption of FIN 48, ILG recognizes liabilities for uncertain tax positions based on
the two-step process prescribed by the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is
more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon ultimate settlement.
Foreign Currency Translation and Transaction Gains and Losses
The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency. Local
currency assets and liabilities are translated at the rates of exchange as of the balance sheet date, and local currency revenue and expenses are translated at average rates of exchange during the
period. Resulting translation gains or losses are included as a component of accumulated other comprehensive income (loss), a separate component of shareholders' equity. Accumulated other
comprehensive income is solely related to foreign currency translation and is recorded net of tax. Transaction gains and losses arising from transactions denominated in a currency other than the
functional currency of the entity involved are included in the consolidated statements of operations.
Foreign
currency transaction net losses for the years ended December 31, 2007, 2006 and 2005 were $0.6 million, $0.5 million and $0.2 million, respectively,
and are included in "Other expense" in the accompanying consolidated statements of operations.
Stock-Based Compensation
Effective January 1, 2006, ILG adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the modified
prospective transition method and therefore has not restated results for prior periods. See Note 4 for a further description of the impact of the adoption of SFAS 123R and Staff
Accounting Bulletin No. 107 ("SAB 107").
Minority Interest
Minority interest in 2007 represents minority ownership in RQH. In connection with the acquisition of RQH, a member of senior management of this business
purchased an ownership interest at the same per share price as ILG. ILG is party to a fair value put and call arrangement with respect to this interest. This put and call arrangement allows this
member of management to require ILG to purchase their interest or allows ILG to acquire such interest at fair value, respectively. This put and call arrangement becomes exercisable by ILG and the
counter-party, respectively, at a date no earlier than 2013. Upon such exercise, the consideration payable can be denominated in either shares of IAC or cash at IAC's option. This put and call
arrangement will be modified prior to the spin-off so that the consideration payable in IAC shares will be replaced with ILG shares. This put arrangement is exercisable by the counter-party outside
the control of ILG and is accounted for in accordance with
B-10
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EITF D-98
"Classification and Measurement of Redeemable Securities." Accordingly, to the extent that the fair value of this interest exceeds the value determined by normal minority
interest accounting, the value of such interest is adjusted to fair value with a corresponding adjustment to invested capital. At and for the year ended December 31, 2007, ILG did not record an
adjustment as this interest is recorded at fair value.
Accounting Estimates
ILG's management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S.
generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of
the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
Significant
estimates underlying the accompanying consolidated financial statements include: the recovery of goodwill and intangible assets; the determination of deferred income taxes,
including related valuation allowances; the determination of deferred revenue; and assumptions related to the determination of stock-based compensation.
Certain Risks and Concentrations
ILG's business is subject to certain risks and concentrations including exposure to risks associated with online commerce security and credit card fraud. A
substantial percentage of the vacation ownership resorts in the Interval network are located in Florida, Hawaii, Las Vegas, Mexico and Southern California and all of the vacation properties for which
RQH provides vacation rental and property management services are located in Hawaii. ILG also depends on relationships with developers and vacation property owners, as well as third party service
providers for processing certain fulfillment services.
Financial
instruments, which potentially subject ILG to concentration of credit risk, consist primarily of cash and cash equivalents. Cash and cash equivalents are maintained with
quality financial institutions of high credit.
ILG conducts business in one foreign country where a currency restriction exists. At December 31, 2007 and 2006, ILG had $5.1 million and $4.0 million of cash which
can only be repatriated upon the approval of that country's government. ILG has requested approval for a portion of the cash to be repatriated. This request is currently pending.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting
Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish
B-11
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
between
the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. SFAS No. 160 will
be applied prospectively, except as it relates to disclosures, for which the effects will be applied retrospectively for all periods presented. Early adoption is not permitted. ILG is currently
assessing the impact of SFAS No. 160 on its consolidated financial position, results of operations and cash flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces FASB Statement No. 141. SFAS No. 141R
establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies
prospectively to business combinations in fiscal years beginning after December 15, 2008. Early adoption is not permitted. ILG is currently assessing the impact of the adoption of SFAS
No. 141R on its consolidated financial position, results of operations and cash flows.
NOTE 3BUSINESS ACQUISITIONS
On May 31, 2007, ILG completed the acquisition of RQH, a vacation rental and property management services company, for approximately $110 million in
cash. The acquisition was funded by IAC, and such funding has been recorded as a transfer from IAC within the statement of shareholders' equity. ILG performed valuations of certain tangible and
intangible assets acquired. These valuations identified $56.2 million of intangible assets other than goodwill. The goodwill recognized amounted to $40.4 million. Intangible assets with
definite lives included property management contracts ($45.7 million), wholesaler agreements ($5.9 million), trade names and trademarks ($4.3 million) and other agreements
($0.3 million) and are being amortized over a weighted-average period of 12.7 years. IAC also allocated $9.0 million of the purchase price to increase the recorded value of two
vacation property front desk units to fair value. The entire amount allocated to goodwill is tax deductible. ILG viewed RQH's revenue, operating income, Operating Income Before Amortization, net
income and cash flow as its most important valuation metrics. ILG agreed to consideration that resulted in recognition of a significant amount of goodwill because RQH's business model complements the
business model of ILG and because of RQH's market position, brand and growth opportunities in its market. As a result, a significant portion of the consideration was based on the expected financial
performance of RQH, and not the asset value on the books of RQH at the time of acquisition.
NOTE 4SFAS 123R AND STOCK-BASED COMPENSATION
The equity awards described below principally relate to awards to ILG employees that were granted under various IAC stock and annual incentive plans.
Effective
January 1, 2006, ILG adopted SFAS 123R using the modified prospective transition method and has applied the classification provisions of SAB 107 regarding
the SEC's interpretation of SFAS 123R and the valuation of share-based payments for public companies in its adoption of SFAS 123R.
The
adoption of SFAS 123R did not impact the amount of stock-based compensation expense recorded in the accompanying consolidated statements of operations as ILG had previously
adopted the
B-12
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4SFAS 123R AND STOCK-BASED COMPENSATION (Continued)
expense
recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
Prior
to the adoption of SFAS 123R, the entire tax benefit from stock-based compensation was reported as a component of operating cash flows. Upon the adoption of
SFAS 123R, tax benefits resulting from tax deductions in excess of the stock-based compensation expense recognized in the consolidated statement of operations are reported as a component of
financing cash flows. For the years ended December 31, 2007 and 2006, excess tax benefits from stock-based compensation of $0.3 million and $0.3 million, respectively, are
included as a component of financing cash flows. For the year ended December 31, 2005, excess tax benefits from stock-based compensation of less than $0.1 million is included as a
component of operating cash flows.
Non-cash
stock-based compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of operations for the
years ended December 31, 2007, 2006 and 2005 (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cost of sales |
|
$ |
282 |
|
$ |
225 |
|
$ |
82 |
|
Selling and marketing expense |
|
|
308 |
|
|
210 |
|
|
46 |
|
General and administrative expense |
|
|
3,039 |
|
|
2,851 |
|
|
1,131 |
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation expense before income taxes |
|
|
3,629 |
|
|
3,286 |
|
|
1,259 |
|
Income tax benefit |
|
|
(1,400 |
) |
|
(1,268 |
) |
|
(486 |
) |
|
|
|
|
|
|
|
|
Non-cash stock-based compensation expense after income taxes |
|
$ |
2,229 |
|
$ |
2,018 |
|
$ |
773 |
|
|
|
|
|
|
|
|
|
The
form of awards granted to ILG employees are principally restricted stock units ("RSUs") and performance stock units ("PSUs"). RSUs and PSUs are awards in the form of phantom shares
or units, denominated in a hypothetical equivalent number of shares of IAC common stock and with the value of each award equal to the fair value of IAC common stock at the date of grant. All
outstanding award agreements provide for settlement, upon vesting, in stock for U.S. employees and in cash for non-U.S. employees. Each RSU, PSU and restricted stock grant is subject to
service-based vesting, where a specific period of continued employment must pass before an award vests, and certain grants also include performance-based vesting, where certain performance targets set
at the time of grant must be achieved before an award vests. ILG recognizes expense for all RSUs, PSUs and restricted stock, for which vesting is considered probable. For RSU and restricted stock
grants to U.S. employees, the accounting charge is measured at the grant date as the fair value of IAC common stock and expensed ratably as non-cash compensation over the vesting term. For
PSU grants to U.S. employees, the expense is measured at the grant date as the fair value of IAC common stock and expensed as non-cash compensation when the performance targets are
considered probable of being achieved. The expense associated with RSU and PSU awards to non-U.S. employees is initially measured at fair value at the grant date and expensed
ratably over the vesting term, subject to mark-to-market adjustments for changes in the price of IAC common stock, as compensation expense within general and administrative
expense. The expense related to awards to international employees totaled $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
B-13
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4SFAS 123R AND STOCK-BASED COMPENSATION (Continued)
The
amount of stock-based compensation expense recognized in the consolidated statements of operations is reduced by estimated forfeitures, as the amount recorded is based on awards
ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods if the actual forfeiture rate differs
from the estimated rate.
As
of December 31, 2007, there was approximately $14.0 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards. This
cost is expected to be recognized over a weighted-average period of approximately 3.0 years. At December 31, 2007, there were less than 0.1 million awards outstanding to
non-U.S. employees.
In connection with the acquisition of RQH by IAC in 2007 a member of RQH's management was granted restricted common equity in RQH. This award was granted on May 31, 2007 and was
initially measured at fair value, which is being amortized to expense over the vesting period. This award vests ratably over four and a half years, or earlier based upon the occurrence of certain
prescribed events. The award vests in non-voting restricted common shares of RQH.
These shares are subject to a put right by the holder and a call right by IAC, which are not exercisable until the first quarter of 2013 and annually thereafter. The value of these
shares upon exercise of the put or call is equal to their fair market value, determined by negotiation or arbitration, reduced by the accreted value of the preferred interest that was taken by IAC
upon the purchase of RQH. The initial value of the preferred interest was equal to the acquisition price of RQH. The preferred interest accretes value at a 10% annual rate. Upon exercise of the put or
call the consideration is payable in IAC shares or cash or a combination thereof at IAC's option. Prior to the separation, this put and call arrangement will be modified so that the consideration
payable in IAC's shares will be replaced with ILG shares.
The unrecognized compensation cost related to this equity award is $0.4 million at December 31, 2007.
NOTE 5GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands):
|
|
December 31,
|
|
|
2007
|
|
2006
|
Goodwill |
|
$ |
514,308 |
|
$ |
473,879 |
Intangible assets with indefinite lives |
|
|
33,300 |
|
|
33,300 |
Intangible assets with definite lives, net |
|
|
155,595 |
|
|
119,920 |
|
|
|
|
|
|
Total goodwill and intangible assets, net |
|
$ |
703,203 |
|
$ |
627,099 |
|
|
|
|
|
B-14
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5GOODWILL AND INTANGIBLE ASSETS (Continued)
Intangible
assets with indefinite lives relate principally to acquired trade names and trademarks. At December 31, 2007, intangible assets with definite lives relate to the
following (in thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted-Average
Amortization Life (Years)
|
Customer relationships |
|
$ |
129,500 |
|
$ |
(68,257 |
) |
$ |
61,243 |
|
10.0 |
Purchase agreements |
|
|
73,500 |
|
|
(38,741 |
) |
|
34,759 |
|
10.0 |
Property management contracts |
|
|
45,700 |
|
|
(1,904 |
) |
|
43,796 |
|
14.0 |
Technology |
|
|
24,630 |
|
|
(24,600 |
) |
|
30 |
|
5.0 |
Other |
|
|
16,854 |
|
|
(1,087 |
) |
|
15,767 |
|
8.2 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
290,184 |
|
$ |
(134,589 |
) |
$ |
155,595 |
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006, intangible assets with definite lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted-Average
Amortization Life (Years)
|
Customer relationships |
|
$ |
129,500 |
|
$ |
(55,307 |
) |
$ |
74,193 |
|
10.0 |
Purchase agreements |
|
|
73,500 |
|
|
(31,391 |
) |
|
42,109 |
|
10.0 |
Technology |
|
|
24,630 |
|
|
(21,012 |
) |
|
3,618 |
|
5.0 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
227,630 |
|
$ |
(107,710 |
) |
$ |
119,920 |
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets with definite lives is computed on a straight-line basis and, based on December 31, 2007 balances, such amortization for the next
five years and thereafter is estimated to be as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
25,917 |
2009 |
|
|
25,887 |
2010 |
|
|
25,887 |
2011 |
|
|
25,826 |
2012 |
|
|
19,892 |
2013 and thereafter |
|
|
32,186 |
|
|
|
|
|
$ |
155,595 |
|
|
|
The
following table presents the balance of goodwill by segment, including the changes in carrying amount of goodwill, for the year ended December 31, 2007 (in thousands):
|
|
Balance as of
January 1, 2007
|
|
Additions
|
|
(Deductions)
|
|
Balance as of
December 31, 2007
|
Interval |
|
$ |
473,879 |
|
$ |
|
|
$ |
|
|
$ |
473,879 |
RQH |
|
|
|
|
|
40,429 |
|
|
|
|
|
40,429 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
473,879 |
|
$ |
40,429 |
|
$ |
|
|
$ |
514,308 |
|
|
|
|
|
|
|
|
|
B-15
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5GOODWILL AND INTANGIBLE ASSETS (Continued)
Additions
in 2007 relate to the acquisition of RQH.
The
following table presents the balance of goodwill by segment, including the changes in carrying amount of goodwill, for the year ended December 31, 2006 (in thousands):
|
|
Balance as of
January 1, 2006
|
|
Additions
|
|
(Deductions)
|
|
Balance as of
December 31, 2006
|
Interval |
|
$ |
467,504 |
|
$ |
6,822 |
|
$ |
(447 |
) |
$ |
473,879 |
RQH |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
467,504 |
|
$ |
6,822 |
|
$ |
(447 |
) |
$ |
473,879 |
|
|
|
|
|
|
|
|
|
Additions
in 2006 principally relate to the pushdown of IAC's acquisition of a minority interest in Interval.
NOTE 6PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Computer equipment |
|
$ |
14,443 |
|
$ |
11,900 |
|
Capitalized software |
|
|
31,312 |
|
|
26,869 |
|
Buildings and leasehold improvements |
|
|
19,182 |
|
|
8,114 |
|
Furniture and other equipment |
|
|
8,096 |
|
|
6,638 |
|
Projects in progress |
|
|
5,848 |
|
|
3,347 |
|
|
|
|
|
|
|
|
|
|
78,881 |
|
|
56,868 |
|
Less: accumulated depreciation and amortization |
|
|
(43,918 |
) |
|
(35,538 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
34,963 |
|
$ |
21,330 |
|
|
|
|
|
|
|
NOTE 7INCOME TAXES
ILG is a member of IAC's consolidated federal and state tax returns. In all periods presented, current and deferred tax expense has been computed for ILG on a
separate return basis. ILG's payments to IAC related to its share of IAC's consolidated federal and state tax return liabilities have been reflected within cash flows from operating activities in the
accompanying consolidated statements of cash flows.
U.S.
and foreign earnings from continuing operations before income tax and minority interest are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
U.S. |
|
$ |
104,021 |
|
$ |
82,258 |
|
$ |
67,914 |
Foreign |
|
|
12,079 |
|
|
11,653 |
|
|
10,533 |
|
|
|
|
|
|
|
|
Total |
|
$ |
116,100 |
|
$ |
93,911 |
|
$ |
78,447 |
|
|
|
|
|
|
|
B-16
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7INCOME TAXES (Continued)
The components of the provision for income taxes attributable to continuing operations are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Current income tax provision: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
40,619 |
|
$ |
33,902 |
|
$ |
30,413 |
|
State |
|
|
5,945 |
|
|
4,744 |
|
|
5,456 |
|
Foreign |
|
|
4,574 |
|
|
4,497 |
|
|
3,219 |
|
|
|
|
|
|
|
|
|
Current income tax provision |
|
|
51,138 |
|
|
43,143 |
|
|
39,088 |
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit) provision: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(6,161 |
) |
|
(6,268 |
) |
|
(8,355 |
) |
State |
|
|
412 |
|
|
(14 |
) |
|
(1,400 |
) |
Foreign |
|
|
(357 |
) |
|
(993 |
) |
|
(129 |
) |
|
|
|
|
|
|
|
|
Deferred income tax (benefit) |
|
|
(6,106 |
) |
|
(7,275 |
) |
|
(9,884 |
) |
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
45,032 |
|
$ |
35,868 |
|
$ |
29,204 |
|
|
|
|
|
|
|
|
|
Current
income taxes payable has been reduced by $0.3 million and $0.3 million for the years ended December 31, 2007 and 2006, respectively, for tax
deductions attributable to stock-based compensation. There was no significant reduction for the year ended December 31, 2005. The related income tax benefits of this stock-based compensation
were recorded as amounts charged or credited to invested capital or a reduction in goodwill.
The
tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006
are presented below (in thousands). The valuation allowance is related to items for which it is more likely than not that the tax benefit will not be realized.
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
Deferred revenue |
|
$ |
50,243 |
|
$ |
46,838 |
|
Provision for accrued expenses |
|
|
4,015 |
|
|
2,556 |
|
Net operating loss carryforwards |
|
|
837 |
|
|
936 |
|
Other |
|
|
3,565 |
|
|
2,522 |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
58,660 |
|
|
52,852 |
|
Less valuation allowance |
|
|
(679 |
) |
|
(714 |
) |
|
|
|
|
|
|
Net deferred tax assets |
|
|
57,981 |
|
|
52,138 |
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Intangible and other assets |
|
|
(110,831 |
) |
|
(111,258 |
) |
Deferred membership costs |
|
|
(12,612 |
) |
|
(11,106 |
) |
Property and equipment |
|
|
(737 |
) |
|
(2,299 |
) |
Other |
|
|
(276 |
) |
|
(56 |
) |
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(124,456 |
) |
|
(124,719 |
) |
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(66,475 |
) |
$ |
(72,581 |
) |
|
|
|
|
|
|
B-17
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7INCOME TAXES (Continued)
At December 31, 2007, ILG had foreign net operating losses ("NOLs") of approximately $2.6 million available to offset future income. Of these foreign
losses, approximately $2.0 million can be carried forward indefinitely, and approximately $0.6 million will expire within ten years. During 2007, ILG did not recognize any significant
tax benefits related to NOLs.
During
2007, ILG's valuation allowance did not significantly change. At December 31, 2007, ILG had a valuation allowance of approximately $0.7 million related to the
portion of tax operating loss carryforwards for which it is more likely than not that the tax benefit will not be realized.
A
reconciliation of total income tax provision to the amounts computed by applying the statutory federal income tax rate to earnings from continuing operations before income taxes and
minority interest is shown as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Income tax provision at the federal statutory rate of 35% |
|
$ |
40,635 |
|
$ |
32,869 |
|
$ |
27,456 |
|
State income taxes, net of effect of federal tax benefit |
|
|
4,132 |
|
|
3,075 |
|
|
2,637 |
|
Foreign income taxed at a different statutory tax rate |
|
|
(520 |
) |
|
(789 |
) |
|
(979 |
) |
Other, net |
|
|
785 |
|
|
713 |
|
|
90 |
|
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
45,032 |
|
$ |
35,868 |
|
$ |
29,204 |
|
|
|
|
|
|
|
|
|
In
accordance with APB No. 23, no federal and state income taxes have been provided on permanently reinvested earnings of certain foreign subsidiaries aggregating approximately
$12.8 million at December 31, 2007. If, in the future, these earnings are repatriated to the U.S., or if ILG determines such earnings will be repatriated to the U.S. in the foreseeable
future, additional tax provisions would be required. Due to complexities in the tax laws and the assumptions that would have to be made, it is not practicable to estimate the amounts of income taxes
that would have to be provided.
ILG
adopted the provisions of FIN 48 effective January 1, 2007. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial statements. FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The cumulative effect of the adoption resulted in an increase of $0.2 million to retained earnings. A reconciliation of the beginning and ending amount of
unrecognized tax benefits, excluding interest, is as follows (in thousands):
Balance at January 1, 2007 |
|
$ |
2,872 |
Additions based on tax positions related to the current year |
|
|
2,068 |
Additions for tax positions of prior years |
|
|
756 |
Reductions for tax positions of prior years |
|
|
|
Settlements |
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
5,696 |
|
|
|
As
of January 1, 2007 and December 31, 2007, the unrecognized tax benefits, including interest, were $4.0 million and $7.3 million, respectively. Included in
unrecognized tax benefits at December 31, 2007 is approximately $4.9 million for tax positions included in IAC's consolidated tax return filings.
B-18
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7INCOME TAXES (Continued)
Included
within "Receivables from IAC and subsidiaries" in the accompanying consolidated balance sheet at December 31, 2007 is approximately $6.3 million of unrecognized tax benefits and
related interest that will remain a liability of IAC after the spin-off. Also included in unrecognized tax benefits at December 31, 2007 is approximately $2.0 million for tax
positions which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
ILG
recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. Included in income tax expense from continuing operations for the year
ended December 31, 2007 is $0.4 million, net of related deferred taxes of $0.2 million, for interest on unrecognized tax benefits. At January 1, 2007 and
December 31, 2007, ILG has accrued $1.0 million and $1.6 million, respectively, for the payment of interest. There are no material accruals for penalties.
By
virtue of previously filed separate company and consolidated tax returns with IAC, ILG is routinely under audit by federal, state, local and foreign authorities in the area of income
tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient
to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the
reserves for tax contingencies and the amounts owed by ILG are recorded in the period they become known.
The
Internal Revenue Service ("IRS") is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of
Interval from September 24, 2002, its date of acquisition by IAC. The statute of limitations for these years has been extended to December 31, 2008. Various IAC consolidated tax returns
filed with state, local and foreign jurisdictions are currently under examination, the most significant of which are Florida, New York state and New York City, for various tax years after
December 31, 2001. These examinations are expected to be completed by late 2008.
ILG
believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $2.9 million within twelve months of the current reporting date due
primarily to the reversal of deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits
cannot be made, but are not expected to be significant.
NOTE 8SEGMENT INFORMATION
The overall concept that ILG employs in determining its operating segments and related financial information is to present them in a manner consistent with how
the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of
products or services offered or the target market. ILG has two operating segments, Interval, its vacation ownership membership services business, and RQH, its vacation rental and property management
business.
ILG's
primary metric is Operating Income Before Amortization, which is defined as operating income excluding, if applicable: (1) non-cash compensation expense,
(2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions and (4) one-time items. ILG believes this measure is
useful to investors because it represents the consolidated operating results from ILG's segments, taking into account depreciation, which it believes is an ongoing cost of doing business,
B-19
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8SEGMENT INFORMATION (Continued)
but
excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to ILG's statement
of operations of certain expenses, including non-cash compensation, and acquisition-related accounting.
The
following table reconciles Operating Income Before Amortization to operating income and net income in 2007, 2006 and 2005:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Operating Income Before Amortization |
|
$ |
137,074 |
|
$ |
114,634 |
|
$ |
99,303 |
|
Non-cash compensation expense |
|
|
(3,629 |
) |
|
(3,286 |
) |
|
(1,259 |
) |
Amortization of intangibles |
|
|
(26,879 |
) |
|
(25,220 |
) |
|
(25,220 |
) |
|
|
|
|
|
|
|
|
|
Operating income |
|
|
106,566 |
|
|
86,128 |
|
|
72,824 |
|
Interest income |
|
|
10,345 |
|
|
8,914 |
|
|
6,518 |
|
Interest expense |
|
|
(205 |
) |
|
(357 |
) |
|
(623 |
) |
Other expense |
|
|
(606 |
) |
|
(774 |
) |
|
(272 |
) |
Income tax provision |
|
|
(45,032 |
) |
|
(35,868 |
) |
|
(29,204 |
) |
Minority interest in income of consolidated subsidiaries |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
71,056 |
|
$ |
58,043 |
|
$ |
49,243 |
|
|
|
|
|
|
|
|
|
The
following tables reconcile Operating Income Before Amortization to operating income for ILG's operating segments and to net income in total (in thousands):
|
|
Year Ended December 31, 2007
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization
of Intangibles
|
|
Operating
Income
|
|
Interval |
|
$ |
129,936 |
|
$ |
(3,513 |
) |
$ |
(23,994 |
) |
$ |
102,429 |
|
RQH |
|
|
7,138 |
|
|
(116 |
) |
|
(2,885 |
) |
|
4,137 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
137,074 |
|
$ |
(3,629 |
) |
$ |
(26,879 |
) |
$ |
106,566 |
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
9,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
116,100 |
|
Income tax provision |
|
|
(45,032 |
) |
Minority interest in income of consolidated subsidiaries |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
71,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B-20
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8SEGMENT INFORMATION (Continued)
Prior
to the acquisition of RQH in 2007, there was only one reporting segment.
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Revenue: |
|
|
|
|
|
|
|
|
|
Interval |
|
$ |
318,370 |
|
$ |
288,646 |
|
$ |
260,843 |
RQH |
|
|
42,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
360,407 |
|
$ |
288,646 |
|
$ |
260,843 |
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Operating Income: |
|
|
|
|
|
|
|
|
|
Interval |
|
$ |
102,429 |
|
$ |
86,128 |
|
$ |
72,824 |
RQH |
|
|
4,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
106,566 |
|
$ |
86,128 |
|
$ |
72,824 |
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Operating Income Before Amortization: |
|
|
|
|
|
|
|
|
|
Interval |
|
$ |
129,936 |
|
$ |
114,634 |
|
$ |
99,303 |
RQH |
|
|
7,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
137,074 |
|
$ |
114,634 |
|
$ |
99,303 |
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Assets: |
|
|
|
|
|
|
Interval |
|
$ |
802,846 |
|
$ |
767,677 |
RQH |
|
|
119,771 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
922,617 |
|
$ |
767,677 |
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Depreciation and amortization of intangibles: |
|
|
|
|
|
|
|
|
|
Interval |
|
$ |
31,846 |
|
$ |
33,052 |
|
$ |
32,588 |
RQH |
|
|
3,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,294 |
|
$ |
33,052 |
|
$ |
32,588 |
|
|
|
|
|
|
|
B-21
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8SEGMENT INFORMATION (Continued)
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
Interval |
|
$ |
9,892 |
|
$ |
6,682 |
|
$ |
8,966 |
RQH |
|
|
427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,319 |
|
$ |
6,682 |
|
$ |
8,966 |
|
|
|
|
|
|
|
ILG
maintains operations in the United States, the United Kingdom and other international territories. Geographic information about the United States and international territories is
presented below:
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
302,135 |
|
$ |
237,818 |
|
$ |
213,319 |
|
All other countries |
|
|
58,272 |
|
|
50,828 |
|
|
47,524 |
|
|
|
|
|
|
|
|
Total |
|
$ |
360,407 |
|
$ |
288,646 |
|
$ |
260,843 |
|
|
|
|
|
|
|
B-22
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8SEGMENT INFORMATION (Continued)
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Long-lived assets (excluding goodwill and intangible assets): |
|
|
|
|
|
|
|
United States |
|
$ |
33,688 |
|
$ |
20,161 |
|
All other countries |
|
|
1,275 |
|
|
1,169 |
|
|
|
|
|
|
Total |
|
$ |
34,963 |
|
$ |
21,330 |
|
|
|
|
|
NOTE 9COMMITMENTS
ILG leases office space, computers and equipment used in connection with its operations under various operating leases, many of which contain escalation clauses.
Future
minimum payments under operating lease agreements are as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
9,333 |
2009 |
|
|
8,152 |
2010 |
|
|
6,440 |
2011 |
|
|
6,257 |
2012 |
|
|
6,172 |
Thereafter |
|
|
38,589 |
|
|
|
|
Total |
|
$ |
74,943 |
|
|
|
Expenses
charged to operations under these agreements were $9.9 million, $9.4 million and $8.7 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
ILG
also has funding commitments that could potentially require its performance in the event of demands by third parties or contingent events, such as under letters of credit extended or
under guarantees of debt, as follows (in thousands):
|
|
Amount of Commitment Expiration Per Period
|
|
|
Total
Amounts
Committed
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
Guarantees, surety bonds, and letters of credit |
|
$ |
32,612 |
|
$ |
25,040 |
|
$ |
3,722 |
|
$ |
1,806 |
|
$ |
2,044 |
Purchase obligations |
|
|
10,587 |
|
|
4,177 |
|
|
3,150 |
|
|
2,173 |
|
|
1,087 |
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments |
|
$ |
43,199 |
|
$ |
29,217 |
|
$ |
6,872 |
|
$ |
3,979 |
|
$ |
3,131 |
|
|
|
|
|
|
|
|
|
|
|
The
total commercial commitments above primarily consist of guarantees, which support ILG's business in the United Kingdom. The purchase obligations primarily relate to future space
purchases.
B-23
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10CONTINGENCIES
In the ordinary course of business, ILG is a party to various lawsuits. ILG establishes reserves for specific legal matters when it determines that the likelihood
of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not probable and,
therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against ILG, including claims where an unfavorable outcome is reasonably possible,
will not have a material impact on the liquidity,
results of operations, or financial condition of ILG, these matters are subject to inherent uncertainties and management's view of these matters may change in the future. ILG also evaluates other
contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 7 for discussion related to income tax contingencies.
NOTE 11FINANCIAL INSTRUMENTS
The additional disclosure below of the estimated fair value of financial instruments has been determined by ILG using available market information and appropriate
valuation methodologies when available. ILG's financial instruments include guarantees, letters of credit and surety bonds. These commitments are in place to facilitate the commercial operations of
certain Company subsidiaries.
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents |
|
$ |
67,113 |
|
$ |
67,113 |
|
$ |
37,557 |
|
$ |
37,557 |
|
Restricted cash and cash equivalents |
|
|
5,817 |
|
|
5,817 |
|
|
293 |
|
|
293 |
|
Accounts receivable, net |
|
|
15,750 |
|
|
15,750 |
|
|
9,301 |
|
|
9,301 |
|
Guarantees, surety bonds and letters of credit |
|
|
N/A |
|
|
(32,612 |
) |
|
N/A |
|
|
(19,612 |
) |
The
carrying amounts of cash and cash equivalents and restricted cash and cash equivalents reflected in the accompanying consolidated balance sheets approximate fair value as they are
redeemable at par upon notice or maintained with various high-quality financial institutions and have maturities of less than 91 days. Accounts receivable, net, are short-term in
nature and are generally settled shortly after the sale.
NOTE 12SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
55 |
|
$ |
51 |
|
$ |
|
|
|
Income tax payments, including amounts paid to IAC for ILG's share of IAC's consolidated tax liability |
|
|
48,593 |
|
|
41,663 |
|
|
38,254 |
|
|
Income tax refunds |
|
|
(729 |
) |
|
(32 |
) |
|
(233 |
) |
B-24
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13RELATED PARTY TRANSACTIONS
ILG has an agreement with Arise Virtual Solutions relating to outsourced call center services provided by ILG to its members. During 2007 and 2006, total payments
of approximately $3.2 million and $1.1 million, respectively, were made to Arise. Amounts payable related to these services were $0.1 million at both December 31, 2007 and
2006 and are included in "Accrued expenses and other current liabilities" in the accompanying consolidated balance sheets. Arise is considered a related party
because one of IAC's board members is a partner of Accretive LLC, which owns Arise Virtual Solutions.
ILG's
expenses include allocations from IAC of costs associated with IAC's accounting, treasury, legal, tax, corporate support, human resources and internal audit functions. These
allocations were based on the ratio of ILG's revenue as a percentage of IAC's total revenue. Allocated costs were $1.0 million, $0.7 million and $0.7 million in 2007, 2006 and
2005, respectively, and are included in "General and administrative expense" in the accompanying consolidated statements of operations. It is not practicable to determine the actual expenses that
would have been incurred for these services had ILG operated as a stand-alone entity. In the opinion of management, the allocation method is reasonable.
The
portion of interest income reflected in the consolidated statements of operations that is intercompany in nature, was $7.7 million, $7.0 million and $4.7 million
for the years ended December 31, 2007, 2006 and 2005, respectively. This intercompany interest relates to the receivables from IAC.
An
analysis of ILG's receivables from IAC and subsidiaries is as follows (in thousands):
|
|
2007
|
|
2006
|
|
Receivables from IAC and subsidiaries, beginning of year |
|
$ |
355,057 |
|
$ |
259,122 |
|
Cash transfers to IAC related to its centrally managed U.S. treasury function |
|
|
95,234 |
|
|
108,202 |
|
Interest income |
|
|
7,718 |
|
|
7,003 |
|
Employee equity instruments and associated tax withholdings |
|
|
1,074 |
|
|
1,049 |
|
Taxes (excludes withholdings associated with employee equity instruments) |
|
|
506 |
|
|
(4,178 |
) |
Allocation of non-cash compensation expense |
|
|
(3,566 |
) |
|
(3,286 |
) |
Administrative expenses and other |
|
|
(19,548 |
) |
|
(12,855 |
) |
|
|
|
|
|
|
Receivables from IAC and subsidiaries, end of year |
|
$ |
436,475 |
|
$ |
355,057 |
|
|
|
|
|
|
|
Relationship Between IAC and ILG after the Spin-Off
For purposes of governing certain of the ongoing relationships between ILG and IAC at and after the spin-off, and to provide for an orderly
transition, ILG and IAC are expected to enter into a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement (the "Spin-Off
Agreements"), among other agreements.
Separation Agreement
The separation agreement is expected to provide generally that (i) immediately prior to the spin-off, IAC will contribute or otherwise transfer
to ILG all of the subsidiaries and assets comprising the ILG Businesses, (ii) ILG will assume all of the liabilities related to the ILG Businesses, (iii) each party will indemnify the
other and its respective affiliates, current and former directors, officers and
B-25
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13RELATED PARTY TRANSACTIONS (Continued)
employees
for any losses arising out of any breach of any of the Spin-Off Agreements and (iv) ILG will indemnify IAC for its failure to assume and perform any assumed liabilities
and any liabilities relating to ILG financial and business information included in the SEC documentation filed with respect to the spin-off as well as such other terms as to which IAC and
ILG mutually agree.
Tax Sharing Agreement
The tax sharing agreement will govern the respective rights, responsibilities and obligations of IAC and ILG after the spin-off with respect to taxes
for the periods ending on or before the spin-off. Generally, IAC will pay taxes with respect to ILG income included on its consolidated, unitary or combined federal or state tax returns
including audit adjustments with respect thereto. Other pre-distribution taxes that are attributable to the ILG Businesses,
including taxes reported on separately filed and all foreign returns and audit adjustments with respect thereto, will be borne solely by ILG. The tax sharing agreement is expected to contain certain
customary restrictive covenants that generally prohibit ILG (absent a supplemental IRS ruling or an unqualified opinion of counsel to the contrary, in each case, in a form and substance satisfactory
acceptable to IAC in its sole discretion) from taking actions that could jeopardize the tax free nature of the spin-off. ILG is expected to agree to indemnify IAC for any taxes and related
losses resulting from its non-compliance with these restrictive covenants, as well as for the breach of certain representations in the Spin-Off Agreements and other
documentation relating to the tax-free nature of the spin-off.
Employee Matters Agreement
The employee matters agreement will generally provide that ILG will be responsible for, among other obligations, all employment and benefit-related obligations
and liabilities related to those persons employed by the ILG Businesses immediately prior to the spin-off (and their dependents and beneficiaries) and former employees who most recently
worked for the ILG Businesses. This agreement is also expected to provide that assets and liabilities from the IAC Retirement Savings Plan of ILG employees will be transferred to a newly established
ILG Retirement Savings Plan as soon as practicable following the spin-off.
Transition Services Agreement
Under the transition services agreement, beginning on the date of the completion of the spin-off, IAC will provide to ILG on an interim, transitional
basis, various services, which are expected to relate primarily to public company and operational matters, and such other services as to which IAC and ILG mutually agree. The agreed upon charges for
these services will generally allow IAC to recover fully the allocated costs of providing the services, plus all out-of-pocket costs and expenses. ILG may terminate the
agreement with respect to one or more particular services upon prior written notice.
Commercial Agreements
IAC and ILG currently, and for the foreseeable future expect to provide certain services to each other pursuant to certain commercial relationships. In connection
with the spin-off, IAC and ILG will enter into a number of commercial agreements between subsidiaries of IAC, on the one hand, and subsidiaries of ILG, on the other hand, many of which
will memorialize (in most material respects) pre-existing arrangements in effect prior to the spin-off and all of which are intended to reflect arm's
B-26
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13RELATED PARTY TRANSACTIONS (Continued)
length
terms. In addition, IAC and ILG believe that such agreements, whether taken individually or in the aggregate, do not constitute a material contract to either IAC or ILG.
Aggregate
revenue earned with respect to these commercial agreements, with IAC subsidiaries, by the ILG Businesses was not material in 2007, 2006 and 2005. The ILG Businesses incurred
approximately $2.1 million, $1.7 million and $1.5 million in 2007, 2006 and 2005, respectively, in expenses related to these commercial agreements with IAC subsidiaries.
NOTE 14BENEFIT PLANS
During the three years ended December 31, 2007, ILG participated in a retirement savings plan sponsored by IAC that qualified under Section 401(k)
of the Internal Revenue Code. Subsequent to the spin-off, the net assets available for benefits of the employees of ILG are expected to be transferred from the IAC plan to a newly created
ILG plan. Under the IAC plan, participating employees may contribute up to 16% of their pretax earnings, but not more than statutory limits. ILG's match under the IAC plan is fifty cents for each
dollar a participant contributes in this plan, with a maximum contribution of 3% of a participant's eligible earnings. Matching contributions for the plan were approximately $1.1 million,
$1.0 million and $1.0 million in 2007, 2006, and 2005, respectively. Matching contributions are invested in the same manner as each participant's voluntary contributions in the
investment options provided under the plan. Investment options in the plan include IAC common stock, but neither participant nor matching contributions are required to be invested in IAC common stock.
During
the three years ended December 31, 2007, ILG also had or participated in various benefit plans, principally defined contribution plans, for its non-U.S.
employees. ILG's contributions for these plans were approximately $0.3 million, $0.3 million and $0.3 million in 2007, 2006 and 2005, respectively.
NOTE 15QUARTERLY RESULTS (UNAUDITED)
|
|
Quarter Ended
March 31,
|
|
Quarter Ended
June 30,(a)
|
|
Quarter Ended
September 30,(a)
|
|
Quarter Ended
December 31,(a)
|
|
|
(In thousands)
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
86,433 |
|
$ |
85,885 |
|
$ |
96,019 |
|
$ |
92,070 |
Gross profit |
|
|
67,489 |
|
|
63,377 |
|
|
65,753 |
|
|
62,989 |
Operating income |
|
|
31,829 |
|
|
26,434 |
|
|
25,054 |
|
|
23,249 |
Net income |
|
|
21,149 |
|
|
17,419 |
|
|
16,546 |
|
|
15,942 |
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
78,676 |
|
$ |
71,377 |
|
$ |
70,359 |
|
$ |
68,234 |
Gross profit |
|
|
61,219 |
|
|
54,281 |
|
|
54,010 |
|
|
52,843 |
Operating income |
|
|
26,179 |
|
|
19,173 |
|
|
19,913 |
|
|
20,863 |
Net income |
|
|
17,241 |
|
|
13,256 |
|
|
13,293 |
|
|
14,253 |
- (a)
- The
second, third and fourth quarters of 2007 include the results of RQH, which was acquired by ILG on May 31, 2007.
B-27
Schedule II
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Description
|
|
Balance at
Beginning of
Period
|
|
Charges to
Earnings
|
|
Charges to
Other
Accounts
|
|
Deductions
|
|
Balance at
End of Period
|
|
|
(In thousands)
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
255 |
|
$ |
(95 |
) |
$ |
200 |
|
$ |
(8) |
(1) |
$ |
352 |
Deferred tax valuation allowance |
|
|
714 |
|
|
45 |
|
|
(80 |
) |
|
|
|
|
679 |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
619 |
|
$ |
(182 |
) |
$ |
(182 |
) |
$ |
|
|
$ |
255 |
Deferred tax valuation allowance |
|
|
861 |
|
|
(147 |
) |
|
|
|
|
|
|
|
714 |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
1,129 |
|
$ |
(298 |
) |
$ |
|
|
$ |
(212) |
(1) |
$ |
619 |
Deferred tax valuation allowance |
|
|
687 |
|
|
177 |
|
|
(3 |
) |
|
|
|
|
861 |
- (1)
- Write-off
of uncollectible accounts receivable.
B-28
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Revenue |
|
$ |
115,937 |
|
$ |
86,433 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
36,033 |
|
|
18,944 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
79,904 |
|
|
67,489 |
|
Selling and marketing expense |
|
|
12,263 |
|
|
11,662 |
|
General and administrative expense |
|
|
19,965 |
|
|
15,805 |
|
Amortization of intangibles |
|
|
6,477 |
|
|
6,305 |
|
Depreciation |
|
|
2,235 |
|
|
1,888 |
|
|
|
|
|
|
|
|
Operating income |
|
|
38,964 |
|
|
31,829 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
2,016 |
|
|
2,641 |
|
|
Interest expense |
|
|
(60 |
) |
|
(46 |
) |
|
Other expense |
|
|
(500 |
) |
|
(113 |
) |
|
|
|
|
|
|
Total other income, net |
|
|
1,456 |
|
|
2,482 |
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
40,420 |
|
|
34,311 |
|
Income tax provision |
|
|
(15,604 |
) |
|
(13,162 |
) |
Minority interest in income of consolidated subsidiaries |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,808 |
|
$ |
21,149 |
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
B-29
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
|
|
(In thousands)
|
|
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
69,242 |
|
$ |
67,113 |
|
Restricted cash and cash equivalents |
|
|
8,342 |
|
|
5,817 |
|
Accounts receivable, net of allowance of $273 and $352, respectively |
|
|
23,852 |
|
|
15,750 |
|
Deferred income taxes |
|
|
28,000 |
|
|
28,109 |
|
Deferred membership costs |
|
|
14,153 |
|
|
13,688 |
|
Prepaid expenses and other current assets |
|
|
21,571 |
|
|
17,086 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
165,160 |
|
|
147,563 |
|
Property and equipment, net |
|
|
35,192 |
|
|
34,963 |
|
Goodwill |
|
|
514,320 |
|
|
514,308 |
|
Intangible assets, net |
|
|
182,442 |
|
|
188,895 |
|
Deferred membership costs |
|
|
22,025 |
|
|
21,217 |
|
Deferred income taxes |
|
|
12,549 |
|
|
12,549 |
|
Other non-current assets |
|
|
2,217 |
|
|
3,122 |
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
933,905 |
|
$ |
922,617 |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
Accounts payable, trade |
|
$ |
12,993 |
|
$ |
10,981 |
|
Deferred revenue |
|
|
106,372 |
|
|
97,898 |
|
Income taxes payable |
|
|
3,590 |
|
|
2,489 |
|
Accrued compensation and benefits |
|
|
10,523 |
|
|
11,635 |
|
Member deposits |
|
|
11,795 |
|
|
11,167 |
|
Accrued expenses and other current liabilities |
|
|
27,665 |
|
|
26,105 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
172,938 |
|
|
160,275 |
|
Other long-term liabilities |
|
|
1,976 |
|
|
2,286 |
|
Deferred revenue |
|
|
143,140 |
|
|
139,044 |
|
Deferred income taxes |
|
|
107,782 |
|
|
107,133 |
|
Minority interest |
|
|
520 |
|
|
512 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY: |
|
|
|
|
|
|
|
Invested capital |
|
|
726,760 |
|
|
726,919 |
|
Receivables from IAC and subsidiaries |
|
|
(467,664 |
) |
|
(436,475 |
) |
Retained earnings |
|
|
247,292 |
|
|
222,484 |
|
Accumulated other comprehensive income |
|
|
1,161 |
|
|
439 |
|
|
|
|
|
|
|
|
Total shareholders' equity |
|
|
507,549 |
|
|
513,367 |
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
|
$ |
933,905 |
|
$ |
922,617 |
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
B-30
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
|
|
Total
|
|
Invested
Capital
|
|
Receivables
from IAC and
Subsidiaries
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
(In thousands)
|
Balance as of December 31, 2007 |
|
$ |
513,367 |
|
$ |
726,919 |
|
$ |
(436,475 |
) |
$ |
222,484 |
|
$ |
439 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the three months ended March 31, 2008 |
|
|
24,808 |
|
|
|
|
|
|
|
|
24,808 |
|
|
|
|
Foreign currency translation |
|
|
722 |
|
|
|
|
|
|
|
|
|
|
|
722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
25,530 |
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers to IAC |
|
|
(159 |
) |
|
(159 |
) |
|
|
|
|
|
|
|
|
Net change in receivables from IAC and subsidiaries |
|
|
(31,189 |
) |
|
|
|
|
(31,189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2008 |
|
$ |
507,549 |
|
$ |
726,760 |
|
$ |
(467,664 |
) |
$ |
247,292 |
|
$ |
1,161 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
B-31
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
24,808 |
|
$ |
21,149 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization of intangibles |
|
|
6,477 |
|
|
6,305 |
|
|
Depreciation |
|
|
2,235 |
|
|
1,888 |
|
|
Non-cash compensation expense |
|
|
1,395 |
|
|
365 |
|
|
Deferred income taxes |
|
|
805 |
|
|
(1,951 |
) |
|
Minority interest in income of consolidated subsidiaries |
|
|
8 |
|
|
|
|
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(8,082 |
) |
|
(2,135 |
) |
|
Prepaid expenses and other current assets |
|
|
(4,485 |
) |
|
261 |
|
|
Accounts payable and other current liabilities |
|
|
773 |
|
|
(588 |
) |
|
Income taxes payable |
|
|
930 |
|
|
456 |
|
|
Deferred revenue |
|
|
10,761 |
|
|
13,015 |
|
Other, net |
|
|
886 |
|
|
284 |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
36,511 |
|
|
39,049 |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Transfers to IAC |
|
|
(32,566 |
) |
|
(33,036 |
) |
|
Capital expenditures |
|
|
(2,440 |
) |
|
(1,613 |
) |
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(35,006 |
) |
|
(34,649 |
) |
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Excess tax benefits from stock-based awards |
|
|
|
|
|
256 |
|
|
Other, net |
|
|
|
|
|
(898 |
) |
|
|
|
|
|
|
Net cash used in financing activities |
|
|
|
|
|
(642 |
) |
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
624 |
|
|
167 |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
2,129 |
|
|
3,925 |
|
Cash and cash equivalents at beginning of period |
|
|
67,113 |
|
|
37,557 |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
69,242 |
|
$ |
41,482 |
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
B-32
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying Interval Leisure Group, Inc. ("ILG") as one of those five companies. In these consolidated financial statements, we refer to the separation transaction as the
"spin-off." In connection with the spin-off, ILG was incorporated as a Delaware corporation in May 2008. ILG currently does not have any material assets or liabilities, nor
does it engage in any business or other activities and, other than in connection with the spin-off, will not acquire or incur any material assets or liabilities, nor will it engage in any
business or other activities. Upon completion of the spin-off, ILG will consist of Interval and ResortQuest Hawaii and ResortQuest Real Estate of Hawaii, collectively referred to herein as
"RQH", which was acquired on May 31, 2007, the businesses that formerly comprised IAC's Interval segment. The businesses to be operated by ILG following the spin-off are referred to
herein as the "ILG Businesses."
Basis of Presentation
The historical consolidated financial statements of ILG and its subsidiaries reflect the contribution or other transfer to ILG of all of the subsidiaries and
assets and the assumption by ILG of all of the liabilities relating to the ILG Businesses in connection with the spin-off and the allocation to ILG of certain IAC corporate expenses
relating to the ILG Businesses. Accordingly, the historical consolidated financial statements of ILG reflect the historical financial position, results of operations and cash flows of the ILG
Businesses since their respective dates of acquisition by IAC, based on the historical consolidated financial statements and accounting records of IAC and using the historical results of operations
and historical bases of the assets and liabilities of the ILG Businesses with the exception of accounting for income taxes. For purposes of these financial statements, income taxes have been computed
for ILG on an as if stand-alone, separate tax return basis. Intercompany transactions and accounts have been eliminated.
In the opinion of ILG's management, the assumptions underlying the historical consolidated financial statements of ILG are reasonable. However, this financial information does not
necessarily reflect what the historical financial position, results of operations and cash flows of ILG would have been had ILG been a stand-alone company during the periods presented.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and
with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles
for complete financial statements. In the opinion of ILG's management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Interim results are not necessarily indicative of the results that may be expected for a full year. The accompanying unaudited
consolidated financial statements should be read in conjunction with ILG's audited consolidated financial statements and notes thereto for the year ended December 31, 2007.
Company Overview
ILG is a leading provider of membership services, primarily to the vacation ownership industry, through Interval. With the acquisition of RQH in May 2007, ILG
also entered the vacation rental and property management services industry.
B-33
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
ILG's management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S.
generally accepted accounting principles. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of
the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial statements include: the recovery of goodwill and intangible assets; the determination of deferred income taxes,
including
related valuation allowances; the determination of deferred revenue; and assumptions related to the determination of stock-based compensation.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statementsan amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and
the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008.
SFAS No. 160 will be applied prospectively, except as it relates to disclosures, for which the effects will be applied retrospectively for all periods presented. Early adoption is not
permitted. ILG is currently assessing the impact of SFAS No. 160 on its consolidated financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces FASB Statement No. 141. SFAS No. 141R
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest
in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS
No. 141R applies prospectively to business combinations in fiscal years beginning after December 15, 2008. Early adoption is not permitted. ILG is currently assessing the impact of the
adoption of SFAS No. 141R on its consolidated financial position, results of operations and cash flows.
B-34
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands):
|
|
March 31, 2008
|
|
December 31, 2007
|
Goodwill |
|
$ |
514,320 |
|
$ |
514,308 |
Intangible assets with indefinite lives |
|
|
33,300 |
|
|
33,300 |
Intangible assets with definite lives, net |
|
|
149,142 |
|
|
155,595 |
|
|
|
|
|
|
Total goodwill and intangible assets, net |
|
$ |
696,762 |
|
$ |
703,203 |
|
|
|
|
|
Intangible assets with indefinite lives relate principally to trade names and trademarks. At March 31, 2008, intangible assets with definite lives relate to the following (in
thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Amortization Life
(Years)
|
Customer relationships |
|
$ |
129,500 |
|
$ |
(71,494 |
) |
$ |
58,006 |
|
10.0 |
Purchase agreements |
|
|
73,500 |
|
|
(40,578 |
) |
|
32,922 |
|
10.0 |
Property management contracts |
|
|
45,700 |
|
|
(2,720 |
) |
|
42,980 |
|
14.0 |
Technology |
|
|
24,630 |
|
|
(24,601 |
) |
|
29 |
|
5.0 |
Other |
|
|
16,878 |
|
|
(1,673 |
) |
|
15,205 |
|
8.1 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
290,208 |
|
$ |
(141,066 |
) |
$ |
149,142 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, intangible assets with definite lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Amortization Life
(Years)
|
Customer relationships |
|
$ |
129,500 |
|
$ |
(68,257 |
) |
$ |
61,243 |
|
10.0 |
Purchase agreements |
|
|
73,500 |
|
|
(38,741 |
) |
|
34,759 |
|
10.0 |
Property management contracts |
|
|
45,700 |
|
|
(1,904 |
) |
|
43,796 |
|
14.0 |
Technology |
|
|
24,630 |
|
|
(24,600 |
) |
|
30 |
|
5.0 |
Other |
|
|
16,854 |
|
|
(1,087 |
) |
|
15,767 |
|
8.2 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
290,184 |
|
$ |
(134,589 |
) |
$ |
155,595 |
|
|
|
|
|
|
|
|
|
|
|
B-35
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3GOODWILL AND INTANGIBLE ASSETS (Continued)
Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on December 31, 2007 balances, such amortization for the next
five years and thereafter is estimated to be as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
25,917 |
2009 |
|
|
25,887 |
2010 |
|
|
25,887 |
2011 |
|
|
25,826 |
2012 |
|
|
19,892 |
2013 and thereafter |
|
|
32,186 |
|
|
|
|
|
$ |
155,595 |
|
|
|
The following table presents the balance of goodwill by segment, including changes in the carrying amount of goodwill, for the three months ended March 31, 2008 (in thousands):
|
|
Balance as of
January 1, 2008
|
|
Additions
|
|
(Deductions)
|
|
Balance as of
March 31, 2008
|
Interval |
|
$ |
473,879 |
|
$ |
|
|
$ |
|
|
$ |
473,879 |
RQH |
|
|
40,429 |
|
|
12 |
|
|
|
|
|
40,441 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
514,308 |
|
$ |
12 |
|
$ |
|
|
$ |
514,320 |
|
|
|
|
|
|
|
|
|
NOTE 4PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
|
March 31, 2008
|
|
December 31, 2007
|
|
Computer equipment |
|
$ |
15,648 |
|
$ |
14,443 |
|
Capitalized software |
|
|
33,063 |
|
|
31,312 |
|
Buildings and leasehold improvements |
|
|
19,222 |
|
|
19,182 |
|
Furniture and other equipment |
|
|
8,488 |
|
|
8,096 |
|
Projects in progress |
|
|
4,978 |
|
|
5,848 |
|
|
|
|
|
|
|
|
|
|
81,399 |
|
|
78,881 |
|
Less: accumulated depreciation and amortization |
|
|
(46,207 |
) |
|
(43,918 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
35,192 |
|
$ |
34,963 |
|
|
|
|
|
|
|
NOTE 5SEGMENT INFORMATION
The overall concept that ILG employs in determining its operating segments and related financial information is to present them in a manner consistent with how
the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of
products or services offered or the target market. ILG has two operating segments, Interval, its vacation ownership membership services business, and RQH, its vacation rental and property management
business.
B-36
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5SEGMENT INFORMATION (Continued)
ILG's primary metric is Operating Income Before Amortization, which is defined as operating income excluding, if applicable: (1) non-cash compensation expense,
(2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions, and (4) one-time items. ILG believes this measure is
useful to investors because it represents the consolidated operating results from ILG's segments, taking into account depreciation, which it believes is an ongoing cost of doing business, but
excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to ILG's statement of
operations of certain expenses, including non-cash compensation, and acquisition related accounting.
The following tables reconcile Operating Income Before Amortization to operating income for ILG's operating segments and to net income in total (in thousands):
|
|
For the Three Months Ended March 31, 2008:
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization of
Intangibles
|
|
Operating
Income
|
|
Interval |
|
$ |
42,912 |
|
$ |
(1,320 |
) |
$ |
(5,241 |
) |
$ |
36,351 |
|
RQH |
|
|
3,924 |
|
|
(75 |
) |
|
(1,236 |
) |
|
2,613 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,836 |
|
$ |
(1,395 |
) |
$ |
(6,477 |
) |
|
38,964 |
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
1,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
40,420 |
|
Income tax provision |
|
|
(15,604 |
) |
Minority interest in income of consolidated subsidiaries |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the acquisition of RQH on May 31, 2007, there was only one reporting segment.
|
|
For the Three Months Ended March 31, 2007:
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization of
Intangibles
|
|
Operating
Income
|
|
Interval |
|
$ |
38,499 |
|
$ |
(365 |
) |
$ |
(6,305 |
) |
$ |
31,829 |
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
2,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
34,311 |
|
Income tax provision |
|
|
(13,162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B-37
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5SEGMENT INFORMATION (Continued)
Non-cash compensation expense in the tables above is included in the following line items in the accompanying consolidated statements of operations for the three months ended
March 31, 2008 and 2007 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
Cost of sales |
|
$ |
108 |
|
$ |
29 |
Selling and marketing expense |
|
|
118 |
|
|
32 |
General and administrative expense |
|
|
1,169 |
|
|
304 |
|
|
|
|
|
Non-cash compensation expense |
|
$ |
1,395 |
|
$ |
365 |
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
Revenue: |
|
|
|
|
|
|
Interval |
|
$ |
96,834 |
|
$ |
86,433 |
RQH |
|
|
19,103 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
115,937 |
|
$ |
86,433 |
|
|
|
|
|
ILG maintains operations in the United States, the United Kingdom and other international territories. Geographic information about the United States and international territories is
presented below (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
Revenue: |
|
|
|
|
|
|
|
United States |
|
$ |
97,289 |
|
$ |
71,131 |
|
All other countries |
|
|
18,648 |
|
|
15,302 |
|
|
|
|
|
|
Total |
|
$ |
115,937 |
|
$ |
86,433 |
|
|
|
|
|
|
|
March 31, 2008
|
|
December 31, 2007
|
Long-lived assets (excluding goodwill and intangible assets): |
|
|
|
|
|
|
|
United States |
|
$ |
33,829 |
|
$ |
33,688 |
|
All other countries |
|
|
1,363 |
|
|
1,275 |
|
|
|
|
|
|
Total |
|
$ |
35,192 |
|
$ |
34,963 |
|
|
|
|
|
B-38
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6COMPREHENSIVE INCOME
Comprehensive income is comprised of (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
Net income |
|
$ |
24,808 |
|
$ |
21,149 |
Foreign currency translation |
|
|
722 |
|
|
68 |
|
|
|
|
|
Comprehensive income |
|
$ |
25,530 |
|
$ |
21,217 |
|
|
|
|
|
Accumulated other comprehensive income at March 31, 2008 and December 31, 2007 is solely related to foreign currency translation and is recorded net of tax.
NOTE 7INCOME TAXES
ILG calculates its interim income tax provision in accordance with Accounting Principles Board Opinion No. 28 and FASB Interpretation No. 18. At the
end of each interim period, ILG makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date earnings or loss. The tax
or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim
period in which those items occur. In addition, the effect of changes in enacted tax laws or rates, tax status, or judgment on the realizability of a
beginning-of-the-year deferred tax asset in future years is recognized in the interim period in which the change occurs.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income
for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets
generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained
or ILG's tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense for the
current quarter.
For the three months ended March 31, 2008 and 2007, ILG recorded tax provisions of $15.6 million and $13.2 million, respectively, which represent effective tax rates
of 39% and 38%, respectively. The tax rates for the three months ended March 31, 2008 and March 31, 2007 are higher than the federal
statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates.
As of December 31, 2007 and March 31, 2008, ILG had unrecognized tax benefits of approximately $5.7 million. Included in unrecognized tax benefits at
March 31, 2008 is approximately $4.9 million for tax positions included in IAC's consolidated tax return filings that will remain a liability of IAC after the spin-off. ILG
recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There were no material accruals for interest for the quarter ended March 31, 2008.
At March 31, 2008, ILG has accrued $1.7 million for the payment of interest. There are no material accruals for penalties.
By virtue of previously filed separate company and consolidated tax returns with IAC, ILG is routinely under audit by federal, state, local and foreign authorities in the area of income
tax. These
B-39
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7INCOME TAXES (Continued)
audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay
assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for
tax contingencies and the amounts owed by ILG are recorded in the period they become known.
The Internal Revenue Service is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of ILG from
September 24, 2002, its date of acquisition by IAC. The statute of limitations for these years has been extended to December 31, 2008. Various IAC consolidated tax returns filed with
state, local and foreign jurisdictions are currently under examination, the most significant of which are California, Florida, New York state and New York City, for various tax years after
December 31, 2001. These examinations are expected to be completed by late 2008.
ILG believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $2.9 million within twelve months of the current reporting date due
primarily to the reversal of deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits
cannot be made, but are not expected to be significant.
NOTE 8CONTINGENCIES
In the ordinary course of business, ILG is a party to various lawsuits. ILG establishes reserves for specific legal matters when it determines that the likelihood
of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not probable and,
therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against ILG, including claims where an unfavorable outcome is reasonably possible,
will not have a material impact on the liquidity, results of operations, or financial condition of ILG, these matters are subject to inherent uncertainties and management's view of these matters may
change in the future. ILG also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 7 for discussion
related to income tax contingencies.
NOTE 9RELATED PARTY TRANSACTIONS
ILG's expenses include allocations from IAC of costs associated with IAC's accounting, treasury, legal, tax, corporate support, human resources and internal audit
functions. These allocations were based on the ratio of ILG's revenue as a percentage of IAC's total revenue. Allocated costs were $0.3 million and $0.2 million for the three months
ended March 31, 2008 and 2007, respectively, and are included in "General and administrative expense" in the accompanying consolidated statements of operations. It is not practicable to
determine the actual expenses that would have been incurred for these services had ILG operated as a stand-alone entity. In the opinion of management, the allocation method is reasonable.
The portion of interest income reflected in the consolidated statements of operations that is intercompany in nature, was $1.3 million and $1.5 million for the three months
ended March 31, 2008 and 2007, respectively. This intercompany interest relates to the receivables from IAC.
B-40
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9RELATED PARTY TRANSACTIONS (Continued)
An analysis of ILG's receivables from IAC and subsidiaries is as follows (in thousands):
|
|
March 31, 2008
|
|
Receivables from IAC and subsidiaries at December 31, 2007 |
|
$ |
436,475 |
|
Cash transfers to IAC related to its centrally managed U.S. treasury function |
|
|
37,646 |
|
Interest income |
|
|
1,276 |
|
Employee equity instruments and associated tax withholdings |
|
|
738 |
|
Allocation of non-cash compensation expense |
|
|
(1,368 |
) |
Administrative expenses and other |
|
|
(7,103 |
) |
|
|
|
|
Receivables from IAC and subsidiaries at March 31, 2008 |
|
$ |
467,664 |
|
|
|
|
|
Relationship Between IAC and ILG after the Spin-Off
For purposes of governing certain of the ongoing relationships between ILG and IAC at and after the spin-off, and to provide for an orderly
transition, ILG and IAC are expected to enter into a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement (the "Spin-Off
Agreements"), among other agreements. See ILG's consolidated financial statements for the year ended December 31, 2007 for descriptions of the Spin-Off Agreements.
B-41
ANNEX C
TICKETMASTER AND SUBSIDIARIES
COMBINED FINANCIAL STATEMENTS
TABLE OF CONTENTS
|
|
PAGE
|
Audited Financial Statements: |
|
|
|
Report of Independent Registered Public Accounting Firm |
|
C-2 |
|
Combined Statements of Operations for the years ended December 31, 2007, 2006 and 2005 |
|
C-3 |
|
Combined Balance Sheets as of December 31, 2007 and 2006 |
|
C-4 |
|
Combined Statements of Invested Equity for the years ended December 31, 2007, 2006 and 2005 |
|
C-5 |
|
Combined Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 |
|
C-6 |
|
Notes to Combined Financial Statements |
|
C-7 |
Schedule IIValuation and Qualifying Accounts |
|
C-29 |
Unaudited Interim Financial Statements |
|
|
|
Combined Statements of Operations for the three months ended March 31, 2008 and 2007 |
|
C-30 |
|
Combined Balance Sheets as of March 31, 2008 and December 31, 2007 |
|
C-31 |
|
Combined Statements of Invested Equity for the three months ended March 31, 2008 |
|
C-32 |
|
Combined Statements of Cash Flows for the three months ended March 31, 2008 and 2007 |
|
C-33 |
|
Notes to Unaudited Combined Financial Statements |
|
C-34 |
C-1
Report of Independent Registered Public Accounting Firm
We have audited the accompanying combined balance sheets of Ticketmaster and subsidiaries as of December 31, 2007 and 2006, and the related combined
statements of operations, invested equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule on
page C-29. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 combined financial position of Ticketmaster and subsidiaries at
December 31, 2007 and 2006, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic combined financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
New
York, New York
May 5, 2008
C-2
TICKETMASTER AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Revenue |
|
$ |
1,240,477 |
|
$ |
1,062,672 |
|
$ |
928,704 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
766,538 |
|
|
637,152 |
|
|
561,060 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
473,939 |
|
|
425,520 |
|
|
367,644 |
|
Selling and marketing expense |
|
|
43,487 |
|
|
20,123 |
|
|
17,691 |
|
General and administrative expense |
|
|
149,478 |
|
|
118,317 |
|
|
121,695 |
|
Amortization of intangibles |
|
|
26,200 |
|
|
27,109 |
|
|
28,748 |
|
Depreciation |
|
|
38,458 |
|
|
35,080 |
|
|
33,495 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
216,316 |
|
|
224,891 |
|
|
166,015 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
33,065 |
|
|
33,982 |
|
|
17,417 |
|
|
Interest expense |
|
|
(1,003 |
) |
|
(302 |
) |
|
(65 |
) |
|
Equity in income of combined affiliates |
|
|
6,301 |
|
|
2,997 |
|
|
3,401 |
|
|
Other income |
|
|
1,120 |
|
|
982 |
|
|
689 |
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
39,483 |
|
|
37,659 |
|
|
21,442 |
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
255,799 |
|
|
262,550 |
|
|
187,457 |
|
Income tax provision |
|
|
(89,007 |
) |
|
(85,967 |
) |
|
(68,288 |
) |
Minority interest in losses (income) of combined subsidiaries |
|
|
2,559 |
|
|
118 |
|
|
(1,470 |
) |
|
|
|
|
|
|
|
|
Net income |
|
$ |
169,351 |
|
$ |
176,701 |
|
$ |
117,699 |
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Combined Financial Statements are an integral part of these statements.
C-3
TICKETMASTER AND SUBSIDIARIES
COMBINED BALANCE SHEETS
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
(In thousands)
|
|
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
568,417 |
|
$ |
317,577 |
|
Restricted cash |
|
|
853 |
|
|
|
|
Accounts receivable, client accounts |
|
|
99,453 |
|
|
75,367 |
|
Accounts receivable, trade, net of allowance of $2,346 and $2,798, respectively |
|
|
33,979 |
|
|
22,256 |
|
Deferred income taxes |
|
|
5,883 |
|
|
10,639 |
|
Contract advances |
|
|
63,126 |
|
|
28,834 |
|
Prepaid expenses and other current assets |
|
|
21,149 |
|
|
15,134 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
792,860 |
|
|
469,807 |
|
Property and equipment, net |
|
|
95,122 |
|
|
82,599 |
|
Goodwill |
|
|
1,090,418 |
|
|
1,051,732 |
|
Intangible assets, net |
|
|
92,325 |
|
|
110,629 |
|
Long-term investments |
|
|
149,295 |
|
|
52,845 |
|
Other non-current assets |
|
|
86,514 |
|
|
48,099 |
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,306,534 |
|
$ |
1,815,711 |
|
|
|
|
|
|
|
LIABILITIES AND INVESTED EQUITY |
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
Accounts payable, client accounts |
|
$ |
413,075 |
|
$ |
304,829 |
|
Accounts payable, trade |
|
|
14,698 |
|
|
14,401 |
|
Accrued compensation and benefits |
|
|
31,171 |
|
|
32,280 |
|
Deferred revenue |
|
|
19,829 |
|
|
16,751 |
|
Income taxes payable |
|
|
1,721 |
|
|
3,693 |
|
Other accrued expenses and current liabilities |
|
|
42,449 |
|
|
38,211 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
522,943 |
|
|
410,165 |
|
Income taxes payable |
|
|
982 |
|
|
|
|
Other long-term liabilities |
|
|
3,204 |
|
|
3,510 |
|
Deferred income taxes |
|
|
32,416 |
|
|
43,530 |
|
Minority interest |
|
|
7,812 |
|
|
669 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
INVESTED EQUITY: |
|
|
|
|
|
|
|
Invested capital |
|
|
2,172,497 |
|
|
1,874,710 |
|
Receivables from IAC and subsidiaries |
|
|
(474,110 |
) |
|
(539,861 |
) |
Accumulated other comprehensive income |
|
|
40,790 |
|
|
22,988 |
|
|
|
|
|
|
|
|
Total invested equity |
|
|
1,739,177 |
|
|
1,357,837 |
|
|
|
|
|
|
|
TOTAL LIABILITIES AND INVESTED EQUITY |
|
$ |
2,306,534 |
|
$ |
1,815,711 |
|
|
|
|
|
|
|
The
accompanying Notes to Combined Financial Statements are an integral part of these statements.
C-4
TICKETMASTER AND SUBSIDIARIES
COMBINED STATEMENTS OF INVESTED EQUITY
|
|
Total
|
|
Invested Capital
|
|
Receivables
from IAC and
Subsidiaries
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
(In thousands)
|
|
Balance as of December 31, 2004 |
|
$ |
1,270,899 |
|
$ |
1,509,641 |
|
$ |
(246,815 |
) |
$ |
8,073 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2005 |
|
|
117,699 |
|
|
117,699 |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
(7,078 |
) |
|
|
|
|
|
|
|
(7,078 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
110,621 |
|
|
|
|
|
|
|
|
|
|
Net transfers from IAC (principally funding for acquisitions and the transfer of an investment to Ticketmaster)(a) |
|
|
54,311 |
|
|
54,311 |
|
|
|
|
|
|
|
Net change in receivables from IAC and subsidiaries |
|
|
(82,786 |
) |
|
|
|
|
(82,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
1,353,045 |
|
|
1,681,651 |
|
|
(329,601 |
) |
|
995 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2006 |
|
|
176,701 |
|
|
176,701 |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
21,993 |
|
|
|
|
|
|
|
|
21,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
198,694 |
|
|
|
|
|
|
|
|
|
|
Net transfers from IAC (principally funding for acquisitions reduced by the transfer of an investment to IAC)(a) |
|
|
16,358 |
|
|
16,358 |
|
|
|
|
|
|
|
Net change in receivables from IAC and subsidiaries |
|
|
(210,260 |
) |
|
|
|
|
(210,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
|
1,357,837 |
|
|
1,874,710 |
|
|
(539,861 |
) |
|
22,988 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2007 |
|
|
169,351 |
|
|
169,351 |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
17,802 |
|
|
|
|
|
|
|
|
17,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
187,153 |
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of FIN 48 |
|
|
1,344 |
|
|
1,344 |
|
|
|
|
|
|
|
Net transfers from IAC (principally the transfer of an investment to Ticketmaster and funding for acquisitions)(a) |
|
|
127,092 |
|
|
127,092 |
|
|
|
|
|
|
|
Net change in receivables from IAC and subsidiaries |
|
|
65,751 |
|
|
|
|
|
65,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
1,739,177 |
|
$ |
2,172,497 |
|
$ |
(474,110 |
) |
$ |
40,790 |
|
|
|
|
|
|
|
|
|
|
|
- (a)
- See
Note 12 for a further discussion of the investment transfers.
The
accompanying Notes to Combined Financial Statements are an integral part of these statements.
C-5
TICKETMASTER AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
169,351 |
|
$ |
176,701 |
|
$ |
117,699 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles |
|
|
26,200 |
|
|
27,109 |
|
|
28,748 |
|
|
Depreciation |
|
|
38,458 |
|
|
35,080 |
|
|
33,495 |
|
|
Non-cash compensation expense |
|
|
12,572 |
|
|
7,839 |
|
|
20,305 |
|
|
Deferred income taxes |
|
|
(11,210 |
) |
|
(10,205 |
) |
|
(8,190 |
) |
|
Excess tax benefits from stock-based awards |
|
|
|
|
|
|
|
|
2,485 |
|
|
Equity in income of unconsolidated affiliates, net of dividends |
|
|
1,035 |
|
|
(1,997 |
) |
|
97 |
|
|
Minority interest in (losses) income of consolidated subsidiaries |
|
|
(2,559 |
) |
|
(118 |
) |
|
1,470 |
|
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(10,878 |
) |
|
(3,415 |
) |
|
(4,498 |
) |
|
Prepaid expenses and other current assets |
|
|
(77,559 |
) |
|
(667 |
) |
|
(13,631 |
) |
|
Accounts payable and other current liabilities |
|
|
(9,645 |
) |
|
(7,506 |
) |
|
12,930 |
|
|
Income taxes payable |
|
|
1,081 |
|
|
2,220 |
|
|
2,702 |
|
|
Deferred revenue |
|
|
2,038 |
|
|
1,974 |
|
|
2,979 |
|
|
Funds collected on behalf of clients, net |
|
|
72,093 |
|
|
2,593 |
|
|
70,889 |
|
Other, net |
|
|
990 |
|
|
1,068 |
|
|
49 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
211,967 |
|
|
230,676 |
|
|
267,529 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Transfers from (to) IAC |
|
|
64,548 |
|
|
(214,186 |
) |
|
(110,391 |
) |
|
Acquisitions, net of cash acquired |
|
|
(29,423 |
) |
|
(17,844 |
) |
|
(28,542 |
) |
|
Capital expenditures |
|
|
(47,521 |
) |
|
(39,288 |
) |
|
(36,953 |
) |
|
Purchases of marketable securities |
|
|
|
|
|
(37,841 |
) |
|
(79,623 |
) |
|
Proceeds from sales and maturities of marketable securities |
|
|
|
|
|
146,708 |
|
|
68,451 |
|
|
Increase in long-term investments |
|
|
(630 |
) |
|
(20,638 |
) |
|
|
|
|
Other, net |
|
|
|
|
|
(5,977 |
) |
|
155 |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(13,026 |
) |
|
(189,066 |
) |
|
(186,903 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Capital contributions from IAC |
|
|
29,423 |
|
|
17,844 |
|
|
28,542 |
|
|
Principal payments on long-term obligations |
|
|
(2,175 |
) |
|
(21 |
) |
|
(17 |
) |
|
Excess tax benefits from stock-based awards |
|
|
3,029 |
|
|
2,738 |
|
|
|
|
|
Other, net |
|
|
|
|
|
|
|
|
(3,588 |
) |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
30,277 |
|
|
20,561 |
|
|
24,937 |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
21,622 |
|
|
17,576 |
|
|
(6,809 |
) |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
250,840 |
|
|
79,747 |
|
|
98,754 |
|
Cash and cash equivalents at beginning of period |
|
|
317,577 |
|
|
237,830 |
|
|
139,076 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
568,417 |
|
$ |
317,577 |
|
$ |
237,830 |
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Combined Financial Statements are an integral part of these statements.
C-6
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying Ticketmaster as one of those five companies. In these combined financial statements, we refer to the separation transaction herein as the "spin-off." Upon completion of the
spin-off, Ticketmaster will consist of the businesses that formerly comprised IAC's Ticketmaster segment, which consists of its domestic and international ticketing and ticketing related
businesses, subsidiaries and investments, excluding its ReserveAmerica subsidiary and its investment in Active.com. Ticketmaster will include IAC's investment in Front Line Management
Group Inc. ("Front Line"). The businesses to be operated by Ticketmaster following the spin-off are referred to herein as the "Ticketmaster Businesses."
Basis of Presentation
The historical combined financial statements of Ticketmaster and its subsidiaries reflect the historical financial position, results of operations and cash flows
of the Ticketmaster Businesses since their respective dates of acquisition by IAC, and the allocation to Ticketmaster of certain IAC corporate expenses relating to the Ticketmaster Businesses based on
the historical consolidated financial statements and accounting records of IAC and using the historical results of operations and historical bases of the assets and liabilities of the Ticketmaster
Businesses. However, for the purposes of these financial statements, income taxes have been computed for Ticketmaster on an as if stand-alone, separate tax return basis. These financial statements are
prepared on a combined, rather than a consolidated, basis because they exclude ReserveAmerica and the investment in Active.com that were owned, and include the investment in Front Line that was not
owned, either directly or indirectly, by legal entities that comprise the Ticketmaster Businesses. The ownership of ReserveAmerica and the investment in Active.com will be retained by IAC after the
spin-off. These combined financial statements present IAC's and its subsidiaries net investment in the Ticketmaster Businesses as invested equity in lieu of shareholders' equity.
Intercompany transactions and accounts have been eliminated.
In
the opinion of Ticketmaster's management, the assumptions underlying the historical combined financial statements of Ticketmaster are reasonable. However, this financial information
does not necessarily reflect what the historical financial position, results of operations and cash flows of Ticketmaster would have been had Ticketmaster been a stand-alone company during the periods
presented.
Company Overview
Ticketmaster is the world's leading live entertainment ticketing and marketing company, providing ticket sales, ticket resale services, marketing and distribution
through www.ticketmaster.com, one of the largest e-commerce sites on the internet, approximately 6,700 independent sales outlets and 19 call centers worldwide. Ticketmaster serves leading
arenas, stadiums, amphitheaters, music clubs, concert promoters, professional sports franchises and leagues, college sports teams, performing arts venues, museums and theaters in the United States and
abroad, including Australia, Canada, China, Denmark, Finland, Germany, Ireland, the Netherlands, New Zealand, Norway, Spain, Sweden, Turkey and the United Kingdom. Ticketmaster is also a party to
joint ventures with third parties to provide ticket distribution services in Mexico and to supply ticketing services for the 2008 Beijing Olympic Games. Ticketmaster licenses its technology in Mexico,
Argentina, Brazil, Chile, China and Belgium.
C-7
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue, which primarily consists of convenience and order processing fees from ticketing operations, is recognized as tickets are sold, and is recorded on a net
basis (net of the face value of the ticket) as Ticketmaster acts as an agent in these transactions. Interest income is earned on funds that are collected from ticket purchasers and invested until
remittance to the applicable clients. As the process of collecting, holding and remitting these funds is a critical component of providing service to these clients, the interest earned on these funds
is included in revenue. For the years ended December 31, 2007, 2006 and 2005, $18.7 million, $15.3 million and $8.9 million, respectively, of interest income is included in
revenue. Sales taxes collected are not included in revenue.
Order Processing and Delivery Costs
Costs associated with processing and delivering orders to customers are recorded as cost of sales.
Cash and Cash Equivalents
Cash and cash equivalents include cash, money market instruments and time deposits with original maturities of less than 91 days. Cash and cash equivalents
include $313.6 million and $229.5 million at December 31, 2007 and 2006, respectively, of collected proceeds relating to the face value of the tickets, which are payable to
clients and reflected as accounts payable, client accounts. Cash and cash equivalents held in international territories totaled $358.2 million and $218.4 million at December 31,
2007 and 2006, respectively.
Marketable Securities
At times, Ticketmaster invests in marketable securities and accounts for them in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Ticketmaster did not hold any marketable securities at December 31, 2007 or 2006. Ticketmaster only invests
in marketable securities with active secondary or resale markets to ensure portfolio liquidity and the ability to readily convert investments into cash to fund current operations, or satisfy other
cash requirements as needed. Marketable securities are, when held, classified as available-for-sale and reported at fair value based on quoted market prices.
Accounts Receivable
Accounts receivable, client accounts are due principally from ticketing outlets and credit card processors and represent the face value of tickets sold plus
convenience and order processing fees, generally net of outlet commissions.
Accounts
receivable, trade includes amounts relating to advertising and software licensing sales and are stated at amounts due, net of an allowance for doubtful accounts. Accounts
receivable outstanding
longer than the contractual payment terms are considered past due. Ticketmaster determines its allowance by considering a number of factors, including the length of time accounts receivable are past
due, Ticketmaster's previous loss history, the specific customer's current ability to pay its obligation to Ticketmaster and the condition of the general economy and the customer's industry.
Ticketmaster writes off accounts receivable when they become uncollectible.
C-8
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment, including significant improvements, are recorded at cost. Repairs and maintenance and any gains or losses on dispositions are included in
operations.
Depreciation
is recorded on a straight-line basis to allocate the cost of depreciable assets to operations over their estimated service lives.
Asset Category
|
|
Depreciation Period
|
Computer equipment and capitalized software |
|
1 to 3 Years |
Leasehold improvements |
|
3 to 17 Years |
Furniture and other equipment |
|
5 to 7 Years |
In
accordance with American Institute of Certified Public Accountants' Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for
Internal Use," Ticketmaster capitalizes certain qualified costs incurred in connection with the development of internal use software. Capitalization of internal use software costs begins when the
preliminary project stage is completed, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable that the project will be completed and
the software will be used to perform the function intended. Capitalized internal use software is depreciated on a straight-line basis over the estimated useful life of the software, not to
exceed three years. Capitalized internal software costs, net of accumulated depreciation, totaled $26.7 million and $21.3 million at December 31, 2007 and 2006, respectively, and
are included in "Property and equipment, net" in the accompanying combined balance sheets.
Goodwill and Indefinite-Lived Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), Ticketmaster tests goodwill and indefinite-lived
intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired. If the carrying amount of Ticketmaster's goodwill
exceeds its implied fair value, an impairment loss equal to the excess is recorded. If the carrying amount of an indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss
equal to the excess is recorded.
Long-Lived Assets and Intangible Assets with Definite Lives
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"),
long-lived assets, including property and equipment and intangible assets with definite lives, are tested for recoverability whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. If the carrying amount is deemed to not be recoverable, an impairment loss is recorded as the amount by which the carrying amount of the long-lived
asset exceeds its fair value. Amortization of definite lived intangible assets is recorded on a straight-line basis over their estimated lives.
C-9
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Term Investments
Investments in which Ticketmaster has the ability to exercise significant influence over the operating and financial matters of the investee are accounted for
using the equity method. Investments in which Ticketmaster does not have the ability to exercise significant influence over the operating and financial matters of the investee are accounted for using
the cost method. Ticketmaster evaluates each equity and cost method investment for impairment on a quarterly basis and recognizes an impairment loss if a decline in value is determined to be
other-than-temporary. Such impairment evaluations include, but are not limited to, the current business environment including competition and uncertainty of financial
condition; going concern considerations such as the rate at which the investee company utilizes cash, and the investee company's ability to obtain additional private financing to fulfill its stated
business plan; the need for changes to the investee company's existing business model due to changing business environments and its ability to successfully implement necessary changes; and comparable
valuations. If Ticketmaster has not identified events or changes in circumstances that may have a significant adverse effect on the fair value of a cost investment, then the fair value of such cost
method investment is not estimated, as it is impracticable to do so.
Investments
accounted for under the cost method are included in "Long-term investments" in the accompanying combined balance sheets and have a carrying value of approximately
$4.1 million and $3.5 million as of December 31, 2007 and 2006, respectively. See Note 9 for discussion related to investments accounted for under the equity method.
Contract Advances
Contract advances, which can be either recoupable or non-recoupable, represent amounts paid in advance to Ticketmaster's clients pursuant to
agreements that provide for the client's participation in the convenience charges and/or order processing fees. Recoupable contract advances are generally recoupable against future royalties earned by
the clients based on the contract terms over the life of the contract (generally 3 to 7 years). Non-recoupable contract advances are fixed additional incentives which are normally
amortized over the life of the contract on a straight-line basis (generally 3 to 7 years). Recoupment of contract advances and amortization of non-recoupable contract
advances are included in "Cost of sales" in the accompanying combined statements of operations.
Accounts Payable, Client Accounts
Accounts payable, client accounts consists of contractual amounts due to clients for tickets sold on behalf of the organizations that sponsor events and ticketing
royalties, which arise from the clients' share of convenience and order processing charges.
Deferred Revenue
Deferred revenue primarily consists of unredeemed gift cards issued by Ticketmaster. Deferred revenue is recognized as revenue upon redemption of the gift card or
when the likelihood of redemption of the gift card becomes remote (gift card breakage). The likelihood of redemption becoming remote occurs when the gift card expires or, if no expiration date exists,
it generally occurs ratably over a period of three to seven years after the purchase of the gift card. Income from gift card breakage, net of any amounts subject to escheat laws, is included in
"Revenue" in the accompanying combined statements of operations.
C-10
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
Advertising costs are expensed in the period incurred and represent both offline costs, including sports sponsorships and radio advertising, and online
advertising costs, including fees paid to search engines and distribution partners. Advertising expense was $21.6 million, $6.3 million and $6.0 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Research and Development
Research and development costs, which relate primarily to software development, are charged to operations as incurred. Based on Ticketmaster's development
process, technological feasibility is established upon completion of a working model. Costs incurred prior to the completion of a working model are expensed as incurred. Costs incurred subsequent to
the completion of a working model and the point at which the software is ready for general release are capitalized. Research and development costs were $21.4 million, $20.1 million and
$16.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Income Taxes
Ticketmaster accounts for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided on deferred tax assets if it is determined that
it is more likely than not that the deferred tax asset will not be realized. Ticketmaster records interest on potential tax contingencies as a component of income tax expense and records interest net
of any applicable related income tax benefit.
Effective
January 1, 2007, Ticketmaster adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of
FASB Statement No. 109" ("FIN 48"). As a result of the adoption of FIN 48, Ticketmaster recognizes liabilities for uncertain tax positions based on the two-step
process prescribed by the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that
the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than
50% likely of being realized upon ultimate settlement.
Foreign Currency Translation and Transaction Gains and Losses
The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency. Local
currency assets and liabilities are translated at the rates of exchange as of the balance sheet date, and local currency revenue and expenses are translated at average rates of exchange during the
period. Resulting translation gains or losses are included as a component of accumulated other comprehensive income, a separate component of invested equity. Accumulated other comprehensive income is
solely related to foreign currency translation. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included
in the combined statements of operations.
C-11
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign
currency transaction net gains for the years ended December 31, 2007, 2006 and 2005 were $1.1 million, $1.2 million and $0.6 million, respectively,
and are included in "Other income" in the accompanying combined statements of operations.
Stock-Based Compensation
Effective January 1, 2006, Ticketmaster adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the
modified prospective transition method and therefore has not restated results for prior periods. See Note 3 for a further description of the impact of the adoption of SFAS 123R and Staff
Accounting Bulletin No. 107 ("SAB 107").
Minority Interest
Minority interest in 2007 represented minority ownership in newly acquired subsidiaries and certain international operations. In 2006, minority interest
represented minority ownership in certain international operations.
In
connection with the acquisition of certain subsidiaries, former management of these businesses has retained an ownership interest. Ticketmaster is party to fair value put and call
arrangements with respect to these interests. These put and call arrangements allow management to require Ticketmaster to purchase their interests or allow Ticketmaster to acquire such interests at
fair value, respectively. These put and call arrangements become exercisable by Ticketmaster and the counter-party, respectively, at various dates over the next five years. Upon such exercise, the
consideration payable can be denominated in either shares of IAC or cash at IAC's option. This put and call arrangement will be modified prior to the spin-off so that the consideration payable in IAC
shares will be replaced with Ticketmaster shares. During 2008, none of these arrangements become exercisable. These put arrangements are exercisable by the counter-party outside the control of
Ticketmaster and are accounted for in accordance with EITF Issue No. D-98 "Classification and Measurement of Redeemable Securities." Accordingly, to the extent that the fair value
of these interests exceeds the value determined by normal minority interest accounting, the value of such interests is adjusted to fair value with a corresponding adjustment to invested equity.
Accounting Estimates
Ticketmaster's management is required to make certain estimates and assumptions during the preparation of the combined financial statements in accordance with
U.S. generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date
of the combined financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
Significant
estimates underlying the accompanying combined financial statements include: the recoverability of contract advances; the recoverability of long-lived assets; the
recovery of goodwill and intangible assets; the determination of income taxes payable and deferred income taxes, including related valuation allowances; and assumptions related to the determination of
stock-based compensation.
C-12
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Certain Risks and Concentrations
Ticketmaster's business is subject to certain risks and concentrations including dependence on third party technology providers, exposure to risks associated with
online commerce security and credit card fraud.
Ticketmaster's
largest client, Live Nation, Inc. ("Live Nation") (including its subsidiary House of Blues), represented approximately 17%, 20% and 20% of its total revenue for the
years ended December 31, 2007, 2006 and 2005, respectively. This client relationship consists of four agreements, two with Live Nation (a worldwide agreement (other than England, Scotland and
Wales) that expires on December 31, 2008 and an agreement covering England, Scotland and Wales that expires on December 31, 2009) and two with House of Blues (a U.S. agreement that
expires on December 31, 2009 and a Canadian agreement that expires on March 1, 2010). Ticketmaster anticipates that these contracts will not be renewed. Ticketmaster is undertaking and
expects to continue to undertake efforts to replace the revenue it expects to lose upon the expiration of its contracts with Live Nation.
Financial
instruments, which potentially subject Ticketmaster to concentration of credit risk, consist primarily of cash and cash equivalents. Cash and cash equivalents are maintained
with quality financial institutions of high credit and cash held in the U.S. is in excess of Federal Deposit Insurance Corporation insurance limits.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statementsan amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests
of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. SFAS No. 160 will be applied
prospectively, except as it relates to disclosures, for which the effects will be applied retrospectively for all periods presented. Early adoption is not permitted. Ticketmaster is currently
assessing the impact of SFAS No. 160 on its combined financial position, results of operations and cash flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces FASB Statement No. 141. SFAS No. 141R
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest
in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS
No. 141R applies prospectively to business combinations in fiscal years beginning after December 15, 2008. Early adoption is not permitted. Ticketmaster is currently assessing the impact
of the adoption of SFAS No. 141R on its combined financial position, results of operations and cash flows.
C-13
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 3SFAS 123R AND STOCK-BASED COMPENSATION
The equity awards described below principally relate to awards to Ticketmaster employees that were granted under various IAC stock and annual incentive plans.
Effective
January 1, 2006, Ticketmaster adopted SFAS 123R using the modified prospective transition method and has applied the classification provisions of SAB 107
regarding the SEC's interpretation of SFAS 123R and the valuation of share-based payments for public companies in its adoption of SFAS 123R.
The
adoption of SFAS 123R did not impact the amount of stock-based compensation expense recorded in the accompanying combined statements of operations as Ticketmaster had
previously adopted the expense recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Ticketmaster has been recognizing expense for all
stock-based compensation instruments since it became wholly owned by IAC on January 17, 2003.
Prior
to the adoption of SFAS 123R, the entire tax benefit from stock-based compensation was reported as a component of operating cash flows. Upon the adoption of
SFAS 123R, tax benefits resulting from tax deductions in excess of the stock-based compensation expense recognized in the combined statement of operations are reported as a component of
financing cash flows. For the years ended December 31, 2007 and 2006, excess tax benefits from stock-based compensation of $3.0 million and $2.7 million, respectively, are
included as a component of financing cash flows. For the year ended December 31, 2005, excess tax benefits from stock-based compensation of $2.5 million is included as a component of
operating cash flows.
Non-cash
stock-based compensation expense related to equity awards is included in the following line items in the accompanying combined statements of operations for the years
ended December 31, 2007, 2006 and 2005 (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cost of sales |
|
$ |
800 |
|
$ |
654 |
|
$ |
1,664 |
|
Selling and marketing expense |
|
|
876 |
|
|
646 |
|
|
621 |
|
General and administrative expense |
|
|
10,896 |
|
|
6,539 |
|
|
18,020 |
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation expense before income taxes |
|
|
12,572 |
|
|
7,839 |
|
|
20,305 |
|
Income tax benefit |
|
|
(5,305 |
) |
|
(3,424 |
) |
|
(6,961 |
) |
|
|
|
|
|
|
|
|
Non-cash stock-based compensation expense after income taxes |
|
$ |
7,267 |
|
$ |
4,415 |
|
$ |
13,344 |
|
|
|
|
|
|
|
|
|
The
form of awards granted to Ticketmaster employees are principally restricted stock units ("RSUs"), performance stock units ("PSUs") and stock options.
The
fair value of each stock option award is estimated on the grant date using the Black-Scholes option pricing model. There were no stock options granted by IAC with respect to
Ticketmaster employees during the years ended December 31, 2007, 2006 and 2005.
RSUs
and PSUs are awards in the form of phantom shares or units, denominated in a hypothetical equivalent number of shares of IAC common stock and with the value of each award equal to
the fair value of IAC common stock at the date of grant. All outstanding award agreements provide for settlement, upon vesting, in stock for U.S. employees and in cash for non-U.S.
employees. Each RSU, PSU and restricted stock grant is subject to service-based vesting, where a specific period of continued
C-14
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 3SFAS 123R AND STOCK-BASED COMPENSATION (Continued)
employment
must pass before an award vests, and certain grants also include performance-based vesting, where certain performance targets set at the time of grant must be achieved before an award
vests. Ticketmaster recognizes expense for all RSUs, PSUs and restricted stock for which vesting is considered probable. For RSU and restricted stock grants to U.S. employees, the accounting charge is
measured at the grant date as the fair value of IAC common stock and expensed ratably as non-cash compensation over the vesting term. For PSU grants to U.S. employees, the expense is
measured at the grant date as the fair value of IAC common stock and expensed as non-cash compensation when the performance targets are considered probable of being achieved. The expense
associated with RSU and PSU awards to non-U.S. employees is initially measured at fair value at the grant date and expensed ratably over the vesting term, subject to
mark-to-market adjustments for changes in the price of IAC common stock, as compensation expense within general and administrative expense. The expense related to awards to
international employees totaled $1.8 million, $1.1 million and $0.9 million for the years ended December 31, 2007, 2006 and 2005, respectively. Cash payments related to
awards to international employees, totaled $2.4 million, $1.4 million and $0.9 million for the years ended December 31, 2007, 2006 and 2005, respectively.
The
amount of stock-based compensation expense recognized in the combined statements of operations is reduced by estimated forfeitures, as the amount recorded is based on awards
ultimately expected to
vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the estimated rate.
In
connection with the Expedia spin-off, all of Ticketmaster's outstanding share-based compensation instruments were modified. Accordingly, on August 9, 2005,
Ticketmaster recorded a pre-tax modification charge of $8.2 million related to the treatment of vested stock options. In conjunction with the Expedia spin-off and the
adoption of SFAS 123R, Ticketmaster conducted an assessment of certain assumptions used in determining the expense related to stock-based compensation which was completed in the third quarter
of 2005. The cumulative effect of a change in Ticketmaster's estimate related to the number of stock-based awards that were expected to vest resulted in a reduction in stock-based compensation expense
of $1.7 million. The after-tax effect of this change in estimate on net income was $1.0 million.
As
of December 31, 2007, there was approximately $29.2 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards. This
cost is expected to be recognized over a weighted-average period of approximately 2.5 years. At December 31, 2007, there were approximately 0.2 million awards outstanding to
non-U.S. employees.
NOTE 4GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands):
|
|
December 31,
|
|
|
2007
|
|
2006
|
Goodwill |
|
$ |
1,090,418 |
|
$ |
1,051,732 |
Intangible assets with indefinite lives |
|
|
62,560 |
|
|
62,560 |
Intangible assets with definite lives, net |
|
|
29,765 |
|
|
48,069 |
|
|
|
|
|
|
Total goodwill and intangible assets, net |
|
$ |
1,182,743 |
|
$ |
1,162,361 |
|
|
|
|
|
C-15
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 4GOODWILL AND INTANGIBLE ASSETS (Continued)
Intangible
assets with indefinite lives relate principally to trade names and trademarks acquired in various acquisitions. At December 31, 2007, intangible assets with definite
lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
Weighted-Average Amortization Life (Years)
|
Purchase agreements |
|
$ |
163,681 |
|
$ |
(145,637 |
) |
$ |
18,044 |
|
6.1 |
Distribution agreements |
|
|
28,109 |
|
|
(20,567 |
) |
|
7,542 |
|
4.2 |
Other |
|
|
23,339 |
|
|
(19,160 |
) |
|
4,179 |
|
4.7 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
215,129 |
|
$ |
(185,364 |
) |
$ |
29,765 |
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006, intangible assets with definite lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
Weighted-Average Amortization Life (Years)
|
Purchase agreements |
|
$ |
152,630 |
|
$ |
(123,001 |
) |
$ |
29,629 |
|
5.9 |
Distribution agreements |
|
|
27,876 |
|
|
(15,909 |
) |
|
11,967 |
|
4.2 |
Other |
|
|
22,349 |
|
|
(15,876 |
) |
|
6,473 |
|
4.8 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
202,855 |
|
$ |
(154,786 |
) |
$ |
48,069 |
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets with definite lives is computed on a straight-line basis and, based on December 31, 2007 balances, such amortization for the next
five years and thereafter is estimated to be as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
16,542 |
2009 |
|
|
5,806 |
2010 |
|
|
1,453 |
2011 |
|
|
835 |
2012 |
|
|
854 |
2013 and thereafter |
|
|
4,275 |
|
|
|
|
|
$ |
29,765 |
|
|
|
The
following tables present the balance of goodwill, including the changes in carrying amount of goodwill, for the years ended December 31, 2007 and 2006 (in thousands):
Balance as of
January 1, 2007
|
|
Additions
|
|
(Deductions)
|
|
Foreign Exchange Translation
|
|
Balance as of December 31, 2007
|
$ |
1,051,732 |
|
$ |
35,732 |
|
$ |
(5,899 |
) |
$ |
8,853 |
|
$ |
1,090,418 |
|
|
|
|
|
|
|
|
|
C-16
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 4GOODWILL AND INTANGIBLE ASSETS (Continued)
Additions
principally relate to acquisitions. Deductions principally relate to the establishment of a deferred tax asset related to acquired tax attributes.
Balance as of
January 1, 2006
|
|
Additions
|
|
(Deductions)
|
|
Foreign Exchange Translation
|
|
Balance as of December 31, 2006
|
$ |
1,027,886 |
|
$ |
20,779 |
|
$ |
(4,219 |
) |
$ |
7,286 |
|
$ |
1,051,732 |
|
|
|
|
|
|
|
|
|
Additions
principally relate to international acquisitions. Deductions principally relate to the establishment of a deferred tax asset related to acquired tax attributes and the income
tax benefit realized pursuant to the exercise of stock options assumed in business acquisitions that were vested at the transaction date and are treated as a reduction in goodwill when the income tax
deductions are realized.
NOTE 5PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Computer equipment and capitalized software |
|
$ |
260,983 |
|
$ |
221,123 |
|
Leasehold improvements |
|
|
14,180 |
|
|
14,336 |
|
Furniture and other equipment |
|
|
18,375 |
|
|
15,811 |
|
Projects in progress |
|
|
10,249 |
|
|
6,624 |
|
Land |
|
|
2,500 |
|
|
2,153 |
|
|
|
|
|
|
|
|
|
|
306,287 |
|
|
260,047 |
|
Less: accumulated depreciation and amortization |
|
|
(211,165 |
) |
|
(177,448 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
95,122 |
|
$ |
82,599 |
|
|
|
|
|
|
|
NOTE 6INCOME TAXES
Ticketmaster is a member of IAC's consolidated federal and state tax returns. In all periods presented, current and deferred tax expense has been computed for
Ticketmaster on a separate return basis. Ticketmaster's payments to IAC for its share of IAC's consolidated federal and state tax return liabilities have been reflected within cash flows from
operating activities in the accompanying combined statements of cash flows.
U.S.
and foreign earnings from continuing operations before income taxes and minority interest are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
U.S. |
|
$ |
170,573 |
|
$ |
199,282 |
|
$ |
141,157 |
Foreign |
|
|
85,226 |
|
|
63,268 |
|
|
46,300 |
|
|
|
|
|
|
|
Total |
|
$ |
255,799 |
|
$ |
262,550 |
|
$ |
187,457 |
|
|
|
|
|
|
|
C-17
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 6INCOME TAXES (Continued)
The components of the provision for income taxes attributable to continuing operations are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Current income tax provision: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
62,246 |
|
$ |
60,960 |
|
$ |
50,892 |
|
State |
|
|
12,076 |
|
|
11,416 |
|
|
8,363 |
|
Foreign |
|
|
25,895 |
|
|
23,796 |
|
|
17,223 |
|
|
|
|
|
|
|
|
|
Current income tax provision |
|
|
100,217 |
|
|
96,172 |
|
|
76,478 |
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit) provision: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(9,880 |
) |
|
(1,383 |
) |
|
(6,277 |
) |
State |
|
|
(1,477 |
) |
|
(5,533 |
) |
|
356 |
|
Foreign |
|
|
147 |
|
|
(3,289 |
) |
|
(2,269 |
) |
|
|
|
|
|
|
|
|
Deferred income tax (benefit) |
|
|
(11,210 |
) |
|
(10,205 |
) |
|
(8,190 |
) |
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
89,007 |
|
$ |
85,967 |
|
$ |
68,288 |
|
|
|
|
|
|
|
|
|
Current
income taxes payable has been reduced by $3.0 million, $2.7 million and $2.5 million for the years ended December 31, 2007, 2006 and 2005,
respectively, for tax deductions attributable to stock-
based compensation. The related income tax benefits of this stock-based compensation were recorded as amounts charged or credited to invested capital or a reduction in goodwill.
The
tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006
are presented below (in thousands). The valuation allowance is related to items for which it is more likely than not that the tax benefit will not be realized.
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
Provision for accrued expenses |
|
$ |
6,976 |
|
$ |
3,881 |
|
Net operating loss carryforwards |
|
|
4,118 |
|
|
1,701 |
|
Stock-based compensation |
|
|
7,977 |
|
|
7,257 |
|
Other |
|
|
1,701 |
|
|
2,102 |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
20,772 |
|
|
14,941 |
|
Less valuation allowance |
|
|
(6,770 |
) |
|
(4,164 |
) |
|
|
|
|
|
|
Net deferred tax assets |
|
|
14,002 |
|
|
10,777 |
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Property and equipment |
|
|
(4,973 |
) |
|
|
|
Intangible and other assets |
|
|
(33,992 |
) |
|
(39,693 |
) |
Other |
|
|
(1,536 |
) |
|
(1,685 |
) |
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(40,501 |
) |
|
(41,378 |
) |
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(26,499 |
) |
$ |
(30,601 |
) |
|
|
|
|
|
|
C-18
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 6INCOME TAXES (Continued)
Included
in "Other non-current assets" in the accompanying combined balance sheets at December 31, 2007 and 2006 is a non-current deferred tax asset of
$0.9 million and $2.6 million, respectively. In addition, included in "Other accrued expenses and current liabilities" in the accompanying combined balance sheets at December 31,
2007 and 2006 is a current deferred tax liability of $0.9 million and $0.3 million, respectively.
At December 31, 2007, Ticketmaster had state net operating losses ("NOLs") of approximately $14.0 million. If not utilized, the state NOLs will expire at various times
between 2008 and 2024. At December 31, 2007, Ticketmaster had foreign NOLs of approximately $11.6 million available to offset future income. Of these foreign losses, approximately
$5.1 million can be carried forward indefinitely, and approximately $5.2 million and $1.3 million will expire within five years and ten years, respectively. Utilization of
approximately $4.2 million of foreign NOLs will be subject to annual limitations based on taxable income. During 2007, Ticketmaster did not recognize any significant tax benefits related to
NOLs.
During
2007, Ticketmaster's valuation allowance increased by approximately $2.6 million. This increase was primarily related to foreign net operating losses. At
December 31, 2007, Ticketmaster had a valuation allowance of approximately $6.8 million related to the portion of tax operating loss carryforwards and other items for which it is more
likely than not that the tax benefit will not be realized.
A
reconciliation of the income tax provision to the amounts computed by applying the statutory federal income tax rate to earnings from continuing operations before income taxes and
minority interest is shown as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Income tax provision at the federal statutory rate of 35% |
|
$ |
89,530 |
|
$ |
91,892 |
|
$ |
65,610 |
|
State income taxes, net of effect of federal tax benefit |
|
|
6,890 |
|
|
8,434 |
|
|
4,551 |
|
Foreign income taxed at a different statutory tax rate |
|
|
(4,126 |
) |
|
(4,263 |
) |
|
(1,251 |
) |
Dividends from foreign subsidiaries |
|
|
|
|
|
27,513 |
|
|
|
|
Foreign income tax credits utilized |
|
|
(1,237 |
) |
|
(27,969 |
) |
|
|
|
(Reduction) increase in tax on unremitted earnings of certain non-U.S. subsidiaries |
|
|
|
|
|
(8,111 |
) |
|
1,430 |
|
Other, net |
|
|
(2,050 |
) |
|
(1,529 |
) |
|
(2,052 |
) |
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
89,007 |
|
$ |
85,967 |
|
$ |
68,288 |
|
|
|
|
|
|
|
|
|
In
accordance with APB No. 23, no federal and state income taxes have been provided on permanently reinvested earnings of certain foreign subsidiaries aggregating approximately
$139.5 million at December 31, 2007. If, in the future, these earnings are repatriated to the U.S., or if Ticketmaster determines such earnings will be repatriated to the U.S. in the
foreseeable future, additional tax provisions would be required. Due to complexities in the tax laws and the assumptions that would have to be made, it is not practicable to estimate the amounts of
income taxes that would have to be provided. In 2006, Ticketmaster asserted that the earnings of certain foreign subsidiaries are
permanently reinvested resulting in a benefit of $8.1 million from the release of net deferred tax liabilities established in prior years.
C-19
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 6INCOME TAXES (Continued)
Ticketmaster
adopted the provisions of FIN 48 effective January 1, 2007. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. The cumulative effect of the adoption resulted in an increase of $1.3 million to invested capital. A reconciliation of the beginning and ending
amount of unrecognized tax benefits, excluding interest, is as follows (in thousands):
Balance at January 1, 2007 |
|
$ |
583 |
Additions based on tax positions related to the current year |
|
|
3,884 |
Additions for tax positions of prior years |
|
|
1,022 |
Reductions for tax positions of prior years |
|
|
|
Settlements |
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
5,489 |
|
|
|
As
of January 1, 2007 and December 31, 2007, the unrecognized tax benefits, including interest, were $0.6 million and $6.3 million, respectively. Included in
unrecognized tax benefits at December 31, 2007 is approximately $4.6 million for tax positions included in IAC's consolidated tax return filings. Included within "Receivables from IAC
and subsidiaries" in the accompanying combined balance sheet at December 31, 2007 is approximately $5.3 million of unrecognized tax benefits and related interest that will remain a
liability of IAC after the spin-off. Also included in unrecognized tax benefits at December 31, 2007 is approximately $3.6 million for tax positions which the ultimate
deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
Ticketmaster
recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. Included in income tax expense from continuing operations for
the year ended December 31, 2007 is $0.4 million, net of related deferred taxes of $0.2 million, for interest on unrecognized tax benefits. At January 1, 2007 and
December 31, 2007 Ticketmaster has accrued $0.1 million and $0.8 million, respectively for the payment of interest. There are no material accruals for penalties.
By
virtue of previously filed separate company and consolidated tax returns with IAC, Ticketmaster is routinely under audit by federal, state, local and foreign authorities in the area
of income tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered
sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between
the reserves for tax contingencies and the amounts owed by Ticketmaster are recorded in the period they become known.
The
Internal Revenue Service ("IRS") is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of
Ticketmaster from January 17, 2003, the date which Ticketmaster joined the IAC consolidated tax return. The statute of limitations for these years has been extended to December 31, 2008.
Various IAC consolidated tax returns filed with state, local and foreign jurisdictions are currently under examination, the most
C-20
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 6INCOME TAXES (Continued)
significant
of which are Florida, New York state and New York City, for various tax years after December 31, 2001. These examinations are expected to be completed by late 2008.
Ticketmaster
believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $3.6 million within twelve months of the current reporting
date due to the reversal of deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits
cannot be made, but are not expected to be significant.
NOTE 7SEGMENT INFORMATION
Ticketmaster has one operating segment based upon how the chief operating decision maker and executive management view the business, its organizational structure
and the type of service provided, which primarily is online and offline ticketing services.
Ticketmaster's
primary metric is Operating Income Before Amortization, which is defined as operating income excluding, if applicable: (1) non-cash compensation
expense, (2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions, and (4) one-time items. Ticketmaster believes
this measure is useful to investors because it represents its combined operating results taking into account depreciation, which it believes is an ongoing cost of doing business, but excluding the
effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to Ticketmaster's statement of
operations of certain expenses, including non-cash compensation and acquisition-related accounting.
The
following table reconciles Operating Income Before Amortization to operating income and net income in 2007, 2006 and 2005:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Operating Income Before Amortization |
|
$ |
255,088 |
|
$ |
259,839 |
|
$ |
215,068 |
|
Non-cash compensation expense |
|
|
(12,572 |
) |
|
(7,839 |
) |
|
(20,305 |
) |
Amortization of intangibles |
|
|
(26,200 |
) |
|
(27,109 |
) |
|
(28,748 |
) |
|
|
|
|
|
|
|
|
|
Operating income |
|
|
216,316 |
|
|
224,891 |
|
|
166,015 |
|
Interest income |
|
|
33,065 |
|
|
33,982 |
|
|
17,417 |
|
Interest expense |
|
|
(1,003 |
) |
|
(302 |
) |
|
(65 |
) |
Equity in income of unconsolidated affiliates |
|
|
6,301 |
|
|
2,997 |
|
|
3,401 |
|
Other income |
|
|
1,120 |
|
|
982 |
|
|
689 |
|
Income tax provision |
|
|
(89,007 |
) |
|
(85,967 |
) |
|
(68,288 |
) |
Minority interest in losses (income) of consolidated subsidiaries |
|
|
2,559 |
|
|
118 |
|
|
(1,470 |
) |
|
|
|
|
|
|
|
|
Net income |
|
$ |
169,351 |
|
$ |
176,701 |
|
$ |
117,699 |
|
|
|
|
|
|
|
|
|
C-21
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 7SEGMENT INFORMATION (Continued)
Ticketmaster
maintains operations in the United States, the United Kingdom, Canada and other international territories. Geographic information about the United States and international
territories is presented below:
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Revenue |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
814,851 |
|
$ |
759,339 |
|
$ |
675,781 |
|
All other countries |
|
|
425,626 |
|
|
303,333 |
|
|
252,923 |
|
|
|
|
|
|
|
|
|
$ |
1,240,477 |
|
$ |
1,062,672 |
|
$ |
928,704 |
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Long-lived assets (excluding goodwill and intangible assets) |
|
|
|
|
|
|
|
United States |
|
$ |
63,021 |
|
$ |
57,389 |
|
All other countries |
|
|
32,101 |
|
|
25,210 |
|
|
|
|
|
|
|
$ |
95,122 |
|
$ |
82,599 |
|
|
|
|
|
NOTE 8EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES
At December 31, 2007 and 2006 Ticketmaster's equity investments in unconsolidated affiliates totaled $145.2 million and $49.4 million,
respectively, and are included in "Long-term investments" in the accompanying combined balance sheets. In accordance with the terms of the spin-off, IAC transferred its equity
investment in Front Line, valued at $125.8 million at December 31, 2007 to Ticketmaster. Such transfers totaled approximately $96.6 million and $25.0 million in the years
ended December 31, 2007 and 2005, respectively, and are included in "Net transfers from IAC" in the accompanying combined statements of invested equity. Income related to the investment in
Front Line, which totaled $2.9 million, $0.7 million and $0.6 million in the years ended December 31, 2007, 2006 and 2005, respectively, is included in 'Total other income,
net' in the accompanying combined statements of operations.
The
following is a list of investments accounted for under the equity method, the principal market that the investee operates, and the relevant ownership percentage:
|
|
December 31, 2007
|
|
Front Line (United States) |
|
45.99 |
% |
Beijing Gehua Ticketmaster Ticketing Co., Ltd. (China) |
|
40 |
% |
TM Mexico (JV) |
|
33.3 |
% |
Evolution Artists, Inc. ("iLike") (United States) |
|
25 |
% |
C-22
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 8EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES (Continued)
Summarized
aggregated financial information of Ticketmaster's equity investments is as follows (in thousands):
|
|
2007
|
|
2006
|
|
2005
|
Current assets |
|
$ |
93,693 |
|
$ |
27,037 |
|
$ |
44,364 |
Non-current assets |
|
|
176,174 |
|
|
8,113 |
|
|
3,495 |
Current liabilities |
|
|
45,620 |
|
|
7,774 |
|
|
33,199 |
Non-current liabilities |
|
|
13,877 |
|
|
|
|
|
503 |
Net sales |
|
|
156,789 |
|
|
25,176 |
|
|
22,893 |
Gross profit |
|
|
94,166 |
|
|
17,522 |
|
|
15,308 |
Net income |
|
|
16,257 |
|
|
8,992 |
|
|
7,424 |
Ticketmaster
received dividends from TM Mexico of $7.3 million, $1.0 million and $3.5 million during the years ended December 31, 2007, 2006 and 2005,
respectively.
NOTE 9COMMITMENTS
Ticketmaster leases office space, equipment and services used in connection with its operations under various operating leases, many of which contain escalation
clauses. In addition, future minimum lease payments include Ticketmaster's allocable share of an IAC data center lease. These payments commenced January 2008 and are expected to continue subsequent to
the spin-off.
Future
minimum payments under operating lease agreements are as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
14,830 |
2009 |
|
|
13,736 |
2010 |
|
|
11,496 |
2011 |
|
|
9,959 |
2012 |
|
|
8,588 |
Thereafter |
|
|
23,736 |
|
|
|
|
Total |
|
$ |
82,345 |
|
|
|
Expenses
charged to operations under lease agreements were $20.1 million, $16.0 million and $16.1 million in the years ended December 31, 2007, 2006 and 2005,
respectively, and include month-to-month and one-time charges relating to leases that do not require future minimum payments. In addition, rent expense charged to
Ticketmaster by IAC, for which no minimum payments are required, totaled $2.4 million, $1.7 million and $1.4 million in the years ended December 31, 2007, 2006 and 2005,
respectively. See Note 13 for a further discussion of transactions between Ticketmaster and IAC.
C-23
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 9COMMITMENTS (Continued)
Ticketmaster also has funding commitments that could potentially require its performance in the event of demands by third parties or contingent events, such as
under letters of credit extended or under guarantees of debt, as follows (in thousands):
|
|
Amount of Commitment Expiration Per Period
|
|
|
Total
Amounts
Committed
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
Guarantees, surety bonds and letters of credit |
|
$ |
3,911 |
|
$ |
596 |
|
$ |
65 |
|
$ |
3,250 |
|
$ |
|
Purchase obligations |
|
|
95,056 |
|
|
30,726 |
|
|
35,268 |
|
|
25,687 |
|
|
3,375 |
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments |
|
$ |
98,967 |
|
$ |
31,322 |
|
$ |
35,333 |
|
$ |
28,937 |
|
$ |
3,375 |
|
|
|
|
|
|
|
|
|
|
|
IAC
guaranteed a $3.25 million line of credit granted to one of Ticketmaster's clients in connection with the production of broadway shows in China. According to the terms of the
spin-off, the guarantee is expected to be transferred from IAC to Ticketmaster and, accordingly, the guarantee is included in the table above. The surety bonds primarily relate to
marketing events and licensing bonds for ticketing services. The purchase obligations primarily arise from sports sponsorship agreements intended to promote Ticketmaster's ticket resale services.
NOTE 10CONTINGENCIES
In the ordinary course of business, Ticketmaster is a party to various lawsuits. Ticketmaster establishes reserves for specific legal matters when it determines
that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is
not probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against Ticketmaster, including claims where an unfavorable
outcome is reasonably possible, will not have a material impact on the liquidity, results of operations, or financial condition of Ticketmaster, these matters are subject to inherent uncertainties and
management's view of these matters may change in the future. It is possible that an unfavorable outcome of one or more of these lawsuits could have a material impact on the liquidity, results of
operations, or financial condition of Ticketmaster. Ticketmaster also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss.
See Note 6 for discussion related to income tax contingencies.
NOTE 11FINANCIAL INSTRUMENTS
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents |
|
$ |
568,417 |
|
$ |
568,417 |
|
$ |
317,577 |
|
$ |
317,577 |
|
Restricted cash |
|
|
853 |
|
|
853 |
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
133,432 |
|
|
133,432 |
|
|
97,623 |
|
|
97,623 |
|
Guarantees, surety bonds and letters of credit |
|
|
N/A |
|
|
(3,911 |
) |
|
N/A |
|
|
(3,537 |
) |
C-24
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 11FINANCIAL INSTRUMENTS (Continued)
The
carrying amount of cash and cash equivalents reflected in the accompanying combined balance sheets approximates fair value as they are maintained with various high quality financial
institutions. The carrying amount of accounts receivable reflected in the accompanying combined balance sheets approximate fair value as they are short-term in nature and are generally
settled shortly after the sale.
NOTE 12SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Non-Cash Transactions
In accordance with the terms of the spin-off, IAC transferred its equity investment in Front Line, valued at $125.8 million at
December 31, 2007, to Ticketmaster. Additionally, Ticketmaster transferred its investment in Active.com, valued at $4.0 million at December 31, 2007, to IAC. The net amount of
these transfers, which are included in "Net transfers from IAC" in the accompanying combined statements of invested equity, were $96.6 million, $(2.3) million and $25.0 million in
the years ended December 31, 2007, 2006 and 2005, respectively.
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
822 |
|
$ |
302 |
|
$ |
65 |
|
|
Income tax payments, including amounts paid to IAC for Ticketmaster's share of IAC's consolidated tax liability |
|
|
96,247 |
|
|
92,291 |
|
|
71,519 |
|
|
Income tax refunds |
|
|
(140 |
) |
|
(1,077 |
) |
|
(228 |
) |
NOTE 13RELATED PARTY TRANSACTIONS
Ticketmaster provided call center support services to Expedia for which they charged amounts totaling $3.0 million, $3.8 million and
$0.7 million in the years ended December 31, 2007, 2006 and 2005, respectively. Amounts receivable by Ticketmaster from Expedia related to these services were approximately
$0.1 million and $0.3 million at December 31, 2007 and 2006, respectively, and are included in "Accounts Receivable, trade" in the accompanying combined balance sheets.
Ticketmaster and Expedia are related parties because they are under common control.
Ticketmaster's
expenses include allocations from IAC of costs associated with IAC's accounting, treasury, legal, tax, corporate support, human resources and internal audit functions.
These expenses were allocated based on the ratio of Ticketmaster's revenue as a percentage of IAC's total revenue. Allocated costs were $3.5 million, $2.6 million and $2.5 million
in the years ended December 31, 2007, 2006 and 2005, respectively, and are included in "General and administrative expense" in the accompanying combined statements of operations. It is not
practicable to determine the amounts of these expenses that would have been incurred had Ticketmaster operated as an unaffiliated entity. In the opinion of management, the allocation method is
reasonable.
Ticketmaster
occupies office space in buildings in Los Angeles and New York City that are currently owned by IAC. Related rental expense charged to Ticketmaster by IAC totaled
$2.4 million, $1.7 million and $1.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.
C-25
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 13RELATED PARTY TRANSACTIONS (Continued)
In
accordance with the terms of the spin-off, IAC transferred its equity investment in Front Line to Ticketmaster and Ticketmaster transferred its investment in Active.com to
IAC. See Notes 8 and 12 for a further description of these transfers.
The
portion of interest income reflected in the combined statements of operations that is intercompany in nature was $27.8 million, $30.5 million and $15.6 million
for the years ended December 31, 2007, 2006 and 2005, respectively. This intercompany interest relates to the receivables from IAC.
An
analysis of Ticketmaster's receivables from IAC and subsidiaries is as follows (in thousands):
|
|
2007
|
|
2006
|
|
Receivables from IAC and subsidiaries, beginning of year |
|
$ |
539,861 |
|
$ |
329,601 |
|
Cash transfers (from) to IAC related to its centrally managed U.S. treasury function |
|
|
(83,052 |
) |
|
185,413 |
|
Interest income |
|
|
27,793 |
|
|
30,539 |
|
Employee equity instruments and associated tax withholdings |
|
|
8,141 |
|
|
6,102 |
|
Taxes (excludes tax withholdings associated with employee equity instruments) |
|
|
8,925 |
|
|
5,500 |
|
Allocation of non-cash compensation expense |
|
|
(10,128 |
) |
|
(7,839 |
) |
Administrative expenses and other |
|
|
(17,430 |
) |
|
(9,455 |
) |
|
|
|
|
|
|
Receivables from IAC and subsidiaries, end of year |
|
$ |
474,110 |
|
$ |
539,861 |
|
|
|
|
|
|
|
Relationship Between IAC and Ticketmaster after the Spin-Off
For purposes of governing certain of the ongoing relationships between Ticketmaster and IAC at and after the spin-off, and to provide for an orderly
transition, Ticketmaster and IAC are expected to enter into a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement (the
"Spin-Off Agreements"), among other agreements.
Separation Agreement
The separation agreement is expected to provide generally that (i) immediately prior to the spin-off, IAC will contribute or otherwise transfer
to Ticketmaster all of the subsidiaries and assets comprising the Ticketmaster Businesses, (ii) Ticketmaster will assume all of the liabilities related to the Ticketmaster Businesses,
(iii) each party will indemnify the other and its respective affiliates, current and former directors, officers and employees for any losses arising out of any breach of any of the
Spin-Off Agreements and (iv) Ticketmaster will indemnify IAC for its failure to assume and perform any assumed liabilities and any liabilities relating to Ticketmaster financial and
business information included in the SEC documentation filed with respect to the spin-off as well as such other terms as to which IAC and Ticketmaster mutually agree.
Tax Sharing Agreement
The tax sharing agreement will govern the respective rights, responsibilities and obligations of IAC and Ticketmaster after the spin-off with respect
to taxes for the periods ending on or before the spin-off. Generally, IAC will pay taxes with respect to Ticketmaster income included on its consolidated, unitary or combined federal or
state tax returns, including audit adjustments with respect
C-26
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 13RELATED PARTY TRANSACTIONS (Continued)
thereto.
Other pre-distribution taxes that are attributable to the Ticketmaster Businesses including taxes reported on separately-filed and all foreign returns and audit adjustments with
respect thereto, will be borne solely by Ticketmaster. The tax sharing agreement is expected to contain certain customary restrictive covenants that generally prohibit Ticketmaster (absent a
supplemental IRS ruling or an unqualified opinion of counsel to the contrary, in each case, in a form and substance satisfactory acceptable to IAC in its sole discretion) from taking actions that
could jeopardize the tax free nature of the spin-off. Ticketmaster is expected to agree to indemnify IAC for any taxes and related losses resulting from its non-compliance with
these restrictive covenants, as well as for the breach of certain representations in the Spin-Off Agreements and other documentation relating to the tax-free nature of the
spin-off.
Employee Matters Agreement
The employee matters agreement will generally provide that Ticketmaster will be responsible for, among other obligations, all employment and benefit-related
obligations and liabilities related to its employees immediately prior to the spin-off (and their dependents and beneficiaries) and former employees who most recently worked for the
Ticketmaster Businesses. This agreement is also expected to provide that assets and liabilities from the IAC Retirement Savings Plan of Ticketmaster employees will be transferred to a newly
established Ticketmaster Retirement Savings Plan as soon as practicable following the spin-off.
Transition Services Agreement
Under the transition services agreement, beginning on the date of the completion of the spin-off, IAC will provide to Ticketmaster on an interim,
transitional basis, various services, which are expected to relate primarily to public company and operational matters, and such other services as to which IAC and Ticketmaster mutually agree. The
agreed upon charges for these services will generally allow IAC to recover fully the allocated costs of providing the services, plus all out-of-pocket costs and expenses.
Ticketmaster may terminate the agreement with respect to one or more particular services upon prior written notice.
Commercial Agreements
IAC and Ticketmaster currently, and for the foreseeable future expect to provide certain services to each other pursuant to certain commercial relationships. In
connection with the spin-off, IAC and Ticketmaster will enter into a number of commercial agreements between subsidiaries of IAC, on the one hand, and subsidiaries of Ticketmaster, on the
other hand, many of which will memorialize (in most material respects) pre-existing arrangements in effect prior to the spin-off and all of which are intended to reflect arm's
length terms. In addition, IAC and Ticketmaster believe that such agreements, whether taken individually or in the aggregate, do not constitute a material contract to either IAC or Ticketmaster.
Aggregate
revenue earned with respect to these commercial agreements by the Ticketmaster Businesses with IAC subsidiaries was $12.2 million, $11.6 million and
$11.6 million, respectively, in the years ended December 31, 2007, 2006 and 2005. The Ticketmaster Businesses incurred approximately $1.8 million in the years ended
December 31, 2007 and less than $0.1 million in the years ended
C-27
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 13RELATED PARTY TRANSACTIONS (Continued)
December 31,
2006 and 2005 in expenses related to these commercial agreements with IAC subsidiaries.
NOTE 14BENEFIT PLANS
During the three years ended December 31, 2007, Ticketmaster either participated in a retirement savings plan sponsored by IAC or had a retirement savings
plan in the United States that was qualified under Section 401(k) of the Internal Revenue Code. Subsequent to the spin-off, the net assets available for benefits of the employees of
Ticketmaster are expected to be transferred from the IAC plan to a newly created Ticketmaster plan. Under the IAC plan, participating employees may contribute up to 16% of their pretax earnings, but
not more than statutory limits. Ticketmaster match under the IAC plan is fifty cents for each dollar a participant contributes in this plan, with a maximum contribution of 3% of a participant's
eligible earnings. Matching contributions for the IAC plan were approximately $2.5 million, $2.1 million and $1.9 million in 2007, 2006, and 2005, respectively. The increase in
matching contributions for 2007 and 2006 is primarily related to increased participation in the plan. Matching contributions are invested in the same manner as each participant's voluntary
contributions in the investment options provided under the plan. Investment options in the plan included IAC common stock, but neither participant nor matching contributions are required to be
invested in IAC common stock.
During
the three years ended December 31, 2007, Ticketmaster also had or participated in various benefit plans, principally defined contribution plans, for its
non-U.S. employees. Ticketmaster's contributions for these plans were approximately $4.1 million, $3.4 million and $2.7 million in 2007, 2006 and 2005, respectively.
NOTE 15QUARTERLY RESULTS (UNAUDITED)
|
|
Quarter Ended
March 31,
|
|
Quarter Ended
June 30,
|
|
Quarter Ended
September 30,
|
|
Quarter Ended
December 31,
|
|
|
(In thousands)
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
303,577 |
|
$ |
293,416 |
|
$ |
292,466 |
|
$ |
351,018 |
Gross profit |
|
|
118,793 |
|
|
109,556 |
|
|
111,280 |
|
|
134,310 |
Operating income |
|
|
61,488 |
|
|
45,368 |
|
|
48,036 |
|
|
61,424 |
Net income |
|
|
42,925 |
|
|
34,804 |
|
|
40,541 |
|
|
51,081 |
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
240,722 |
|
$ |
287,595 |
|
$ |
258,497 |
|
$ |
275,858 |
Gross profit |
|
|
99,790 |
|
|
115,597 |
|
|
100,113 |
|
|
110,020 |
Operating income |
|
|
58,143 |
|
|
65,215 |
|
|
45,533 |
|
|
56,000 |
Net income |
|
|
39,636 |
|
|
45,761 |
|
|
34,706 |
|
|
56,598 |
C-28
Schedule II
TICKETMASTER AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Description
|
|
Balance at
Beginning of
Period
|
|
Charges to
Earnings
|
|
Charges to
Other
Accounts
|
|
Deductions
|
|
Balance at
End of Period
|
|
|
(In thousands)
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
2,798 |
|
$ |
496 |
|
$ |
126 |
|
$ |
(1,074) |
(1) |
$ |
2,346 |
Deferred tax valuation allowance |
|
|
4,164 |
|
|
2,606 |
|
|
|
|
|
|
|
|
6,770 |
Other reserves |
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
2,033 |
|
$ |
761 |
|
$ |
74 |
|
$ |
(70) |
(1) |
$ |
2,798 |
Deferred tax valuation allowance |
|
|
5,404 |
|
|
(915 |
) |
|
(325 |
) |
|
|
|
|
4,164 |
Other reserves |
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
39 |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
1,978 |
|
$ |
125 |
|
$ |
484 |
|
$ |
(554) |
(1) |
$ |
2,033 |
Deferred tax valuation allowance |
|
|
6,513 |
|
|
(1,109 |
) |
|
|
|
|
|
|
|
5,404 |
Other reserves |
|
|
1,062 |
|
|
|
|
|
|
|
|
|
|
|
39 |
- (1)
- Write-off
of uncollectible accounts receivable.
C-29
TICKETMASTER AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Revenue |
|
$ |
348,981 |
|
$ |
303,577 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
221,022 |
|
|
184,784 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
127,959 |
|
|
118,793 |
|
Selling and marketing expense |
|
|
19,393 |
|
|
7,073 |
|
General and administrative expense |
|
|
41,853 |
|
|
34,258 |
|
Amortization of intangibles |
|
|
8,868 |
|
|
6,853 |
|
Depreciation |
|
|
11,055 |
|
|
9,121 |
|
|
|
|
|
|
|
|
Operating income |
|
|
46,790 |
|
|
61,488 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
3,290 |
|
|
5,378 |
|
|
Interest expense |
|
|
(735 |
) |
|
(266 |
) |
|
Equity in income of uncombined affiliates |
|
|
666 |
|
|
865 |
|
|
Other income |
|
|
944 |
|
|
83 |
|
|
|
|
|
|
|
Total other income, net |
|
|
4,165 |
|
|
6,060 |
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
50,955 |
|
|
67,548 |
|
Income tax provision |
|
|
(18,821 |
) |
|
(24,637 |
) |
Minority interest in losses of combined subsidiaries |
|
|
573 |
|
|
14 |
|
|
|
|
|
|
|
Net income |
|
$ |
32,707 |
|
$ |
42,925 |
|
|
|
|
|
|
|
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
C-30
TICKETMASTER AND SUBSIDIARIES
COMBINED BALANCE SHEETS
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
|
|
(In thousands)
|
|
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
501,752 |
|
$ |
568,417 |
|
Restricted cash |
|
|
506 |
|
|
853 |
|
Accounts receivable, client accounts |
|
|
161,632 |
|
|
99,453 |
|
Accounts receivable, trade, net of allowance of $4,047 and $2,346, respectively |
|
|
36,102 |
|
|
33,979 |
|
Deferred income taxes |
|
|
5,769 |
|
|
5,883 |
|
Contract advances |
|
|
64,105 |
|
|
63,126 |
|
Prepaid expenses and other current assets |
|
|
38,570 |
|
|
21,149 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
808,436 |
|
|
792,860 |
|
Property and equipment, net |
|
|
110,528 |
|
|
95,122 |
|
Goodwill |
|
|
1,411,139 |
|
|
1,090,418 |
|
Intangible assets, net |
|
|
230,570 |
|
|
92,325 |
|
Long-term investments |
|
|
150,121 |
|
|
149,295 |
|
Other non-current assets |
|
|
99,155 |
|
|
86,514 |
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,809,949 |
|
$ |
2,306,534 |
|
|
|
|
|
|
|
LIABILITIES AND INVESTED EQUITY |
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
Accounts payable, client accounts |
|
$ |
500,547 |
|
$ |
413,075 |
|
Accounts payable, trade |
|
|
35,407 |
|
|
14,698 |
|
Accrued compensation and benefits |
|
|
37,436 |
|
|
31,171 |
|
Deferred revenue |
|
|
31,791 |
|
|
19,829 |
|
Income taxes payable |
|
|
1,616 |
|
|
1,721 |
|
Other accrued expenses and current liabilities |
|
|
49,874 |
|
|
42,449 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
656,671 |
|
|
522,943 |
|
Income taxes payable |
|
|
1,002 |
|
|
982 |
|
Other long-term liabilities |
|
|
8,004 |
|
|
3,204 |
|
Deferred income taxes |
|
|
87,888 |
|
|
32,416 |
|
Minority interest |
|
|
7,766 |
|
|
7,812 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
INVESTED EQUITY: |
|
|
|
|
|
|
|
Invested capital |
|
|
2,599,884 |
|
|
2,172,497 |
|
Receivables from IAC and subsidiaries |
|
|
(604,340 |
) |
|
(474,110 |
) |
Accumulated other comprehensive income |
|
|
53,074 |
|
|
40,790 |
|
|
|
|
|
|
|
|
Total invested equity |
|
|
2,048,618 |
|
|
1,739,177 |
|
|
|
|
|
|
|
TOTAL LIABILITIES AND INVESTED EQUITY |
|
$ |
2,809,949 |
|
$ |
2,306,534 |
|
|
|
|
|
|
|
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
C-31
TICKETMASTER AND SUBSIDIARIES
COMBINED STATEMENTS OF INVESTED EQUITY
(Unaudited)
|
|
Total
|
|
Invested Capital
|
|
Receivables from
IAC and
Subsidiaries
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
(In thousands)
|
Balance as of December 31, 2007 |
|
$ |
1,739,177 |
|
$ |
2,172,497 |
|
$ |
(474,110 |
) |
$ |
40,790 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the three months ended March 31, 2008 |
|
|
32,707 |
|
|
32,707 |
|
|
|
|
|
|
|
Foreign currency translation |
|
|
12,284 |
|
|
|
|
|
|
|
|
12,284 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
44,991 |
|
|
|
|
|
|
|
|
|
Net transfers from IAC (principally funding for acquisitions) |
|
|
394,680 |
|
|
394,680 |
|
|
|
|
|
|
Net change in receivables from IAC and subsidiaries |
|
|
(130,230 |
) |
|
|
|
|
(130,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2008 |
|
$ |
2,048,618 |
|
$ |
2,599,884 |
|
$ |
(604,340 |
) |
$ |
53,074 |
|
|
|
|
|
|
|
|
|
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
C-32
TICKETMASTER AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
32,707 |
|
$ |
42,925 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization of intangibles |
|
|
8,868 |
|
|
6,853 |
|
|
Depreciation |
|
|
11,055 |
|
|
9,121 |
|
|
Non-cash compensation expense |
|
|
4,765 |
|
|
1,879 |
|
|
Deferred income taxes |
|
|
1,111 |
|
|
(3,103 |
) |
|
Equity in income of uncombined affiliates, net of dividends |
|
|
(666 |
) |
|
(865 |
) |
|
Minority interest in losses of combined subsidiaries |
|
|
(573 |
) |
|
(14 |
) |
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
6,542 |
|
|
(6,941 |
) |
|
Prepaid expenses and other current assets |
|
|
(18,692 |
) |
|
(2,070 |
) |
|
Accounts payable and other current liabilities |
|
|
4,964 |
|
|
(9,731 |
) |
|
Income taxes payable |
|
|
(3,255 |
) |
|
(363 |
) |
|
Deferred revenue |
|
|
(581 |
) |
|
(338 |
) |
|
Funds collected on behalf of clients, net |
|
|
18,958 |
|
|
43,302 |
|
Other, net |
|
|
632 |
|
|
66 |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
65,835 |
|
|
80,721 |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Transfers to IAC |
|
|
(135,481 |
) |
|
(1,466 |
) |
|
Acquisitions, net of cash acquired |
|
|
(394,999 |
) |
|
(10,219 |
) |
|
Capital expenditures |
|
|
(9,487 |
) |
|
(9,304 |
) |
|
Increase in long-term investments |
|
|
(158 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(540,125 |
) |
|
(20,989 |
) |
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Capital contributions from IAC |
|
|
394,999 |
|
|
10,219 |
|
|
Principal payments on long-term obligations |
|
|
(345 |
) |
|
(684 |
) |
|
Excess tax benefits from stock-based awards |
|
|
28 |
|
|
1,659 |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
394,682 |
|
|
11,194 |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
12,943 |
|
|
2,184 |
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(66,665 |
) |
|
73,110 |
|
Cash and cash equivalents at beginning of period |
|
|
568,417 |
|
|
317,577 |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
501,752 |
|
$ |
390,687 |
|
|
|
|
|
|
|
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
C-33
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying Ticketmaster as one of those five companies. In these combined financial statements, we refer to the separation transaction as the "spin-off." Upon completion of the
spin-off, Ticketmaster will consist of the businesses that formerly comprised IAC's Ticketmaster segment, which consists of its domestic and international ticketing and ticketing related
businesses, subsidiaries and investments, excluding its ReserveAmerica subsidiary and its investment in Active.com. Ticketmaster will include IAC's investment in Front Line Management
Group Inc. ("Front Line"). The businesses to be operated by Ticketmaster following the spin-off are referred to herein as the "Ticketmaster Businesses."
Basis of Presentation
The historical combined financial statements of Ticketmaster and its subsidiaries reflect the historical financial position, results of operations and cash flows
of the Ticketmaster Businesses since their respective dates of acquisition by IAC, and the allocation to Ticketmaster of certain IAC corporate expenses relating to the Ticketmaster Businesses based on
the historical consolidated financial statements and accounting records of IAC and using the historical results of operations and historical bases of the assets and liabilities of the Ticketmaster
Businesses. However, for the purposes of these financial statements, income taxes have been computed for Ticketmaster on an as if stand-alone, separate tax return basis. These financial statements are
prepared on a combined, rather than a consolidated, basis because they exclude ReserveAmerica and the investment in Active.com that were owned, and include the investment in Front Line that was not
owned, either directly or indirectly, by legal entities that comprise the Ticketmaster Businesses. The ownership of ReserveAmerica and the investment in Active.com will be retained by IAC after the
spin-off. These combined financial statements present IAC's and its subsidiaries net investment in the Ticketmaster Businesses as invested equity in lieu of shareholders' equity.
Intercompany transactions and accounts have been eliminated.
In the opinion of Ticketmaster's management, the assumptions underlying the historical combined financial statements of Ticketmaster are reasonable. However, this financial information
does not necessarily reflect what the historical financial position, results of operations and cash flows of Ticketmaster would have been had Ticketmaster been a stand-alone company during the periods
presented.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and
with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles
for complete financial statements. In the opinion of Ticketmaster's management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. The
accompanying unaudited combined financial statements should be read in conjunction with Ticketmaster's audited combined financial statements and notes thereto for the year ended December 31,
2007.
C-34
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)
Company Overview
Ticketmaster is the world's leading live entertainment ticketing and marketing company, providing ticket sales, ticket resale services, marketing and distribution
through www.ticketmaster.com, one of the largest e-commerce sites on the internet, approximately 6,700 independent sales outlets and 19 call
centers worldwide. Ticketmaster serves leading arenas, stadiums, amphitheaters, music clubs, concert promoters, professional sports franchises and leagues, college sports teams, performing arts
venues, museums and theaters in the United States and abroad, including Australia, Canada, China, Denmark, Finland, Germany, Ireland, the Netherlands, New Zealand, Norway, Spain, Sweden, Turkey and
the United Kingdom. Ticketmaster is also a party to joint ventures with third parties to provide ticket distribution services in Mexico and to supply ticketing services for the 2008 Beijing Olympic
Games. Ticketmaster licenses its technology in Mexico, Argentina, Brazil, Chile, China and Belgium.
NOTE 2SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
Ticketmaster's management is required to make certain estimates and assumptions during the preparation of the combined financial statements in accordance with
U.S. generally accepted accounting principles. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date
of the combined financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying combined financial statements include: the recoverability of contract advances; the recoverability of long-lived assets; the
recovery of goodwill and intangible assets; the determination of income taxes payable and deferred income taxes, including related valuation allowances; and assumptions related to the determination of
stock-based compensation.
Other
Interest income earned on funds that are collected from ticket purchasers and invested until remittance to the applicable clients is included in revenue. For the
three months ended March 31, 2008 and 2007, $4.2 million and $3.0 million, respectively, of interest income is included in revenue.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statementsan amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of combined net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008.
SFAS No. 160 will be applied prospectively, except as it relates to disclosures, for
C-35
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 2SIGNIFICANT ACCOUNTING POLICIES (Continued)
which the effects will be applied retrospectively for all periods presented. Early adoption is not permitted. Ticketmaster is currently assessing the impact of SFAS No. 160 on its combined
financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces FASB Statement No. 141. SFAS No. 141R
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest
in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS
No. 141R applies prospectively to business combinations in fiscal years beginning after December 15, 2008. Early adoption is not permitted. Ticketmaster is currently assessing the impact
of the adoption of SFAS No. 141R on its combined financial position, results of operations and cash flows.
NOTE 3GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands):
|
|
March 31, 2008
|
|
December 31, 2007
|
Goodwill |
|
$ |
1,411,139 |
|
$ |
1,090,418 |
Intangible assets with indefinite lives |
|
|
62,560 |
|
|
62,560 |
Intangible assets with definite lives, net |
|
|
168,010 |
|
|
29,765 |
|
|
|
|
|
|
Total goodwill and intangible assets, net |
|
$ |
1,641,709 |
|
$ |
1,182,743 |
|
|
|
|
|
Intangible assets with indefinite lives relate principally to trade names and trademarks acquired in various acquisitions. At March 31, 2008, intangible assets with definite lives
relate to the following (in thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Amortization Life
(Years)
|
Purchase agreements |
|
$ |
165,661 |
|
$ |
(151,539 |
) |
$ |
14,122 |
|
6.1 |
Broker relationships |
|
|
63,800 |
|
|
(444 |
) |
|
63,356 |
|
12.0 |
Customer lists |
|
|
34,600 |
|
|
(1,057 |
) |
|
33,543 |
|
7.0 |
Technology |
|
|
32,087 |
|
|
(9,309 |
) |
|
22,778 |
|
3.5 |
Distribution agreements |
|
|
28,929 |
|
|
(22,212 |
) |
|
6,717 |
|
4.3 |
Other |
|
|
40,022 |
|
|
(12,528 |
) |
|
27,494 |
|
7.5 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
365,099 |
|
$ |
(197,089 |
) |
$ |
168,010 |
|
|
|
|
|
|
|
|
|
|
|
C-36
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 3GOODWILL AND INTANGIBLE ASSETS (Continued)
At December 31, 2007, intangible assets with definite lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Amortization Life
(Years)
|
Purchase agreements |
|
$ |
163,681 |
|
$ |
(145,637 |
) |
$ |
18,044 |
|
6.1 |
Distribution agreements |
|
|
28,109 |
|
|
(20,567 |
) |
|
7,542 |
|
4.2 |
Technology |
|
|
8,587 |
|
|
(8,397 |
) |
|
190 |
|
4.0 |
Other |
|
|
14,752 |
|
|
(10,763 |
) |
|
3,989 |
|
5.2 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
215,129 |
|
$ |
(185,364 |
) |
$ |
29,765 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on March 31, 2008 balances, such amortization for the remainder
of 2008 and each of the next five years and thereafter is estimated to be as follows (in thousands):
Remaining nine months of 2008 |
|
$ |
27,081 |
2009 |
|
|
27,529 |
2010 |
|
|
23,054 |
2011 |
|
|
14,608 |
2012 |
|
|
12,026 |
2013 |
|
|
11,796 |
2014 and thereafter |
|
|
51,916 |
|
|
|
|
|
$ |
168,010 |
|
|
|
The following table presents the balance of goodwill, including changes in the carrying amount of goodwill, for the three months ended March 31, 2008 (in thousands):
Balance As Of
January 1, 2008
|
|
Additions
|
|
(Deductions)
|
|
Foreign
Exchange
Translation
|
|
Balance As Of
March 31, 2008
|
$ |
1,090,418 |
|
$ |
315,803 |
|
$ |
(14 |
) |
$ |
4,932 |
|
$ |
1,411,139 |
|
|
|
|
|
|
|
|
|
Additions principally relate to the acquisitions of TicketsNow, Paciolan, and GET ME IN! LTD. The aggregate purchase price for these acquisitions totaled approximately
$425 million. Ticketmaster identified approximately $146.2 million of intangible assets other than goodwill. The goodwill recognized amounted to approximately $311.6 million. The
purchase price allocation for each of these acquisitions is preliminary and subject to adjustment during the allocation period, which is not expected to last beyond a year from the respective date of
purchase, and as such the goodwill may change.
C-37
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 4PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
|
March 31, 2008
|
|
December 31, 2007
|
|
Computer equipment and capitalized software |
|
$ |
283,944 |
|
$ |
260,983 |
|
Leasehold improvements |
|
|
16,813 |
|
|
14,180 |
|
Furniture and other equipment |
|
|
20,305 |
|
|
18,375 |
|
Projects in progress |
|
|
10,199 |
|
|
10,249 |
|
Land |
|
|
2,458 |
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
333,719 |
|
|
306,287 |
|
Less: accumulated depreciation and amortization |
|
|
(223,191 |
) |
|
(211,165 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
110,528 |
|
$ |
95,122 |
|
|
|
|
|
|
|
NOTE 5SEGMENT INFORMATION
Ticketmaster has one operating segment based upon how the chief operating decision maker and executive management view the business, its organizational structure
and the type of service provided, which primarily is online and offline ticketing services.
Ticketmaster's primary metric is Operating Income Before Amortization, which is defined as operating income excluding, if applicable: (1) non-cash compensation
expense, (2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions, and (4) one-time items. Ticketmaster believes
this measure is useful to investors because it represents its combined operating results taking into account depreciation, which it believes is an ongoing cost of doing business, but excluding the
effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to Ticketmaster's statement of
operations of certain expenses, including non-cash compensation and acquisition-related accounting.
C-38
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5SEGMENT INFORMATION (Continued)
The following table reconciles Operating Income Before Amortization to operating income and net income (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Operating Income Before Amortization |
|
$ |
60,423 |
|
$ |
70,220 |
|
Non-cash compensation expense |
|
|
(4,765 |
) |
|
(1,879 |
) |
Amortization of intangibles |
|
|
(8,868 |
) |
|
(6,853 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
46,790 |
|
|
61,488 |
|
Interest income |
|
|
3,290 |
|
|
5,378 |
|
Interest expense |
|
|
(735 |
) |
|
(266 |
) |
Equity in income of uncombined affiliates |
|
|
666 |
|
|
865 |
|
Other income |
|
|
944 |
|
|
83 |
|
Income tax provision |
|
|
(18,821 |
) |
|
(24,637 |
) |
Minority interest in losses of combined subsidiaries |
|
|
573 |
|
|
14 |
|
|
|
|
|
|
|
Net income |
|
$ |
32,707 |
|
$ |
42,925 |
|
|
|
|
|
|
|
Non-cash compensation expense in the table above is included in the following line items in the accompanying consolidated statements of operations for the three months ended
March 31, 2008 and 2007 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
Cost of sales |
|
$ |
235 |
|
$ |
148 |
Selling and marketing expense |
|
|
258 |
|
|
163 |
General and administrative expense |
|
|
4,272 |
|
|
1,568 |
|
|
|
|
|
Non-cash compensation expense |
|
$ |
4,765 |
|
$ |
1,879 |
|
|
|
|
|
C-39
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5SEGMENT INFORMATION (Continued)
Ticketmaster maintains operations in the United States, the United Kingdom, Canada and other international territories. Geographic information about the United
States and international territories is presented below (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
Revenue: |
|
|
|
|
|
|
|
United States |
|
$ |
239,707 |
|
$ |
209,077 |
|
All other countries |
|
|
109,274 |
|
|
94,500 |
|
|
|
|
|
|
Total |
|
$ |
348,981 |
|
$ |
303,577 |
|
|
|
|
|
|
|
March 31, 2008
|
|
December 31, 2007
|
Long-lived assets (excluding goodwill and intangible assets): |
|
|
|
|
|
|
|
United States |
|
$ |
78,811 |
|
$ |
63,021 |
|
All other countries |
|
|
31,717 |
|
|
32,101 |
|
|
|
|
|
|
Total |
|
$ |
110,528 |
|
$ |
95,122 |
|
|
|
|
|
NOTE 6EQUITY INVESTMENTS IN UNCOMBINED AFFILIATES
At March 31, 2008 and December 31, 2007, Ticketmaster's equity investments in uncombined affiliates totaled $145.9 million and
$145.2 million, respectively, and are included in "Long-term investments" in the accompanying combined balance sheets.
Summarized aggregated financial information for Ticketmaster's equity investments is as follows (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
2008
|
|
2007
|
Net sales |
|
$ |
72,149 |
|
$ |
9,042 |
Gross profit |
|
|
34,353 |
|
|
6,712 |
Net income |
|
|
4,746 |
|
|
2,616 |
NOTE 7COMPREHENSIVE INCOME
Comprehensive income is comprised of (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
2008
|
|
2007
|
Net income |
|
$ |
32,707 |
|
$ |
42,925 |
Foreign currency translation |
|
|
12,284 |
|
|
2,612 |
|
|
|
|
|
Comprehensive income |
|
$ |
44,991 |
|
$ |
45,537 |
|
|
|
|
|
C-40
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 7COMPREHENSIVE INCOME (Continued)
Accumulated other comprehensive income at March 31, 2008 and December 31, 2007 is solely related to foreign currency translation.
NOTE 8INCOME TAXES
Ticketmaster calculates its interim income tax provision in accordance with Accounting Principles Board Opinion No. 28 and FASB Interpretation
No. 18. At the end of each interim period, Ticketmaster makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary
year-to-date earnings or loss. The tax or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax
effect are individually computed and recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates, tax status, or judgment on the
realizability of a beginning-of-the-year deferred tax asset in future years is recognized in the interim period in which the change occurs.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income
for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets
generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained
or Ticketmaster's tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense
for the current quarter.
For the three months ended March 31, 2008 and 2007, Ticketmaster recorded tax provisions of $18.8 million and $24.6 million, respectively, which represent effective
tax rates of 37% and 36%, respectively. The tax rates for the three months ended March 31, 2008 and March 31, 2007 are higher than the federal statutory rate of 35% due principally to
state taxes.
As of December 31, 2007 and March 31, 2008, Ticketmaster had unrecognized tax benefits of approximately $5.5 million. Included in unrecognized tax benefits at
March 31, 2008 is approximately $4.6 million for tax positions included in IAC's consolidated tax return filings that will remain a liability of IAC after the spin-off.
Ticketmaster recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. Included in income tax expense for the three months ended March 31,
2008 is $0.1 million, net of related deferred taxes, for interest on unrecognized tax benefits. At March 31, 2008, Ticketmaster has accrued $1.0 million for the payment of
interest. There are no material accruals for penalties.
By virtue of previously filed separate company and consolidated tax returns with IAC, Ticketmaster is routinely under audit by federal, state, local and foreign authorities in the area
of income tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered
sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between
the reserves for tax contingencies and the amounts owed by Ticketmaster are recorded in the period they become known.
C-41
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 8INCOME TAXES (Continued)
The Internal Revenue Service is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of
Ticketmaster from January 17, 2003, the date which Ticketmaster joined the IAC consolidated tax return. The statute of limitations for these years has been extended to December 31, 2008.
Various IAC consolidated tax returns filed with state, local and foreign jurisdictions are currently under examination, the most significant of which are California, Florida, New York state and New
York City, for various tax years after December 31, 2001. These examinations are expected to be completed by late 2008.
Ticketmaster believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $3.6 million within twelve months of the current reporting
date due to the reversal of deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits
cannot be made, but are not expected to be significant.
NOTE 9CONTINGENCIES
In the ordinary course of business, Ticketmaster is a party to various lawsuits. Ticketmaster establishes reserves for specific legal matters when it determines
that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is
not probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against Ticketmaster, including claims where an unfavorable
outcome is reasonably possible, will not have a
material impact on the liquidity, results of operations, or financial condition of Ticketmaster, these matters are subject to inherent uncertainties and management's view of these matters may change
in the future. It is possible that an unfavorable outcome of one or more of these lawsuits could have a material impact on the liquidity, results of operations, or financial condition of Ticketmaster.
Ticketmaster also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 8 for discussion related to income
tax contingencies.
NOTE 10RELATED PARTY TRANSACTIONS
Ticketmaster's expenses include allocations from IAC of costs associated with IAC's accounting, treasury, legal, tax, corporate support, human resources and
internal audit functions. These expenses were allocated based on the ratio of Ticketmaster's revenue as a percentage of IAC's total revenue. Allocated costs were $0.9 million, and
$0.8 million for the three months ended March 31, 2008 and 2007, respectively, and are included in "General and administrative expense" in the accompanying combined statements of
operations. It is not practicable to determine the amounts of these expenses that would have been incurred had Ticketmaster operated as an unaffiliated entity. In the opinion of management, the
allocation method is reasonable.
The portion of interest income reflected in the combined statements of operations that is intercompany in nature was $1.7 million and $4.6 million for the three months
ended March 31, 2008 and 2007, respectively. This intercompany interest relates to the receivables from IAC.
C-42
TICKETMASTER AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 10RELATED PARTY TRANSACTIONS (Continued)
An analysis of Ticketmaster's receivables from IAC and subsidiaries is as follows (in thousands):
|
|
March 31, 2008
|
|
Receivables from IAC and subsidiaries at December 31, 2007 |
|
$ |
474,110 |
|
Cash transfers to IAC related to its centrally managed U.S. treasury function |
|
|
134,506 |
|
Interest income |
|
|
1,699 |
|
Employee equity instruments and associated tax withholdings |
|
|
3,888 |
|
Taxes (excludes tax withholdings associated with employee equity instruments) |
|
|
(2,277 |
) |
Allocation of non-cash compensation expense |
|
|
(2,975 |
) |
Administrative expenses and other |
|
|
(4,611 |
) |
|
|
|
|
Receivables from IAC and subsidiaries at March 31, 2008 |
|
$ |
604,340 |
|
|
|
|
|
Relationship Between IAC and Ticketmaster after the Spin-Off
For purposes of governing certain of the ongoing relationships between Ticketmaster and IAC at and after the spin-off, and to provide for an orderly
transition, Ticketmaster and IAC are expected to enter into a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement (the
"Spin-Off Agreements"), among other agreements. See Ticketmaster's consolidated financial statements for the year ended December 31, 2007 for descriptions of the
Spin-Off Agreements.
C-43
ANNEX D
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
|
|
PAGE
|
Audited Financial Statements: |
|
|
|
Report of Independent Registered Public Accounting Firm |
|
D-2 |
|
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005 |
|
D-3 |
|
Consolidated Balance Sheets as of December 31, 2007 and 2006 |
|
D-4 |
|
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2007, 2006 and 2005 |
|
D-5 |
|
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 |
|
D-6 |
|
Notes to Consolidated Financial Statements |
|
D-7 |
Schedule IIValuation and Qualifying Accounts |
|
D-35 |
Unaudited Interim Financial Statements |
|
|
|
Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 |
|
D-36 |
|
Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 |
|
D-37 |
|
Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2008 |
|
D-38 |
|
Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 |
|
D-39 |
|
Notes to Unaudited Consolidated Financial Statements |
|
D-40 |
D-1
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Tree.com, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement
schedule on page D-36. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 Tree.com, Inc. and subsidiaries at
December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.
/s/
Ernst & Young LLP
Los
Angeles, California
May 5, 2008
D-2
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Revenue |
|
$ |
346,378 |
|
$ |
476,478 |
|
$ |
421,355 |
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
|
73,114 |
|
|
73,217 |
|
|
66,342 |
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
273,264 |
|
|
403,261 |
|
|
355,013 |
|
Selling and marketing expense |
|
|
187,612 |
|
|
218,910 |
|
|
176,749 |
|
General and administrative expense |
|
|
99,244 |
|
|
119,284 |
|
|
101,975 |
|
Product development |
|
|
14,991 |
|
|
15,168 |
|
|
15,001 |
|
Proceeds from a litigation settlement |
|
|
(15,000 |
) |
|
|
|
|
|
|
Amortization of intangibles |
|
|
34,469 |
|
|
24,018 |
|
|
35,314 |
|
Restructuring expense |
|
|
22,867 |
|
|
|
|
|
|
|
Depreciation |
|
|
10,058 |
|
|
11,710 |
|
|
6,720 |
|
Goodwill impairment |
|
|
459,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(540,440 |
) |
|
14,171 |
|
|
19,254 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,171 |
|
|
1,307 |
|
|
195 |
|
|
Interest expense |
|
|
(986 |
) |
|
(1,556 |
) |
|
(2,195 |
) |
|
Other income (expense) |
|
|
14 |
|
|
(207 |
) |
|
(35 |
) |
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
|
199 |
|
|
(456 |
) |
|
(2,035 |
) |
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes and minority interest |
|
|
(540,241 |
) |
|
13,715 |
|
|
17,219 |
|
Income tax provision |
|
|
(10,161 |
) |
|
(5,022 |
) |
|
(11,420 |
) |
Minority interest in losses of consolidated subsidiaries |
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(550,402 |
) |
$ |
8,693 |
|
$ |
5,851 |
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
D-3
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
(In thousands)
|
|
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
45,940 |
|
$ |
99,498 |
|
Restricted cash and cash equivalents |
|
|
14,953 |
|
|
15,467 |
|
Accounts receivable, net of allowance of $322 and $1,129, respectively |
|
|
12,433 |
|
|
21,581 |
|
Loans held for sale |
|
|
86,754 |
|
|
345,896 |
|
Deferred income taxes |
|
|
6,420 |
|
|
12,406 |
|
Prepaid and other current assets |
|
|
6,011 |
|
|
10,090 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
172,511 |
|
|
504,938 |
|
Property and equipment, net |
|
|
21,466 |
|
|
30,677 |
|
Goodwill |
|
|
140,892 |
|
|
582,295 |
|
Intangible assets, net |
|
|
108,440 |
|
|
142,781 |
|
Other non-current assets |
|
|
278 |
|
|
354 |
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
443,587 |
|
$ |
1,261,045 |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
Current maturities of long-term obligations and short-term borrowings |
|
$ |
99,622 |
|
$ |
350,072 |
|
Accounts payable, trade |
|
|
3,335 |
|
|
8,989 |
|
Deferred revenue |
|
|
1,435 |
|
|
2,908 |
|
Income taxes payable |
|
|
993 |
|
|
616 |
|
Accrued expenses and other current liabilities |
|
|
83,613 |
|
|
62,890 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
188,998 |
|
|
425,475 |
|
Long-term obligations, net of current maturities |
|
|
|
|
|
19,347 |
|
Income taxes payable |
|
|
730 |
|
|
|
|
Other long-term liabilities |
|
|
2,529 |
|
|
3,794 |
|
Deferred income taxes |
|
|
36,706 |
|
|
38,976 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY: |
|
|
|
|
|
|
|
Invested capital |
|
|
751,923 |
|
|
750,331 |
|
Payables to IAC and subsidiaries |
|
|
20,067 |
|
|
29,126 |
|
Accumulated deficit |
|
|
(557,366 |
) |
|
(6,004 |
) |
|
|
|
|
|
|
|
Total shareholders' equity |
|
|
214,624 |
|
|
773,453 |
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
|
$ |
443,587 |
|
$ |
1,261,045 |
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
D-4
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
Total
|
|
Invested
Capital
|
|
Payables to
IAC and
Subsidiaries
|
|
Accumulated
Deficit
|
|
|
|
(In thousands)
|
|
Balance as of December 31, 2004 |
|
$ |
753,674 |
|
$ |
751,646 |
|
$ |
22,576 |
|
$ |
(20,548 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2005 |
|
|
5,851 |
|
|
|
|
|
|
|
|
5,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
5,851 |
|
|
|
|
|
|
|
|
|
|
Net transfers from IAC (principally related to equity awards) |
|
|
3,127 |
|
|
3,127 |
|
|
|
|
|
|
|
Net change in payables to IAC and subsidiaries |
|
|
3,834 |
|
|
|
|
|
3,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
766,486 |
|
|
754,773 |
|
|
26,410 |
|
|
(14,697 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2006 |
|
|
8,693 |
|
|
|
|
|
|
|
|
8,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
8,693 |
|
|
|
|
|
|
|
|
|
|
Net transfers to IAC (principally tax adjustments related to equity awards) |
|
|
(4,442 |
) |
|
(4,442 |
) |
|
|
|
|
|
|
Net change in payables to IAC and subsidiaries |
|
|
2,716 |
|
|
|
|
|
2,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
|
773,453 |
|
|
750,331 |
|
|
29,126 |
|
|
(6,004 |
) |
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2007 |
|
|
(550,402 |
) |
|
|
|
|
|
|
|
(550,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
(550,402 |
) |
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of EITF 06-2 |
|
|
(960 |
) |
|
|
|
|
|
|
|
(960 |
) |
Net transfers from IAC (principally tax adjustments related to equity awards) |
|
|
1,592 |
|
|
1,592 |
|
|
|
|
|
|
|
Net change in payables to IAC and subsidiaries |
|
|
(9,059 |
) |
|
|
|
|
(9,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
214,624 |
|
$ |
751,923 |
|
$ |
20,067 |
|
$ |
(557,366 |
) |
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
D-5
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(550,402 |
) |
$ |
8,693 |
|
$ |
5,851 |
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles |
|
|
34,469 |
|
|
24,018 |
|
|
35,314 |
|
|
Depreciation |
|
|
10,058 |
|
|
11,710 |
|
|
6,720 |
|
|
Goodwill impairment |
|
|
459,463 |
|
|
|
|
|
|
|
|
Non-cash compensation expense |
|
|
2,925 |
|
|
2,177 |
|
|
7,385 |
|
|
Non-cash restructuring expense |
|
|
8,403 |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
2,764 |
|
|
206 |
|
|
543 |
|
|
Excess tax benefits from stock-based awards |
|
|
|
|
|
|
|
|
3,075 |
|
|
Gain on sales of loans held for sale |
|
|
(147,546 |
) |
|
(221,400 |
) |
|
(179,026 |
) |
|
Provision for loans losses |
|
|
19,321 |
|
|
6,637 |
|
|
4,649 |
|
|
Bad debt expense |
|
|
1,925 |
|
|
1,768 |
|
|
560 |
|
|
Non-cash interest expense |
|
|
903 |
|
|
1,345 |
|
|
1,824 |
|
|
Minority interest in losses of consolidated subsidiaries |
|
|
|
|
|
|
|
|
(52 |
) |
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
9,364 |
|
|
(1,254 |
) |
|
(372 |
) |
|
Origination of loans held for sale |
|
|
(5,822,599 |
) |
|
(7,841,607 |
) |
|
(7,381,439 |
) |
|
Proceeds from sales of loans held for sale |
|
|
6,223,363 |
|
|
8,089,128 |
|
|
7,394,209 |
|
|
Prepaid and other current assets |
|
|
4,110 |
|
|
(4,761 |
) |
|
(3,337 |
) |
|
Accounts payable and other current liabilities |
|
|
(20,612 |
) |
|
(3,594 |
) |
|
21,207 |
|
|
Income taxes payable |
|
|
(702 |
) |
|
582 |
|
|
947 |
|
|
Deferred revenue |
|
|
(1,785 |
) |
|
1,603 |
|
|
(142 |
) |
Other, net |
|
|
(437 |
) |
|
(337 |
) |
|
268 |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
232,985 |
|
|
74,914 |
|
|
(81,816 |
) |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
|
(1,559 |
) |
|
(3,059 |
) |
|
(3,760 |
) |
|
Capital expenditures |
|
|
(9,421 |
) |
|
(13,251 |
) |
|
(17,827 |
) |
|
Proceeds from sales of marketable securities |
|
|
|
|
|
|
|
|
2,416 |
|
|
Other, net |
|
|
33 |
|
|
(100 |
) |
|
806 |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(10,947 |
) |
|
(16,410 |
) |
|
(18,365 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Borrowing under lines of credit |
|
|
5,651,803 |
|
|
7,700,842 |
|
|
7,217,327 |
|
|
Repayments of lines of credit |
|
|
(5,910,849 |
) |
|
(7,724,663 |
) |
|
(7,054,488 |
) |
|
Principal payments on long-term obligations |
|
|
(11,654 |
) |
|
(11,530 |
) |
|
(1,717 |
) |
|
Transfers (to) from IAC |
|
|
(7,083 |
) |
|
(3,870 |
) |
|
3,090 |
|
|
Excess tax benefits from stock-based awards |
|
|
1,673 |
|
|
1,214 |
|
|
|
|
|
Decrease (increase) in restricted cash |
|
|
514 |
|
|
(7,908 |
) |
|
(1,181 |
) |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(275,596 |
) |
|
(45,915 |
) |
|
163,031 |
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(53,558 |
) |
|
12,589 |
|
|
62,850 |
|
Cash and cash equivalents at beginning of period |
|
|
99,498 |
|
|
86,909 |
|
|
24,059 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
45,940 |
|
$ |
99,498 |
|
$ |
86,909 |
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
D-6
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying Tree.com, Inc. ("Tree.com") as one of those five companies. In these consolidated financial statements, we refer to the separation transaction herein as the "spin-off".
In connection with the spin-off, Tree.com was incorporated as a Delaware corporation in April 2008. Tree.com currently does not have any material assets or liabilities, nor does it engage
in any business or other activities and, other than in connection with the spin-off, will not acquire or incur any material assets or liabilities, nor will it engage in any business or
other activities. Upon completion of the spin-off, Tree.com will consist of the businesses that formerly comprised IAC's Lending and Real Estate segments. We refer herein to these
businesses as the "Tree.com Businesses," which include LendingTree.com, RealEstate.com, GetSmart.com, LendingTree Loans, iNest and Domania.
Basis of Presentation
The historical consolidated financial statements of Tree.com and its subsidiaries reflect the contribution or other transfer to Tree.com of all of the
subsidiaries and assets and the assumption by Tree.com of all of the liabilities relating to the Tree.com Businesses in connection with the spin-off and the allocation to Tree.com of
certain IAC corporate expenses relating to the Tree.com Businesses. Accordingly, the historical consolidated financial statements of Tree.com reflect the historical financial position, results of
operations and cash flows of the Tree.com Businesses since their respective dates of acquisition by IAC, based on the historical consolidated financial statements and accounting records of IAC and
using the historical results of operations and historical bases of the assets and liabilities of the Tree.com Businesses with the exception of accounting for income taxes. For purposes of these
financial statements, income taxes have been computed for Tree.com on an as if stand-alone, separate tax return basis. Intercompany transactions and accounts have been eliminated.
In
the opinion of Tree.com's management, the assumptions underlying the historical consolidated financial statements of Tree.com are reasonable. However, this financial information does
not necessarily reflect what the historical financial position, results of operations and cash flows of Tree.com would have been had Tree.com been a stand-alone company during the periods presented.
Company Overview
Lending
Lending consists of online networks (principally LendingTree.com and GetSmart.com) and call centers that connect consumers and financial providers in the lending
industry. Tree.com also originates, processes, approves and funds various residential real estate loans through Home Loan Center ("HLC"), which does business as LendingTree Loans in certain
jurisdictions. The HLC and LendingTree Loans brand names are collectively referred to in these consolidated financial statements as "LendingTree Loans." Additionally, Tree.com provides mortgage
settlement services, including title search, appraisals, flood certification and closing transactions, under the name "LendingTree Settlement Services."
D-7
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)
Real Estate
Real Estate consists of a proprietary full service real estate brokerage that operates in fourteen U.S. markets, www.RealEstate.com, an
online network that connects consumers with real estate brokerages around the country, iNest, an online network that matches
buyers and builders of new homes, and Domania, an online lead provider for banks, mortgage lenders and real estate professionals.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Lending
Lending's network revenue principally represents transmit fees and closed-loan fees paid by lenders that received a transmitted loan request or closed
a loan for a consumer that originated through one of Lending's websites or affiliates. Transmit fees are recognized at the time qualification forms are transmitted, while closed-loan fees
are recognized at the time the lender reports the closed loan to Lending, which may be several months after the qualification form is transmitted.
LendingTree
Loans' revenue is primarily derived from the origination and sale of mortgage loans. Mortgage loans are funded through lines of credit, primarily warehouse lines, and sold to
investors typically within thirty days. The gain or loss on the sale of loans to investors is recognized at the date the loans are sold and is based on the difference between the sale proceeds
received and the carrying value of the loans, which includes deferred loan origination fees less certain direct origination costs and other processing costs. LendingTree Loans sells its loans on a
servicing released basis in which LendingTree Loans gives up the right to service the loan on an ongoing basis, thereby earning an additional premium upon sale. The recognition of gain or loss on the
sale of loans is accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 140").
Real Estate
Real Estate earns revenue from subscription and cooperative brokerage fees paid by real estate professionals participating in its real estate networks and from
commissions paid by consumers for closing a real estate transaction on their behalf. Subscription fees are recognized over the subscription period. Cooperative brokerage fees are recognized when the
transmission of a consumer's information results in the purchase or sale of a home and the transaction is reported closed by the participating real estate professional. Commissions are recognized at
the time the real estate transaction is closed.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market instruments.
Restricted Cash
Restricted cash at December 31, 2007 and 2006 primarily includes minimum required balances that LendingTree Loans maintains in connection with its various
lines of credit, primarily warehouse lines.
D-8
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable
Accounts receivable are stated at amounts due from customers, primarily lending and real estate service providers participating on our networks, net of an
allowance for doubtful accounts.
Accounts
receivable outstanding longer than the contractual payment terms are considered past due. Tree.com determines its allowance for doubtful accounts by considering a number of
factors, including the length of time accounts receivable are past due, Tree.com's previous loss history, the specific customer's current ability to pay its obligation to Tree.com and the condition of
the general economy and the customer's industry. Tree.com writes off accounts receivable when management deems them uncollectible.
Loans Held for Sale
LendingTree Loans originates residential loans with the intent to sell them in the secondary market. Loans held for sale consist primarily of residential first
and second mortgage loans that are secured by residential real estate throughout the United States. Loans held for sale are carried at the lower of cost or market value in accordance with SFAS
No. 65, "Accounting for Certain Mortgage Banking Activities." The lower of cost or market value is determined on an aggregate basis, except for loans that
management has deemed to be impaired, in which case the determination is made on an individual basis. The cost basis of loans held for sale includes the capitalized cost associated with the interest
rate lock commitments, deferred origination fees and deferred origination costs. The market value of loans held for sale is determined using current secondary market prices for loans with similar
coupons, maturities and credit quality. The amount by which the cost of loans held for sale exceeds the market value of loans held for sale is accounted for as a valuation allowance. Loans held for
sale are pledged as collateral under LendingTree Loans' various lines of credit, which are primarily warehouse lines. LendingTree Loans relies substantially on the secondary mortgage market as all of
the loans that are funded are intended to be sold into this market.
Loan
origination fees (income) and costs related to funded loans held for sale (including direct costs of origination as well as payroll and administration costs associated with the
origination process) are deferred until the loan is sold. Upon sale of the loan, the origination fees and costs are recognized as a component of the gain on sale of the loan. Origination costs related
to unsuccessful loan origination efforts are recorded as operating expenses in the period incurred.
Interest
on mortgage loans held for sale is recorded in income as earned. Interest is only accrued if deemed collectible. Interest is generally deemed uncollectible when a loan is
delinquent for three months or more or when a loan has a defect affecting its salability evidencing a lack of collectability of amounts when contractually due. Delinquency is calculated based on the
contractual due date of the loan. The amount of loans on nonaccrual status at December 31, 2007 and 2006 was $7.2 million and $1.6 million, respectively.
LendingTree Loans sells loans it originates to investors on a servicing released basis and without recourse, so that the economic risk of loss or default by the borrower is transferred
to the investor. However, LendingTree Loans is required by these investors to make certain representations relating to credit information, loan documentation and collateral. To the extent that
LendingTree Loans does not comply with such representations, which may be evidenced by early payment defaults, LendingTree Loans may be required to repurchase loans or indemnify these investors for
any loss from borrower
D-9
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
defaults. As such, LendingTree Loans records a liability for the estimated obligation related to this exposure based, in part, on historical and projected loss frequency and loss severity, the
original principal amount of the loans previously sold, the year the loans were sold, and loan type. There are four loan types used in this analysis which are determined based on the extent of the
documentation received (full or limited) and the lien position of the mortgage in the underling property (first or second position). In connection with a majority of its loan sales agreements,
LendingTree Loans is also responsible for a minimum number of payments to be made on each loan. In the case of early payment payoffs, which occurs when a borrower prepays a loan prior to the end of
the prepayment penalty period, LendingTree Loans may be required to repay all or a portion of the premium initially paid by the investor. The estimated obligation associated with early loan payoffs is
calculated based on historical loss experience by type of loan. As of December 31, 2007 and 2006, the loan loss liability was $13.9 million and $3.8 million, respectively. For the
years ended December 31, 2007, 2006 and 2005, LendingTree Loans increased its liability for losses on previously sold loans by approximately $15.5 million, $6.0 million and
$4.7 million, respectively, as a reduction in revenue. In 2007, 2006 and 2005, $5.4 million, $5.3 million and $2.7 million was paid or written off against the liability,
respectively, thereby reducing the liability. Actual losses are charged to the loss liability when incurred and management evaluates the adequacy of the liability calculations quarterly. Because
LendingTree Loans does not service the loans it sells, it does not maintain nor have access to the current balances and loan performance data with respect to the individual loans previously sold to
investors. As such, LendingTree Loans is unable to determine its maximum loss exposure.
For the years ended 2007, 2006 and 2005 LendingTree Loans sold approximately 36,000 55,000 and 48,000 loans, respectively, with initial loan values of $6.1 billion,
$7.9 billion and $7.2 billon, respectively. From loans sold in those periods, LendingTree Loans has experienced repurchase and indemnification losses resulting from lack of compliance with
certain representations relating to loans sold to investors which may be evidenced by early payment defaults on 57, 84 and 46 loans, respectively. The initial value of loans on which losses have been
incurred was $6.4 million, $9.9 million and $6.6 million, respectively. The loss amounts incurred on those loans were $1.2 million, $3.3 million and
$1.1 million, respectively, or less than 0.019%, 0.042% and 0.016%, respectively, of the initial loan value of the total loans sold for 2007, 2006 and 2005.
Property and Equipment
Property and equipment, including significant improvements, are recorded at cost. Repairs and maintenance and any gains or losses on dispositions are included in
operations.
Depreciation
is recorded on a straight-line basis to allocate the cost of depreciable assets to operations over their estimated service lives. Amortization of assets recorded
under capital leases is included in depreciation expense.
Asset Category
|
|
Depreciation Period
|
Computer equipment and capitalized software |
|
3 to 5 Years |
Leasehold improvements |
|
1 to 10 Years |
Furniture and other equipment |
|
7 Years |
D-10
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and Indefinite-Lived Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill acquired in business combinations is assigned to
the reporting units that are expected to benefit from the combination as of the acquisition date.
Goodwill
impairment is determined using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its carrying amount, including
goodwill. In performing the first step, Tree.com determines the fair value of its reporting units by using a discounted cash flow ("DCF") analysis. Determining fair value using a DCF analysis requires
the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. If the fair value of a
reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not required. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test is required to be performed to measure the amount of impairment, if any.
The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill,
an impairment loss is recognized in an amount equal to that excess.
The
impairment test for indefinite-lived intangible assets involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the
indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of indefinite-lived intangible assets are
determined using a DCF valuation analysis that employs a "relief from royalty" methodology in estimating the fair value of its trade names and trademarks. Significant judgments inherent in this
analysis include the determination of royalty rates, discount rates and the terminal growth rates.
Goodwill
and indefinite-lived intangible assets, primarily trade names and trademarks, are tested annually for impairment as of October 1 or earlier upon the occurrence of certain
events or substantive changes in circumstances. Tree.com's 2007 annual impairment assessment identified significant impairments as described in Note 4. Tree.com's reporting units are currently
operating in dynamic and challenged industry segments. To illustrate the magnitude of potential impairment charges relative to future changes in estimated fair value, had the estimated fair value of
Tree.com's reporting units and their respective indefinite-lived intangible assets been hypothetically lower by 10% as of October 1, 2007 the aggregate book value of goodwill and
indefinite-lived intangible assets would have exceeded fair value by approximately $7.0 million at Lending and $8.0 million at Real Estate. Had the estimated fair values of Tree.com's
reporting units and their respective indefinite-lived intangible assets been hypothetically lower by 20% as of October 1, 2007, the book value of goodwill and indefinite-lived intangible assets
would have exceeded fair value by approximately $21.0 million at Lending and $18.0 million at Real Estate.
Long-Lived Assets and Intangible Assets with Definite Lives
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"),
long-lived assets, including property and equipment and intangible assets with definite lives, are tested for recoverability whenever events or changes in circumstances indicate
D-11
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
that
their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from
the use and eventual disposition of the asset. If the carrying amount is deemed to not be recoverable, an impairment loss is recorded as the amount by which the carrying amount of the
long-lived asset exceeds its fair value. Amortization of definite lived intangible assets is recorded on a straight-line basis over their estimated lives.
Derivative Instruments
Tree.com is exposed to certain risks in connection with its mortgage banking operations. LendingTree Loans is exposed to interest rate risk for loans it
originates until those loans are sold in the secondary market ("loans held for sale"). The fair value of loans held for sale is subject to change primarily due to changes in market interest rates.
LendingTree Loans hedges the changes in fair value of certain loans held for sale primarily by entering into mortgage forward delivery contracts. Although LendingTree Loans continues to enter into
derivatives for risk management purposes, effective April 1, 2007 it no longer designates these derivative instruments as hedges and thus the relationships no longer qualify for the hedge
accounting provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). See Note 10 for a description of Tree.com's derivative
financial instruments.
Advertising
Advertising costs are expensed in the period incurred (when the advertisement first runs for production costs that are initially capitalized) and principally
represent offline costs, including television and radio advertising, and online advertising costs, including fees paid to search engines and distribution partners. Advertising expense was
$172.6 million, $204.4 million and $161.6 million for the years ended December 31, 2007, 2006 and 2005, respectively. Prepaid advertising totaled $0.6 million and
$1.1 million at December 31, 2007 and 2006, respectively, and is included in "Prepaid and other current assets" in the accompanying consolidated balance sheets.
Income Taxes
Tree.com accounts for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided on deferred tax assets if it is determined that it is more
likely than not that the deferred tax asset will not be realized. Tree.com records interest on potential tax contingencies as a component of income tax expense and records interest net of any
applicable related income tax benefit.
Effective
January 1, 2007, Tree.com adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109" ("FIN 48"). As a result of the adoption of FIN 48, Tree.com recognizes liabilities for uncertain tax positions based
on the two-step process prescribed by the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is
more likely than not that the position will be sustained on audit, including
D-12
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
resolution
of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate
settlement.
Stock-Based Compensation
Effective January 1, 2006, Tree.com adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the
modified prospective transition method and therefore has not restated results for prior periods. See Note 3 for a further description of the impact of the adoption of SFAS 123R and Staff
Accounting Bulletin No. 107 ("SAB 107").
Minority Interest
Minority interest in 2005 represents minority ownership in LendingTree Settlement Services. Tree.com obtained 100% ownership in September 2005.
Accounting Estimates
Tree.com's management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with
U.S. generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
Significant
estimates underlying the accompanying consolidated financial statements include: reserves for losses associated with loans held for sale and loans that have been previously
sold; recoverability of
long-lived assets; recovery of goodwill and intangible assets; income taxes payable and deferred income taxes, including related valuation allowances; various other allowances, reserves
and accruals; and assumptions related to the determination of stock-based compensation.
Certain Risks and Concentrations
Tree.com's business is subject to certain risks and concentrations including dependence on third party technology providers, exposure to risks associated with
online commerce security and credit card fraud.
Financial
instruments, which potentially subject Tree.com to concentration of credit risk, consist primarily of cash and cash equivalents. Cash and cash equivalents are maintained with
quality financial institutions of high credit and are in excess of Federal Deposit Insurance Corporation ("FDIC") insurance limits.
Due to the nature of the mortgage lending industry, interest rate increases may significantly impact revenue from services related to originating and processing mortgages and subsequent
sales of loans to investors, which are the primary source of income for LendingTree Loans. LendingTree Loans originates mortgage loans on property located throughout the United States, with no one
location representing more than 10% of Tree.com's consolidated revenue for any periods presented. Revenue from loans originated for property located in California and Florida in the aggregate totaled
approximately 10%, 14% and 14% of Tree.com's revenue in 2007, 2006 and 2005, respectively.
D-13
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LendingTree
Loan's two largest investors (purchasers of the loans originated) represented approximately 28% and 13% of Tree.com's revenue for 2007, 30% and 15% of Tree.com's revenue for
2006, and 35% and 8% of Tree.com's revenue for 2005. LendingTree Loans monitors its relationships with investors and, from time to time, makes adjustments in the amount it sells to any one investor
based upon a number of factors, including but not limited to, price, loan review time and funding turnaround, underwriting guidelines and the overall efficiency of its relationship with the investor.
LendingTree
Loans funds loans through various lines of credit, primarily warehouse lines. As of December 31, 2007, 73% of the total balance due on the lines of credit was payable
to one lender. The decision regarding how to allocate this balance amongst lenders is based on several factors, including the interest rate and commitment fee.
Due
to the nature of the mortgage lending industry, interest rate increases may negatively impact future revenue from our lending networks as well as revenue from originating and selling
loans.
Further,
lenders participating on our lending networks can offer their products directly to consumers through brokers, mass marketing campaigns, or through other traditional methods of
credit distribution. These lenders can also offer their products online, either directly to prospective borrowers, through one or more of our online competitors, or both. If a significant number of
potential consumers are able to obtain loans from our participating lenders without utilizing our service, our ability to generate revenue may be limited. Because we do not have exclusive
relationships with the lenders whose loan products are offered on our online marketplace, consumers may obtain offers and loans from these lenders without using our service.
Recent Accounting Pronouncements
On June 15, 2006, the Emerging Issues Task Force ratified Issue 06-2, "Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB
Statement No. 43" ("EITF 06-2"), which requires entities to recognize the expense of employee sabbatical leave in the periods the sabbatical leave vests or accumulates. EITF 06-2
is effective for fiscal years beginning after December 15, 2006. The cumulative effect of applying EITF 06-2 was recorded as an adjustment to the opening balance of accumulated deficit
as of January 1, 2007.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other assets and liabilities at fair value with the objective of reducing both the complexity in the accounting for financial
instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
Tree.com adopted SFAS No. 159 effective January 1, 2008 and elected the fair value option on loans funded after December 31, 2007. Therefore there was no cumulative effect related
to the adoption of SFAS No. 159.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS No. 157"), which provides enhanced guidance for using fair value to
measure assets and liabilities. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements and the effect of the measurements on earnings or
changes in net assets. Among other things, SFAS No. 157 clarifies the principle that fair value should be based
D-14
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
on
the assumptions that market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The
most significant financial impact of adopting the provisions of SFAS No. 157 is related to the valuing of interest rate lock commitments (related to loans intended to be held for sale).
Under SFAS No. 157, the fair value of a closed loan includes the embedded cash flows that are ultimately realized as servicing value or through the sale of a loan on a servicing released
basis. The valuation of loan commitments includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan ("expected close rates"). These expected close rates
are based on Tree.com's historical data, which is a significant unobservable assumption. Prior accounting requirements precluded the recognition of any day one gains and losses if fair value was not
based on observable market data. Rather, these gains and losses were recognized when the interest rate lock commitment expired or when the underlying loan was ultimately sold. The change in valuation
methodology under SFAS No. 157 accelerates the recognition of these day one gains and losses. The cumulative effect of adopting the provisions of SFAS No. 157 is required
to be reported as an adjustment to beginning retained earnings in the year of adoption. Accordingly, upon adoption of SFAS No. 157 on January 1, 2008, Tree.com recorded a
$3.1 million reduction to accumulated deficit.
In
November 2007, the SEC issued Staff Accounting Bulletin No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings" ("SAB 109"). SAB 109
supersedes Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments" ("SAB 105"). It clarifies that the expected net future cash flows related to the
associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. However, it retains the guidance in
SAB 105 that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment. The guidance is effective on a prospective basis to
derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007.
The
adoption of SFAS No. 157, SFAS No. 159, and SAB 109 generally results in higher fair values of loans held for sale being recorded at loan origination. Prior to
adoption certain aspects of the loan value associated with the cash flows related to the servicing of a loan, origination fees and day one gains on derivative transactions would be deferred until the
sale of the loan. However, as loans are typically sold within thirty days of origination, Tree.com has determined that adoption of SFAS No. 157, SFAS No. 159 and SAB 109 will not
have a material impact on the its consolidated financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces FASB Statement No. 141. SFAS No. 141R
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to
evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations in fiscal years beginning after December 15, 2008.
Early adoption is not permitted. Tree.com is currently assessing the impact of the adoption of SFAS No. 141R on its consolidated financial position, results of operations and cash flows.
D-15
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3SFAS 123R AND STOCK-BASED COMPENSATION
The equity awards described below principally relate to awards to Tree.com employees that were granted under various IAC stock and annual incentive plans.
Effective
January 1, 2006, Tree.com adopted SFAS 123R using the modified prospective transition method and has applied the classification provisions of SAB 107
regarding the SEC's interpretation of SFAS 123R and the valuation of share-based payments for public companies in its adoption of SFAS 123R.
The
adoption of SFAS 123R did not impact the amount of stock-based compensation expense recorded in the accompanying consolidated statements of operations as Tree.com had
previously adopted the expense recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
Prior
to the adoption of SFAS 123R, the entire tax benefit from stock-based compensation was reported as a component of operating cash flows. Upon the adoption of
SFAS 123R, tax benefits resulting from tax deductions in excess of the stock-based compensation expense recognized in the consolidated statement of operations are reported as a component of
financing cash flows. For the years ended December 31, 2007 and 2006, excess tax benefits from stock-based compensation of $1.7 million and $1.2 million, respectively, are
included as a component of financing cash flows. For the year ended
December 31, 2005, excess tax benefits from stock-based compensation of $3.1 million is included as a component of operating cash flows.
Non-cash
stock-based compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of operations for the
years ended December 31, 2007, 2006 and 2005 (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cost of revenue |
|
$ |
248 |
|
$ |
263 |
|
$ |
317 |
|
Selling and marketing expense |
|
|
272 |
|
|
289 |
|
|
333 |
|
General and administrative expense |
|
|
2,403 |
|
|
1,603 |
|
|
6,620 |
|
Product development |
|
|
2 |
|
|
22 |
|
|
115 |
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation expense before income taxes |
|
|
2,925 |
|
|
2,177 |
|
|
7,385 |
|
Income tax benefit |
|
|
(1,228 |
) |
|
(1,169 |
) |
|
(1,219 |
) |
|
|
|
|
|
|
|
|
Non-cash stock-based compensation expense after income taxes |
|
$ |
1,697 |
|
$ |
1,008 |
|
$ |
6,166 |
|
|
|
|
|
|
|
|
|
The
form of awards granted to Tree.com employees principally have been restricted stock units ("RSUs") and performance stock units ("PSUs"). RSUs and PSUs are awards in the form of
phantom shares or units, denominated in a hypothetical equivalent number of shares of IAC common stock and with the value of each award equal to the fair value of IAC common stock at the date of
grant. Each RSU, PSU and restricted stock grant is subject to service-based vesting, where a specific period of continued employment must pass before an award vests, and certain grants also include
performance-based vesting, where certain performance targets set at the time of grant must be achieved before an award vests. Tree.com recognizes expense for all RSUs, PSUs and restricted stock for
which vesting is considered probable. For RSU and restricted stock grants the accounting charge is measured at the grant date as the fair value of IAC common stock and expensed ratably as
non-cash compensation over
D-16
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3SFAS 123R AND STOCK-BASED COMPENSATION (Continued)
the
vesting term. For PSU grants the expense is measured at the grant date as the fair value of IAC common stock and expensed as non-cash compensation when the performance targets are
considered probable of being achieved.
The
amount of stock-based compensation expense recognized in the consolidated statement of operations is reduced by estimated forfeitures, as the amount recorded is based on awards
ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods if the actual forfeiture rate differs
from the estimated rate.
As
of December 31, 2007, there was approximately $10.2 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards. This
cost is expected to be recognized over a weighted-average period of approximately 2.8 years.
In connection with the acquisition of LendingTree by IAC in 2003 certain members of LendingTree's management were granted restricted common equity in LendingTree. These awards were
granted on August 8, 2003 and were initially measured at fair value, which is being amortized to expense over the vesting period. These awards vest ratably over four and a half years, or
earlier based upon the occurrence of certain prescribed events. The awards vest in non-voting restricted common shares of LendingTree.
These shares are subject to a put right by the holders, which is not exercisable until the first quarter of 2009 and annually thereafter, and a call right by IAC, which is not
exercisable until the first quarter of 2012 and annually thereafter. The value of these shares upon exercise of the put or call is equal to their fair market value, determined by negotiation or
arbitration, reduced by the accreted value of the preferred interest that was taken by IAC upon the purchase of LendingTree. The initial value of the preferred interest was equal to the acquisition
price of LendingTree. The preferred interest accretes value at a 10% annual rate. Upon exercise of the put or call the consideration is payable in IAC shares or cash or a combination thereof at IAC's
option. As of December 31, 2007, these awards are significantly out of the money and are not expected to result in any value. Prior to the separation, this
put and call arrangement will be modified so that the consideration payable in IAC's shares will be replaced with Tree.com shares.
The unrecognized compensation cost related to these equity awards is $0.2 million at December 31, 2007.
NOTE 4GOODWILL AND INTANGIBLE ASSETS
In connection with its annual impairment assessment in 2007, which was prepared in connection with the preparation of its annual financial statements, Tree.com
identified and recorded impairment charges related to the goodwill and intangible assets of the Lending segment of $459.5 million and $16.2 million, respectively. The intangible asset
impairment charges are included in amortization of intangibles in the accompanying consolidated statement of operations. The write-downs were determined by comparing the fair values of Lending
reporting unit's goodwill and intangible assets with the carrying amounts. The fair values were determined using a discontinued cash flow approach.
The
impairments associated with the Lending segment resulted from Tree.com's reassessment of the likely future profitability of Lending in light of the persistent adverse mortgage market
conditions and the operational strategies Tree.com has undertaken in response to these market realities. These adverse conditions include, among others, constrained liquidity, lender focus on low
margin conforming
D-17
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4GOODWILL AND INTANGIBLE ASSETS (Continued)
loans,
uncertainty as to the eventuality and timing of the return of higher margin mortgage products, the decline in real estate values and a higher rate of delinquency for existing mortgages.
Tree.com has significantly reduced its mortgage origination operations in response to these conditions which will reduce or slow its ability to react to possible improvements in the market. The
impairments at the Lending segment occurred during the fourth quarter of 2007 as Tree.com completed an updated assessment of mortgage market conditions and the development and implementation of
Lending's responsive operational strategies, and quantified these considerations in Lending's future forecasted results.
The
balance of goodwill and intangible assets, net is as follows (in thousands):
|
|
December 31,
|
|
|
2007
|
|
2006
|
Goodwill |
|
$ |
140,892 |
|
$ |
582,295 |
Intangible assets with indefinite lives |
|
|
88,607 |
|
|
104,826 |
Intangible assets with definite lives, net |
|
|
19,833 |
|
|
37,955 |
|
|
|
|
|
|
Total goodwill and intangible assets, net |
|
$ |
249,332 |
|
$ |
725,076 |
|
|
|
|
|
Intangible
assets with indefinite lives relate principally to trade names and trademarks acquired in various acquisitions. At December 31, 2007, intangible assets with definite
lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted-Average
Amortization
Life (Years)
|
Purchase agreements |
|
$ |
76,117 |
|
$ |
(59,212 |
) |
$ |
16,905 |
|
5.7 |
Technology |
|
|
29,100 |
|
|
(28,663 |
) |
|
437 |
|
3.0 |
Customer lists |
|
|
6,607 |
|
|
(6,607 |
) |
|
|
|
2.8 |
Other |
|
|
8,928 |
|
|
(6,437 |
) |
|
2,491 |
|
4.9 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
120,752 |
|
$ |
(100,919 |
) |
$ |
19,833 |
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006, intangible assets with definite lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted-Average
Amortization
Life (Years)
|
Purchase agreements |
|
$ |
79,417 |
|
$ |
(46,771 |
) |
$ |
32,646 |
|
5.7 |
Technology |
|
|
29,100 |
|
|
(28,138 |
) |
|
962 |
|
3.0 |
Customer lists |
|
|
6,607 |
|
|
(6,607 |
) |
|
|
|
2.8 |
Other |
|
|
8,827 |
|
|
(4,480 |
) |
|
4,347 |
|
4.9 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
123,951 |
|
$ |
(85,996 |
) |
$ |
37,955 |
|
|
|
|
|
|
|
|
|
|
|
D-18
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4GOODWILL AND INTANGIBLE ASSETS (Continued)
Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on December 31, 2007 balances, such amortization for the next
five years is estimated to be as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
10,883 |
2009 |
|
|
4,138 |
2010 |
|
|
2,768 |
2011 |
|
|
1,218 |
2012 |
|
|
826 |
|
|
|
|
|
$ |
19,833 |
|
|
|
The
following table presents the balance of goodwill by segment, including the changes in carrying amount of goodwill, for the year ended December 31, 2007 (in thousands):
|
|
Balance as of
January 1, 2007
|
|
Additions
|
|
(Deductions)
|
|
Impairment
|
|
Balance as of
December 31, 2007
|
Lending |
|
$ |
513,405 |
|
$ |
18,914 |
|
$ |
(2,090 |
) |
$ |
(459,463 |
) |
$ |
70,766 |
Real Estate |
|
|
68,890 |
|
|
1,367 |
|
|
(131 |
) |
|
|
|
|
70,126 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
582,295 |
|
$ |
20,281 |
|
$ |
(2,221 |
) |
$ |
(459,463 |
) |
$ |
140,892 |
|
|
|
|
|
|
|
|
|
|
|
Additions
principally relate to estimated contingent consideration payable to former shareholders of HLC under the terms of the purchase agreement. Deductions principally relate to the
income tax benefit realized pursuant to the exercise of stock options assumed in business acquisitions that were vested at the transaction date and are treated as a reduction in goodwill when the
income tax deductions are realized, and adjustments to the carrying value of goodwill based upon the finalization of the valuation of goodwill and intangible assets and their related deferred tax
impacts.
The
following table presents the balance of goodwill by segment, including the changes in carrying amount of goodwill, for the year ended December 31, 2006 (in thousands):
|
|
Balance as of
January 1, 2006
|
|
Additions
|
|
(Deductions)
|
|
Balance as of
December 31, 2006
|
Lending |
|
$ |
515,346 |
|
$ |
1,329 |
|
$ |
(3,270 |
) |
$ |
513,405 |
Real Estate |
|
|
65,870 |
|
|
3,412 |
|
|
(392 |
) |
|
68,890 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
581,216 |
|
$ |
4,741 |
|
$ |
(3,662 |
) |
$ |
582,295 |
|
|
|
|
|
|
|
|
|
Additions
principally relate to acquisitions. Deductions principally relate to adjustments to the carrying value of goodwill based upon the finalization of the valuation of intangible
assets and their related deferred tax impacts and the income tax benefit realized pursuant to the exercise of stock options assumed in business acquisitions that were vested at the transaction date
and are treated as a reduction in goodwill when the income tax deductions are realized.
D-19
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Computer equipment and capitalized software |
|
$ |
35,183 |
|
$ |
36,175 |
|
Leasehold improvements |
|
|
3,076 |
|
|
6,095 |
|
Furniture and other equipment |
|
|
3,737 |
|
|
5,297 |
|
Projects in progress |
|
|
5,002 |
|
|
7,024 |
|
|
|
|
|
|
|
|
|
|
46,998 |
|
|
54,591 |
|
Less: accumulated depreciation and amortization |
|
|
(25,532 |
) |
|
(23,914 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
21,466 |
|
$ |
30,677 |
|
|
|
|
|
|
|
NOTE 6ACCRUED EXPENSES AND OTHER CURRRENT LIABILITIES
Accrued expenses and other current liabilities consists of the following (in thousands):
|
|
December 31,
|
|
|
2007
|
|
2006
|
Contingent consideration payable related to HLC acquisition |
|
$ |
18,914 |
|
$ |
|
Accrued loan loss liability related to loans previously sold |
|
|
13,886 |
|
|
3,820 |
Litigation accruals |
|
|
15,285 |
|
|
12,456 |
Accrued advertising expense |
|
|
11,492 |
|
|
11,125 |
Accrued compensation and benefits |
|
|
8,407 |
|
|
18,683 |
Accrued restructuring costs |
|
|
5,560 |
|
|
|
Derivatives related to loans held for sale and interest rate lock commitments |
|
|
1,185 |
|
|
2,470 |
Other accrued expenses |
|
|
8,884 |
|
|
14,336 |
|
|
|
|
|
|
Total accrued expenses and other current liabilities |
|
$ |
83,613 |
|
$ |
62,890 |
|
|
|
|
|
NOTE 7INCOME TAXES
Tree.com is a member of IAC's consolidated federal and state tax returns. In all periods presented, current and deferred tax expense has been computed for
Tree.com on a separate return basis. Tree.com's payments to IAC for its share of IAC's consolidated federal and state tax return liabilities have been reflected within cash flows from operating
activities in the accompanying consolidated statements of cash flows.
D-20
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7INCOME TAXES (Continued)
The
components of the provision for income taxes attributable to continuing operations are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Current income tax provision: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
5,533 |
|
$ |
2,113 |
|
$ |
7,497 |
|
State |
|
|
1,864 |
|
|
2,703 |
|
|
3,380 |
|
|
|
|
|
|
|
|
|
Current income tax provision |
|
|
7,397 |
|
|
4,816 |
|
|
10,877 |
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit): |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
6,327 |
|
|
1,644 |
|
|
(4,139 |
) |
State |
|
|
(3,563 |
) |
|
(1,438 |
) |
|
4,682 |
|
|
|
|
|
|
|
|
|
Deferred income tax provision |
|
|
2,764 |
|
|
206 |
|
|
543 |
|
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
10,161 |
|
$ |
5,022 |
|
$ |
11,420 |
|
|
|
|
|
|
|
|
|
Current
income taxes payable has been reduced by $1.7 million, $1.2 million and $3.1 million for the years ended December 31, 2007, 2006 and 2005,
respectively, for tax deductions attributable to stock-based compensation. The related income tax benefits of this stock-based compensation were recorded as amounts charged or credited to invested
capital or a reduction in goodwill.
The
tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006
are presented below (in thousands). The valuation allowance is related to items for which it is more likely than not that the tax benefit will not be realized.
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
Provision for accrued expenses |
|
$ |
19,647 |
|
$ |
12,365 |
|
Net operating loss carryforwards |
|
|
32,041 |
|
|
13,770 |
|
Goodwill |
|
|
15,290 |
|
|
|
|
Other |
|
|
7,303 |
|
|
4,974 |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
74,281 |
|
|
31,109 |
|
Less valuation allowance |
|
|
(68,830 |
) |
|
(5,835 |
) |
|
|
|
|
|
|
Net deferred tax assets |
|
|
5,451 |
|
|
25,274 |
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Intangible and other assets |
|
|
(34,581 |
) |
|
(48,689 |
) |
Other |
|
|
(1,156 |
) |
|
(3,155 |
) |
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(35,737 |
) |
|
(51,844 |
) |
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(30,286 |
) |
$ |
(26,570 |
) |
|
|
|
|
|
|
D-21
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7INCOME TAXES (Continued)
At December 31, 2007, Tree.com had consolidated federal and state net operating losses ("NOLs") of approximately $58.9 million and $16.6 million, respectively. These
NOL carryforwards have been fully utilized in the IAC consolidated federal and state return filings and will not be available to Tree.com following the spin-off. In addition, Tree.com had separate
company state NOLs of approximately $159.0 million that will expire at various times between 2008 and 2027.
At
December 31, 2007, Tree.com had tax credit carryforwards of approximately $1.9 million. This entire amount is related to federal credits for increasing research
activities. These credits have been fully utilized in the IAC consolidated federal tax return and will not be available to Tree.com following the spin-off.
During
2007, Tree.com's valuation allowance increased by approximately $63.0 million. This increase related to NOLs and other deferred tax assets including accrued expenses and
goodwill. At December 31, 2007, Tree.com had a valuation allowance of approximately $68.8 million related to the portion of tax operating loss carryforwards and other deferred tax assets
for which it is more likely than not that the tax benefit will not be realized.
A
reconciliation of total income tax provision to the amounts computed by applying the statutory federal income tax rate to earnings from continuing operations before income taxes and
minority interest is shown as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Income tax (benefit) provision at the federal statutory rate of 35% |
|
$ |
(189,084 |
) |
$ |
4,800 |
|
$ |
6,027 |
|
State income taxes, net of effect of federal tax benefit |
|
|
(1,099 |
) |
|
839 |
|
|
(241 |
) |
Change in state effective tax rate |
|
|
(4 |
) |
|
(17 |
) |
|
2,940 |
|
Non-deductible non-cash compensation expense |
|
|
(125 |
) |
|
(332 |
) |
|
1,444 |
|
Impairment of non-deductible goodwill and intangible assets |
|
|
145,665 |
|
|
|
|
|
|
|
Change in valuation allowance |
|
|
54,960 |
|
|
|
|
|
2,542 |
|
Other, net |
|
|
(152 |
) |
|
(268 |
) |
|
(1,292 |
) |
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
10,161 |
|
$ |
5,022 |
|
$ |
11,420 |
|
|
|
|
|
|
|
|
|
Tree.com
adopted the provisions of FIN 48 effective January 1, 2007. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. The adoption had no impact on Tree.com's accumulated deficit. A reconciliation of the
D-22
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7INCOME TAXES (Continued)
beginning
and ending amount of unrecognized tax benefits, excluding interest, is as follows (in thousands):
Balance at January 1, 2007 |
|
$ |
541 |
Additions based on tax positions related to the current year |
|
|
1,645 |
Additions for tax positions of prior years |
|
|
2,203 |
Reductions for tax positions of prior years |
|
|
|
Settlements |
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
4,389 |
|
|
|
As
of January 1, 2007 and December 31, 2007, the unrecognized tax benefits, including interest, were $0.5 million and $5.8 million, respectively. Included in
unrecognized tax benefits is approximately $3.7 million for tax positions included in IAC's consolidated tax return filings. Included within "Payables to IAC and subsidiaries" in the
accompanying consolidated balance sheet at December 31, 2007 is approximately $5.0 million of unrecognized tax benefits and related interest that will remain a liability of IAC after the
spin-off. Also included in unrecognized tax benefits at December 31, 2007 is approximately $2.6 million for tax positions which the ultimate deductibility is highly certain
but for which there is uncertainty about the timing of such deductibility.
Tree.com
recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. Included in income tax expense from continuing operations for the
year ended December 31, 2007 is $0.9 million, net of related deferred taxes of $0.5 million, for interest on unrecognized tax benefits. At December 31, 2007, Tree.com has
accrued $1.4 million for the payment of interest. There were no material accruals for interest as of January 1, 2007. There are no material accruals for penalties.
By
virtue of previously filed separate company and consolidated tax returns with IAC, Tree.com is routinely under audit by federal, state and local authorities in the area of income tax.
These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay
assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for
tax contingencies and the amounts owed by Tree.com are recorded in the period they become known.
The
Internal Revenue Service ("IRS") is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of
LendingTree from August 8, 2003, its date of acquisition by IAC. The statute of limitations for these years has been extended to December 31, 2008. Various IAC consolidated tax returns
filed with state and local jurisdictions are currently under examination, the most significant of which are Florida, New York state and New York City, for various tax years after December 31,
2001. These examinations are expected to be completed by late 2008.
Tree.com
believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $2.6 million within twelve months of the current reporting date
due to the reversal of deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits cannot
be made, but are not expected to be significant.
D-23
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8SEGMENT INFORMATION
The overall concept that Tree.com employs in determining its operating segments and related financial information is to present them in a manner consistent with
how the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the
types of products or services offered or the target market.
Tree.com's
primary metric is Operating Income Before Amortization, which is defined as operating income excluding, if applicable: (1) non-cash compensation expense,
(2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions, and (4) one-time items. Tree.com believes this measure
is useful to investors because it represents the consolidated operating results from Tree.com's segments, taking into account depreciation, which it believes is an ongoing cost of doing business, but
excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to Tree.com's statement
of operations of certain expenses, including non-cash compensation and acquisition-related accounting.
The
following tables reconcile Operating Income Before Amortization to operating income (loss) for Tree.com's operating segments and to net (loss) income in total (in thousands):
|
|
Year Ended December 31, 2007
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization of
Intangibles
|
|
Goodwill
Impairment
|
|
Operating Loss
|
|
Lending |
|
$ |
(23,524 |
) |
$ |
(1,914 |
) |
$ |
(27,683 |
) |
$ |
(459,463 |
) |
$ |
(512,584 |
) |
Real Estate |
|
|
(20,059 |
) |
|
(1,011 |
) |
|
(6,786 |
) |
|
|
|
|
(27,856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(43,583 |
) |
$ |
(2,925 |
) |
$ |
(34,469 |
) |
$ |
(459,463 |
) |
|
(540,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(540,241 |
) |
Income tax provision |
|
|
(10,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(550,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization of
Intangibles
|
|
Operating Income
(Loss)
|
|
Lending |
|
$ |
61,873 |
|
$ |
(1,370 |
) |
$ |
(16,412 |
) |
$ |
44,091 |
|
Real Estate |
|
|
(21,507 |
) |
|
(807 |
) |
|
(7,606 |
) |
|
(29,920 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
40,366 |
|
$ |
(2,177 |
) |
$ |
(24,018 |
) |
|
14,171 |
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
13,715 |
|
Income tax provision |
|
|
(5,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D-24
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8SEGMENT INFORMATION (Continued)
|
|
Year Ended December 31, 2005
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization of
Intangibles
|
|
Operating Income
(Loss)
|
|
Lending |
|
$ |
78,883 |
|
$ |
(4,829 |
) |
$ |
(23,449 |
) |
$ |
50,605 |
|
Real Estate |
|
|
(16,930 |
) |
|
(2,556 |
) |
|
(11,865 |
) |
|
(31,351 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
61,953 |
|
$ |
(7,385 |
) |
$ |
(35,314 |
) |
|
19,254 |
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(2,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
17,219 |
|
Income tax provision |
|
|
(11,420 |
) |
Minority interest in losses of consolidated subsidiaries |
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Revenue: |
|
|
|
|
|
|
|
|
|
Gain on sales of loans held for sale |
|
$ |
147,546 |
|
$ |
221,400 |
|
$ |
179,026 |
Transmit fees |
|
|
80,792 |
|
|
83,930 |
|
|
68,981 |
Closed loan fees |
|
|
65,227 |
|
|
85,022 |
|
|
90,665 |
Other |
|
|
1,061 |
|
|
29,305 |
|
|
25,128 |
|
|
|
|
|
|
|
Lending |
|
|
294,626 |
|
|
419,657 |
|
|
363,800 |
|
|
|
|
|
|
|
Real Estate |
|
|
51,752 |
|
|
56,821 |
|
|
57,555 |
|
|
|
|
|
|
|
|
Total |
|
$ |
346,378 |
|
$ |
476,478 |
|
$ |
421,355 |
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
Assets: |
|
|
|
|
|
|
Lending(a) |
|
$ |
345,810 |
|
$ |
1,127,397 |
Real Estate(a) |
|
|
97,777 |
|
|
133,648 |
|
|
|
|
|
|
Total |
|
$ |
443,587 |
|
$ |
1,261,045 |
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Depreciation, amortization of intangibles and goodwill impairment: |
|
|
|
|
|
|
|
|
|
Lending(a) |
|
$ |
496,052 |
|
$ |
25,721 |
|
$ |
28,989 |
Real Estate(a) |
|
|
7,938 |
|
|
10,007 |
|
|
13,045 |
|
|
|
|
|
|
|
|
Total |
|
$ |
503,990 |
|
$ |
35,728 |
|
$ |
42,034 |
|
|
|
|
|
|
|
D-25
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8SEGMENT INFORMATION (Continued)
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
Lending and Real Estate(b) |
|
$ |
9,421 |
|
$ |
13,251 |
|
$ |
17,827 |
|
|
|
|
|
|
|
|
Total |
|
$ |
9,421 |
|
$ |
13,251 |
|
$ |
17,827 |
|
|
|
|
|
|
|
- (a)
- Assets
related to the Real Estate segment only include goodwill and intangible assets, net as it is impracticable to allocate the remaining jointly used assets between the Lending and
Real Estate segments. Accordingly, assets related to the Lending segment include goodwill and intangible assets, net and the remaining jointly used assets comprising both the Lending and Real Estate
segments. However, depreciation expense, which Tree.com believes is an ongoing cost of doing business and is included in the calculation of both operating income (loss) and Operating Income Before
Amortization, is allocated between the Lending and Real Estate segments.
- (b)
- All
capital expenditures related to the Lending and Real Estate segments are included in one segment as it is impracticable to allocate capital expenditures between the Lending and
Real Estate segments.
Tree.com
maintains operations solely in the United States.
NOTE 9SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
Lines of credit (primarily warehouse lines) |
|
$ |
79,426 |
|
$ |
338,472 |
|
Installment Note Payable due January 31, 2008 |
|
|
20,000 |
|
|
30,000 |
|
Other long-term obligations maturing through 2008 |
|
|
272 |
|
|
1,923 |
|
|
|
|
|
|
|
|
Total gross obligations |
|
|
99,698 |
|
|
370,395 |
|
Total unamortized discount |
|
|
(76 |
) |
|
(976 |
) |
|
|
|
|
|
|
|
Total long-term obligations and short-term borrowings |
|
|
99,622 |
|
|
369,419 |
|
Less current maturities of long-term obligations and short-term borrowings |
|
|
(99,622 |
) |
|
(350,072 |
) |
|
|
|
|
|
|
|
Long-term obligations, net of current maturities |
|
$ |
|
|
$ |
19,347 |
|
|
|
|
|
|
|
At
December 31, 2007 and 2006, current maturities of long-term obligations and short-term borrowings consist primarily of the lines of
credit and the installment note payable.
LendingTree Loans has various lines of credit, primarily warehouse lines, that it uses to fund the origination of consumer residential mortgage loans. As of December 31, 2007,
LendingTree Loans had committed lines of credit totaling $550 million, of which $500 million expired on January 31, 2008 and $50 million expires on October 31, 2008,
and an uncommitted line of credit of $150 million. As of December 31, 2006, LendingTree Loans had committed lines of credit in the aggregate amount of $750 million, which had been
scheduled to expire from August 31, 2007 to October 31, 2007, and uncommitted lines of credit aggregating $250 million. Total borrowings under these lines of credit are secured by
outstanding mortgage loans held for sale. The interest rate under these lines of credit was 30-day LIBOR plus 75 to 100 basis points, but may have been higher under certain circumstances.
Under the terms of the committed lines of credit, LendingTree Loans is required to maintain various financial and other covenants. These financial covenants include maintaining (i) minimum
levels of
D-26
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS (Continued)
tangible net worth, cash on hand with a certain lender and liquid assets, (ii) a maximum ratio of total liabilities to net worth and (iii) positive pre-tax net income on a
quarterly basis. During the fourth quarter of 2007, LendingTree Loans was not in compliance with the quarterly positive pre-tax net income covenant set forth in one of its lines of credit.
LendingTree Loans received a waiver of this covenant breach on February 8, 2008. The breach and the subsequent waiver did not have an impact on LendingTree Loans' other lines of credit and
Tree.com does not expect it to have an impact on LendingTree Loans' ability to secure lines of credit in the future. Borrowings under all of LendingTree Loans' lines of credit are
non-recourse to Tree.com. In the case of committed lines, LendingTree Loans pays a facility fee based on the size of the lines. There were $79.4 million and $338.5 million
outstanding under these lines of credit as of December 31, 2007 and 2006, respectively. The weighted-average interest rates on outstanding borrowings under these lines of credit at
December 31, 2007 and 2006 were 5.53% and 6.35%, respectively. Subsequent to December 31, 2007, the committed line of credit which expired on January 31, 2008 was renewed at a
reduced size of $50 million and an increased base rate of LIBOR plus 140 basis points and will expire on the earlier of sixty days prior to the spin-off or January 24, 2009.
The renewed committed line of credit can be canceled at the option of the lender without default upon sixty days notice.
In
connection with the acquisition of LendingTree Loans, Tree.com committed to pay a portion of the purchase price payments to former shareholders under an installment note payable in
three installments. The final payment of $20.0 million, due January 31, 2008, is recorded net of imputed interest of $0.1 million at December 31, 2007.
At
December 31, 2007 and 2006, Tree.com leased certain equipment under capital leases with interest rates ranging from approximately 6.8% to 9.5%. Included in other
long-term obligations
above as of December 31, 2007 are capital lease obligations totaling approximately $0.3 million. Included in other long-term obligations above as of December 31, 2006
are capital lease obligations totaling approximately $1.9 million, net of interest of $0.1 million. Total fixed assets under capital leases at December 31, 2007 and 2006
approximate $4.5 million and $6.5 million, respectively, with accumulated depreciation of approximately $2.7 million and $3.6 million, respectively.
NOTE 10DERIVATIVE INSTRUMENTS
Tree.com is exposed to certain interest rate risks in connection with its mortgage banking operations because the fair value of loans held for sale is subject to
change primarily due to changes in market interest rates until those loans are sold in the secondary market. LendingTree Loans hedges the changes in fair value of loans held for sale primarily by
entering into mortgage forward delivery contracts. Although LendingTree Loans continues to enter into forward delivery contracts for risk management purposes, effective April 1, 2007 it no
longer designates these derivatives as hedges for accounting purposes.
Prior
to April 1, 2007, the fair value of loans held for sale was determined using current secondary market prices for loans with similar coupons, maturities and credit quality
and the carrying value of the loans held for sale and the related derivative instruments were adjusted for changes in fair value during the time the hedge was deemed to be highly effective. If it was
determined that the hedging relationship was no longer highly effective, hedge accounting was discontinued. When hedge accounting was discontinued, the affected loans held for sale were no longer
adjusted for changes in fair value. However, the changes in fair value of the forward delivery contracts continued to be recognized in current earnings as a component of revenue. The fair value of the
forward delivery contracts is recorded in "Prepaid and other current assets" and/or "Accrued expenses and other current liabilities"
D-27
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10DERIVATIVE INSTRUMENTS (Continued)
in
the accompanying consolidated balance sheets. For the year ended December 31, 2007, Tree.com recognized losses of $1.1 million related to the changes in fair value of derivative
instruments. For the years ended December 31, 2006 and 2005, Tree.com recognized losses of $0.3 million and $1.4 million, respectively, related to hedge ineffectiveness and gains
of $0.1 million and $0.1 million, respectively, related to changes in the fair value of derivative instruments when hedge accounting was discontinued.
LendingTree
Loans enters into commitments with consumers to originate loans at a locked in interest rate (interest rate lock commitments"IRLCs"). Tree.com reports IRLCs as
derivative instruments in accordance with SAB 105 and SFAS No. 133 and determines the fair value of IRLCs using current secondary market prices for underlying loans with similar coupons,
maturity and credit quality, subject to the anticipated loan funding probability, or fallout factor. The fair value of IRLCs is subject to change primarily due to changes in interest rates and fallout
factors. Under LendingTree Loans' risk management policy, LendingTree Loans hedges the changes in fair value of IRLCs primarily by entering into mortgage forward delivery contracts which can reduce
the volatility of economic outcomes. Neither the IRLCs nor the related hedging instrument qualify for hedge accounting and both are recorded at fair value with changes in fair value being recorded in
current earnings as a component of revenue in the statement of operations. The IRLCs are recorded in "Prepaid and other current assets" and/or "Accrued expenses and other current liabilities" in the
accompanying consolidated balance sheets. The net change in the fair value of these derivative instruments for the years ended December 31, 2007, 2006 and 2005 resulted in losses of
$0.8 million, gains of $0.2 million and losses of $0.4 million, respectively, which have been recognized in the accompanying consolidated statements of operations. At
December 31, 2007, there was $157.8 million of IRLC's notional value outstanding.
NOTE 11COMMITMENTS
Tree.com leases office space, equipment and services used in connection with its operations under various operating leases, many of which contain escalation
clauses.
Future
minimum payments under operating lease agreements are as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
7,168 |
2009 |
|
|
6,565 |
2010 |
|
|
3,109 |
2011 |
|
|
2,655 |
2012 |
|
|
2,328 |
Thereafter |
|
|
5,808 |
|
|
|
|
Total |
|
$ |
27,633 |
|
|
|
Expenses
charged to operations under these agreements were $6.9 million, $6.7 million and $6.1 million for the years ended December 31, 2007,
2006 and 2005, respectively.
D-28
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11COMMITMENTS (Continued)
Tree.com
also has funding commitments that could potentially require its performance in the event of demands by third parties or contingent events, such as under letters of credit
extended or under surety bonds, as follows (in thousands):
|
|
Amount of Commitment Expiration Per Period
|
|
|
Total
Amounts
Committed
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than
5 Years
|
Surety bonds and letters of credit |
|
$ |
8,182 |
|
$ |
7,477 |
|
$ |
705 |
|
$ |
|
|
$ |
|
Purchase obligations |
|
|
330 |
|
|
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments |
|
$ |
8,512 |
|
$ |
7,807 |
|
$ |
705 |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The
total commercial commitments above primarily consist of surety bonds relating to guarantees with mortgage brokers. The purchase obligations primarily relate to
marketing event contracts in 2008.
NOTE 12CONTINGENCIES
On November 24, 2003, IMX, Inc. ("IMX") filed suit against Tree.com alleging infringement of a patent held by IMX and seeking damages related to the
alleged infringement. A trial was conducted in
January 2006 and a verdict was returned finding infringement by Tree.com and awarding IMX $5.8 million in damages. Tree.com established a reserve of $5.8 million in its 2005 financial
statements related to this claim. In January 2007 the court enhanced the damages award and rejected Tree.com's counterclaim. During 2006, Tree.com increased the reserve by $6.3 million to
$12.1 million at December 31, 2006. During 2007, the court awarded IMX supplemental damages and pre-judgment and post-judgment interest. During 2007, Tree.com
increased the reserve by $0.8 million to $12.8 million at December 31, 2007. Tree.com has appealed this judgment to the U.S. Court of Appeals for the Federal Circuit. Tree.com
intends to continue to contest this case through all available means. In connection with the appeal, Tree.com's parent, IAC, executed a guarantee of $13.5 million in lieu of posting a bond.
Before IAC completes the spin-off, Tree.com will have to post a bond in a like amount.
HLC
is party to various employment related lawsuits. During 2006, Tree.com established a reserve of $0.4 million for certain of these actions. During 2007, an additional reserve
of $2.1 million was recorded. The balance of the related liability was $0.4 million and $2.5 million at December 31, 2006 and 2007, respectively.
In
addition, during 2007 the Company settled a lawsuit (as the plaintiff) and received a payment of $15.0 million, which is reflected as a separate line in the accompanying
consolidated statement of operations.
In
the ordinary course of business, Tree.com is a party to various lawsuits. Tree.com establishes reserves for specific legal matters when it determines that the likelihood of an
unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not probable and,
therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against Tree.com, including claims where an unfavorable outcome is reasonably
possible, will not have a material impact on the liquidity, results of operations, or financial condition of Tree.com, these matters are subject to inherent uncertainties and management's view of
these matters may change in the future. It is possible that an unfavorable outcome of one or more of these lawsuits could have a material impact on the liquidity, results of operations, or financial
condition of Tree.com. Tree.com also
D-29
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12CONTINGENCIES (Continued)
evaluates
other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 7 for discussion related to income tax contingencies.
NOTE 13FINANCIAL INSTRUMENTS
The additional disclosure below of the estimated fair value of financial instruments has been determined by Tree.com using available market information and
appropriate valuation methodologies when available. Tree.com's financial instruments include letters of credit and surety bonds. These commitments are in place to facilitate the commercial operations
of certain Tree.com subsidiaries.
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents |
|
$ |
45,940 |
|
$ |
45,940 |
|
$ |
99,498 |
|
$ |
99,498 |
|
Restricted cash and cash equivalents |
|
|
14,953 |
|
|
14,953 |
|
|
15,467 |
|
|
15,467 |
|
Accounts receivable, net |
|
|
12,433 |
|
|
12,433 |
|
|
21,581 |
|
|
21,581 |
|
Loans held for sale |
|
|
86,754 |
|
|
89,397 |
|
|
345,896 |
|
|
357,859 |
|
Long-term obligations and short-term borrowings |
|
|
(99,622 |
) |
|
(99,622 |
) |
|
(369,419 |
) |
|
(369,419 |
) |
Derivative asset related to loans held for sale and interest rate lock commitments |
|
|
719 |
|
|
719 |
|
|
3,859 |
|
|
3,859 |
|
Derivative liability related to loans held for sale and interest rate lock commitments |
|
|
(1,185 |
) |
|
(1,185 |
) |
|
(2,470 |
) |
|
(2,470 |
) |
Surety bonds and letters of credit |
|
|
N/A |
|
|
(8,182 |
) |
|
N/A |
|
|
(7,489 |
) |
The
carrying amounts of cash and cash equivalents reflected in the accompanying consolidated balance sheets approximate fair value as they are redeemable at par upon
notice or maintained with various high-quality financial institutions. Restricted cash and cash equivalents are primarily maintained with credit line providers, primarily warehouse lines,
for the purpose of maintaining financial covenants. Accounts receivable, net, are short-term in nature and are generally settled shortly after the sale. The market value of loans held for
sale, net, was estimated using current secondary market prices for loans with similar coupons, maturities and credit quality, subject to the anticipated loan funding probability, or fallout factor.
The fair values of derivative asset and liability contracts were estimated based on the difference between the current value of similar loans and the price at which Tree.com has committed to originate
the loans, subject to the expected close rate of the loans, or fallout factor. The carrying amounts for the remaining long-term obligations and short-term borrowings and all
other financial instruments approximate their fair value.
NOTE 14SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information:
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
14,888 |
|
$ |
19,056 |
|
$ |
12,626 |
|
|
Income tax payments including amounts paid to IAC for Tree.com's share of IAC's consolidated tax liability |
|
|
6,426 |
|
|
3,046 |
|
|
7,258 |
|
|
Income tax refunds |
|
|
|
|
|
(26 |
) |
|
(403 |
) |
D-30
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15RELATED PARTY TRANSACTIONS
Tree.com has various agreements with Microsoft Corporation ("Microsoft"), which was the beneficial owner of more than 5% of IAC's outstanding common stock during
2006 and 2005. These agreements include partner agreements, licensing agreements and support agreements. Total fees paid related to these agreements in 2006 and 2005 were approximately
$21.8 million and $8.5 million, respectively. Amounts payable related to these various agreements at December 31, 2006 were $1.2 million and are included in "Accrued
expenses and other current liabilities" in the accompanying consolidated balance sheets. In the first quarter of 2007, Microsoft publicly disclosed that it was no longer the beneficial owner of 5% or
more of IAC's outstanding common stock, and as a result, it is no longer a related party.
During
the period from January 1, 2005 through June 6, 2005, Tree.com paid $6.9 million to the National Broadcasting Company, a subsidiary of GE, related to
television advertising. As a result of the sale of IAC's common and preferred interests in VUE on June 7, 2005, GE and its subsidiaries are no longer related parties.
Tree.com's
expenses include allocations from IAC of costs associated with IAC's accounting, treasury, legal, tax, corporate support, human resources and internal audit functions. These
expenses were allocated based on the ratio of Tree.com's revenue as a percentage of IAC's total revenue. Allocated costs were $1.0 million, $1.2 million and $1.1 million in 2007,
2006 and 2005, respectively, and are included in "General and administrative expense" in the accompanying consolidated statements of operations. It is not practicable to determine the amounts of these
expenses that would have been incurred had Tree.com operated as an unaffiliated entity. In the opinion of management, the allocation method is reasonable.
The
portion of interest income reflected in the consolidated statements of operations that is intercompany in nature, was $1.0 million and $1.1 million for the years ended
December 31, 2007 and 2006, respectively. This intercompany interest arose from the transfer of cash from Tree.com to IAC that occurred in connection with IAC's treasury operations.
An
analysis of Tree.com's payables to IAC and subsidiaries is as follows (in thousands):
|
|
2007
|
|
2006
|
|
Payables to IAC and subsidiaries, beginning of year |
|
$ |
(29,126 |
) |
$ |
(26,410 |
) |
Cash transfers related to IAC's centrally managed U.S. treasury function |
|
|
35,652 |
|
|
34,079 |
|
Interest income |
|
|
1,000 |
|
|
1,062 |
|
Employee equity instruments and associated tax withholdings |
|
|
1,253 |
|
|
894 |
|
Taxes (excludes tax withholdings associated with employee equity instruments) |
|
|
5,158 |
|
|
(3,041 |
) |
Allocation of non-cash compensation expense |
|
|
(3,139 |
) |
|
(3,501 |
) |
Administrative expenses and other |
|
|
(30,865 |
) |
|
(32,209 |
) |
|
|
|
|
|
|
Payables to IAC and subsidiaries, end of year |
|
$ |
(20,067 |
) |
$ |
(29,126 |
) |
|
|
|
|
|
|
Relationship Between IAC and Tree.com after the Spin-Off
For purposes of governing certain of the ongoing relationships between Tree.com and IAC at and after the spin-off, and to provide for an orderly
transition, Tree.com and IAC are expected to enter into a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement (the "Spin-Off
Agreements"), among other agreements.
D-31
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15RELATED PARTY TRANSACTIONS (Continued)
Separation Agreement
The separation agreement is expected to provide generally that (i) immediately prior to the spin-off, IAC will contribute or otherwise transfer
to Tree.com all of the subsidiaries and assets comprising the Tree.com Businesses, (ii) Tree.com will assume all of the liabilities related to the Tree.com Businesses, (iii) each party
will indemnify the other and its respective affiliates, current and former directors, officers and employees for any losses arising out of any breach of any of the Spin-Off Agreements and
(iv) Tree.com will indemnify IAC for its failure to assume and perform any assumed liabilities and any liabilities relating to Tree.com, financial and business information included in the SEC
documentation filed with respect to the spin-off, as well as such other terms as to which IAC and Tree.com mutually agree.
Tax Sharing Agreement
The tax sharing agreement will govern the respective rights, responsibilities and obligations of IAC and Tree.com after the spin-off with respect to
taxes for the periods ending on or before the spin-off. Generally, IAC will pay taxes with respect to Tree.com income included on its consolidated, unitary or combined federal or state tax
returns including audit adjustments with respect thereto. Other pre-distribution taxes that are attributable to the Tree.com Businesses, including taxes reported on separately-filed
returns and audit adjustments with respect thereto, will be borne solely by Tree.com. The tax sharing agreement is expected to contain certain customary restrictive covenants that generally prohibit
Tree.com (absent a supplemental IRS ruling or an unqualified opinion of counsel to the contrary, in each case, in a form and substance satisfactory and acceptable to IAC in its sole discretion) from
taking actions that could jeopardize the tax free nature of the spin-off. Tree.com is expected to agree to indemnify IAC for any taxes and related losses resulting from its
non-compliance with these restrictive covenants, as well as for the breach of certain representations in the Spin-Off Agreements and other documentation relating to the
tax-free nature of the spin-off.
Employee Matters Agreement
The employee matters agreement will generally provide that Tree.com will be responsible for, among other obligations, all employment and benefit-related
obligations and liabilities related to its employees immediately prior to the spin-off (and their dependents and beneficiaries) and former employees who most recently worked for the
Tree.com Businesses. This agreement is also expected to provide that assets and liabilities from the IAC Retirement Savings Plan of Tree.com employees will be transferred to a newly established
Tree.com Retirement Savings Plan as soon as practicable following the spin-off.
Transition Services Agreement
Under the transition services agreement, beginning on the date of the completion of the spin-off, IAC will provide to Tree.com on an interim,
transitional basis, various services, which are expected to relate primarily to public company and operational matters, and such other services as to which IAC and Tree.com mutually agree. The agreed
upon charges for these services will generally allow IAC to recover fully the allocated costs of providing the services, plus all out-of-pocket costs and expenses. Tree.com may
terminate the agreement with respect to one or more particular services upon prior written notice.
D-32
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15RELATED PARTY TRANSACTIONS (Continued)
Commercial Agreements
IAC and Tree.com currently, and for the foreseeable future, expect to provide certain services to each other pursuant to certain commercial relationships. In
connection with the spin-off, IAC and Tree.com will enter into a number of commercial agreements between subsidiaries of IAC, on the one hand, and subsidiaries of Tree.com, on the other
hand, many of which will memorialize (in most material respects) pre-existing arrangements in effect prior to the spin-off and all of which are intended to reflect arm's length
terms. In addition, IAC and Tree.com believe that such agreements, whether taken individually or in the aggregate, do not constitute a material contract to either IAC or Tree.com.
Aggregate
revenue earned with respect to these commercial agreements by the Tree.com Businesses was not material in 2007, 2006 and 2005. The Tree.com Businesses incurred approximately
$0.4 million, $1.9 million and $0.9 million in 2007, 2006 and 2005, respectively, in expenses related to these commercial agreements with IAC subsidiaries.
NOTE 16BENEFIT PLANS
During the three years ended December 31, 2007, Tree.com either participated in a retirement savings plan sponsored by IAC or had a retirement savings plan
in the United States that was qualified under Section 401(k) of the Internal Revenue Code. Subsequent to the spin-off, the net assets available for benefits of the employees of
Tree.com are expected to be transferred from the IAC plan to a newly created Tree.com plan. Under the IAC plan, participating employees may contribute up to 16% of their pretax earnings, but not more
than statutory limits. Tree.com's match under the IAC plan is fifty cents for each dollar a participant contributes in this plan, with a maximum contribution of 3% of a participant's eligible
earnings. Matching contributions for all plans were approximately $2.7 million, $3.0 million and $2.3 million in 2007, 2006, and 2005, respectively. The decrease in matching
contributions in 2007 is primarily due to the reduction in workforce associated with the current year restructuring. The increase in matching contributions in 2006 is primarily due to increased
participation in the plan. Matching contributions are invested in the same manner as each participant's voluntary contributions in the investment options provided under the plan. Investment options in
the plan include IAC common stock, but neither participant nor matching contributions are required to be invested in IAC common stock.
NOTE 17RESTRUCTURING CHARGES
Restructuring charges were approximately $22.9 million in 2007. Costs that relate to ongoing operations are not part of restructuring charges.
The
restructuring charges primarily relate to Tree.com's significant reduction in its mortgage origination operations in response to the persistent adverse mortgage market conditions.
Restructuring charges by segment and type are as follows:
|
|
For the Year Ended December 31, 2007
|
|
|
Employee
Termination
Costs
|
|
Continuing
Lease
Obligations
|
|
Asset
Write-offs
|
|
Other
|
|
Total
|
|
|
(In thousands)
|
Lending |
|
$ |
8,973 |
|
$ |
5,004 |
|
$ |
7,510 |
|
$ |
80 |
|
$ |
21,567 |
Real Estate |
|
|
333 |
|
|
|
|
|
493 |
|
|
474 |
|
|
1,300 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,306 |
|
$ |
5,004 |
|
$ |
8,003 |
|
$ |
554 |
|
$ |
22,867 |
|
|
|
|
|
|
|
|
|
|
|
D-33
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17RESTRUCTURING CHARGES (Continued)
Restructuring
charges and spending against liabilities are as follows:
|
|
For the Year Ended December 31, 2007
|
|
|
|
Employee
Termination
Costs
|
|
Continuing
Lease
Obligations
|
|
Asset
Write-offs
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance, beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Restructuring charges |
|
|
9,306 |
|
|
5,004 |
|
|
8,003 |
|
|
554 |
|
|
22,867 |
|
|
Payments |
|
|
(7,242 |
) |
|
(1,633 |
) |
|
|
|
|
|
|
|
(8,875 |
) |
|
Write-offs |
|
|
|
|
|
514 |
|
|
(8,003 |
) |
|
|
|
|
(7,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
2,064 |
|
$ |
3,885 |
|
$ |
|
|
$ |
554 |
|
$ |
6,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2007, restructuring liabilities of $5.6 million are included in "Accrued expenses and other current liabilities" and $0.9 million are included in
"Other long-term liabilities" in the accompanying consolidated balance sheet. Tree.com does not expect to incur significant additional costs related to the 2007 restructuring.
NOTE 18QUARTERLY RESULTS (UNAUDITED)
|
|
Quarter Ended
March 31,
|
|
Quarter Ended
June 30,
|
|
Quarter Ended
September 30,
|
|
Quarter Ended
December 31,(a)
|
|
|
|
(In thousands)
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
109,999 |
|
$ |
110,639 |
|
$ |
74,953 |
|
$ |
50,787 |
|
Gross margin |
|
|
89,503 |
|
|
89,697 |
|
|
56,674 |
|
|
37,390 |
|
Operating loss |
|
|
(8,404 |
) |
|
(11,756 |
) |
|
(11,916 |
) |
|
(508,364 |
) |
Net loss |
|
|
(5,123 |
) |
|
(7,492 |
) |
|
(6,293 |
) |
|
(531,494 |
) |
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
122,658 |
|
$ |
120,747 |
|
$ |
120,230 |
|
$ |
112,843 |
|
Gross margin |
|
|
104,749 |
|
|
101,910 |
|
|
100,844 |
|
|
95,758 |
|
Operating income |
|
|
922 |
|
|
1,455 |
|
|
5,811 |
|
|
5,983 |
|
Net income |
|
|
386 |
|
|
746 |
|
|
3,240 |
|
|
4,321 |
|
- (a)
- The
fourth quarter of 2007 includes an impairment charge of $475.7 million related to the write-down of Lending's goodwill and intangible assets.
D-34
Schedule II
TREE.COM AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Description
|
|
Balance at
Beginning of
Period
|
|
Charges to
Earnings
|
|
Charges to
Other
Accounts
|
|
Deductions
|
|
Balance at
End of Period
|
|
|
(In thousands)
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
1,129 |
|
$ |
1,925 |
|
$ |
|
|
$ |
(2,732) |
(2) |
$ |
322 |
Deferred tax valuation allowance |
|
|
5,835 |
|
|
62,995 |
(1) |
|
|
|
|
|
|
|
68,830 |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
727 |
|
$ |
1,768 |
|
$ |
|
|
$ |
(1,366) |
(2) |
$ |
1,129 |
Deferred tax valuation allowance |
|
|
3,652 |
|
|
2,183 |
(1) |
|
|
|
|
|
|
|
5,835 |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
594 |
|
$ |
560 |
|
$ |
|
|
$ |
(427) |
(2) |
$ |
727 |
Deferred tax valuation allowance |
|
|
735 |
|
|
2,917 |
(1) |
|
|
|
|
|
|
|
3,652 |
- (1)
- Amount
is primarily related to Tree.com net operating losses and other deferred tax assets including accrued expenses and goodwill which impacted the income tax provision.
- (2)
- Write-off
of uncollectible accounts receivable.
D-35
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Revenue |
|
$ |
70,193 |
|
$ |
109,999 |
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
|
17,766 |
|
|
20,496 |
|
|
|
|
|
|
|
|
Gross margin |
|
|
52,427 |
|
|
89,503 |
|
Selling and marketing expense |
|
|
33,197 |
|
|
56,478 |
|
General and administrative expense |
|
|
20,764 |
|
|
30,046 |
|
Product development |
|
|
2,109 |
|
|
4,270 |
|
Restructuring expense |
|
|
402 |
|
|
|
|
Amortization of intangibles |
|
|
3,668 |
|
|
4,274 |
|
Depreciation |
|
|
1,775 |
|
|
2,839 |
|
|
|
|
|
|
|
|
Operating loss |
|
|
(9,488 |
) |
|
(8,404 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
9 |
|
|
70 |
|
|
Interest expense |
|
|
(109 |
) |
|
(280 |
) |
|
Other (expense) income |
|
|
(2 |
) |
|
1 |
|
|
|
|
|
|
|
Total other expense, net |
|
|
(102 |
) |
|
(209 |
) |
|
|
|
|
|
|
Loss before income taxes |
|
|
(9,590 |
) |
|
(8,613 |
) |
Income tax (provision) benefit |
|
|
(209 |
) |
|
3,490 |
|
|
|
|
|
|
|
Net loss |
|
$ |
(9,799 |
) |
$ |
(5,123 |
) |
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
D-36
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
|
|
(In thousands)
|
|
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
52,516 |
|
$ |
45,940 |
|
Restricted cash and cash equivalents |
|
|
2,442 |
|
|
14,953 |
|
Accounts receivable, net of allowance of $382 and $322, respectively |
|
|
14,460 |
|
|
12,433 |
|
Loans held for sale |
|
|
91,185 |
|
|
86,754 |
|
Deferred income taxes |
|
|
6,420 |
|
|
6,420 |
|
Prepaid and other current assets |
|
|
9,607 |
|
|
6,011 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
176,630 |
|
|
172,511 |
|
Property and equipment, net |
|
|
20,582 |
|
|
21,466 |
|
Goodwill |
|
|
140,619 |
|
|
140,892 |
|
Intangible assets, net |
|
|
104,772 |
|
|
108,440 |
|
Other non-current assets |
|
|
207 |
|
|
278 |
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
442,810 |
|
$ |
443,587 |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
Short-term borrowings and current maturities of long-term obligations |
|
$ |
78,754 |
|
$ |
99,622 |
|
Accounts payable, trade |
|
|
6,991 |
|
|
3,335 |
|
Deferred revenue |
|
|
1,397 |
|
|
1,435 |
|
Income taxes payable |
|
|
913 |
|
|
993 |
|
Accrued expenses and other current liabilities |
|
|
69,913 |
|
|
83,613 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
157,968 |
|
|
188,998 |
|
Income taxes payable |
|
|
819 |
|
|
730 |
|
Other long-term liabilities |
|
|
2,257 |
|
|
2,529 |
|
Deferred income taxes |
|
|
37,221 |
|
|
36,706 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY: |
|
|
|
|
|
|
|
Invested capital |
|
|
766,374 |
|
|
751,923 |
|
Payables to IAC and subsidiaries |
|
|
42,237 |
|
|
20,067 |
|
Accumulated deficit |
|
|
(564,066 |
) |
|
(557,366 |
) |
|
|
|
|
|
|
|
Total shareholders' equity |
|
|
244,545 |
|
|
214,624 |
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
|
$ |
442,810 |
|
$ |
443,587 |
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
D-37
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
|
|
Total
|
|
Invested
Capital
|
|
Payables to
IAC and
Subsidiaries
|
|
Accumulated
Deficit
|
|
|
|
(In thousands)
|
|
Balance as of December 31, 2007 |
|
$ |
214,624 |
|
$ |
751,923 |
|
$ |
20,067 |
|
$ |
(557,366 |
) |
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three months ended March 31, 2008 |
|
|
(9,799 |
) |
|
|
|
|
|
|
|
(9,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
(9,799 |
) |
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of SFAS No. 157 |
|
|
3,099 |
|
|
|
|
|
|
|
|
3,099 |
|
Net transfers from IAC (principally funding of contingent consideration paid to former shareholders of Home Loan Center) |
|
|
14,451 |
|
|
14,451 |
|
|
|
|
|
|
|
Net change in payables to IAC and subsidiaries |
|
|
22,170 |
|
|
|
|
|
22,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2008 |
|
$ |
244,545 |
|
$ |
766,374 |
|
$ |
42,237 |
|
$ |
(564,066 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
D-38
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net loss |
|
$ |
(9,799 |
) |
$ |
(5,123 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Amortization of intangibles |
|
|
3,668 |
|
|
4,274 |
|
|
Depreciation |
|
|
1,775 |
|
|
2,839 |
|
|
Non-cash compensation expense |
|
|
556 |
|
|
1,121 |
|
|
Non-cash restructuring expense |
|
|
337 |
|
|
|
|
|
Deferred income taxes |
|
|
192 |
|
|
(4,535 |
) |
|
Gain on sales of loans held for sale |
|
|
(23,573 |
) |
|
(48,617 |
) |
|
Provision for loans losses |
|
|
784 |
|
|
1,548 |
|
|
Bad debt expense |
|
|
238 |
|
|
613 |
|
|
Non-cash interest expense |
|
|
76 |
|
|
249 |
|
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,233 |
) |
|
(4,481 |
) |
|
Origination of loans held for sale |
|
|
(611,490 |
) |
|
(1,997,623 |
) |
|
Proceeds from sales of loans held for sale |
|
|
628,501 |
|
|
1,981,313 |
|
|
Prepaid and other current assets |
|
|
(424 |
) |
|
(2,663 |
) |
|
Accounts payable and other current liabilities |
|
|
4,767 |
|
|
(2,930 |
) |
|
Income taxes payable |
|
|
310 |
|
|
(392 |
) |
|
Deferred revenue |
|
|
(127 |
) |
|
177 |
|
Other, net |
|
|
(181 |
) |
|
(359 |
) |
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(5,623 |
) |
|
(74,589 |
) |
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Contingent consideration paid to former shareholders of Home Loan Center |
|
|
(14,487 |
) |
|
|
|
|
Capital expenditures |
|
|
(1,470 |
) |
|
(3,698 |
) |
|
Other, net |
|
|
4 |
|
|
1 |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(15,953 |
) |
|
(3,697 |
) |
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowing under lines of credit |
|
|
553,141 |
|
|
1,947,302 |
|
|
Repayments of lines of credit |
|
|
(553,828 |
) |
|
(1,884,903 |
) |
|
Principal payments on long-term obligations |
|
|
(20,031 |
) |
|
(10,449 |
) |
|
Transfers from IAC |
|
|
21,774 |
|
|
17,960 |
|
|
Capital contributions from IAC |
|
|
14,487 |
|
|
|
|
|
Excess tax benefits from stock-based awards |
|
|
98 |
|
|
484 |
|
|
Decrease (increase) in restricted cash |
|
|
12,511 |
|
|
(843 |
) |
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
28,152 |
|
|
69,551 |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
6,576 |
|
|
(8,735 |
) |
Cash and cash equivalents at beginning of period |
|
|
45,940 |
|
|
99,498 |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
52,516 |
|
$ |
90,763 |
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
D-39
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION
Spin-Off
On November 5, 2007, IAC/InterActiveCorp ("IAC") announced that its Board of Directors approved a plan to separate IAC into five publicly traded companies,
identifying Tree.com, Inc. ("Tree.com") as one of those five companies. In these consolidated financial statements, we refer to the separation transaction as the "spin-off." In
connection with the spin-off, Tree.com was incorporated as a Delaware corporation in April 2008. Tree.com currently does not have any material assets or liabilities, nor does it engage in
any business or other activities and, other than in connection with the spin-off, will not acquire or incur any material assets or liabilities, nor will it engage in any business or other
activities. Upon completion of the spin-off, Tree.com will consist of the businesses that formerly comprised IAC's Lending and Real Estate segments. We refer herein to these businesses as
the "Tree.com Businesses," which include LendingTree.com, RealEstate.com, GetSmart.com, LendingTree Loans, iNest and Domania.
Basis of Presentation
The historical consolidated financial statements of Tree.com and its subsidiaries reflect the contribution or other transfer to Tree.com of all of the
subsidiaries and assets and the assumption by Tree.com of all of the liabilities relating to the Tree.com Businesses in connection with the spin-off and the allocation to Tree.com of
certain IAC corporate expenses relating to the Tree.com Businesses. Accordingly, the historical consolidated financial statements of Tree.com reflect the historical financial position, results of
operations and cash flows of the Tree.com Businesses since their respective dates of acquisition by IAC, based on the historical consolidated financial statements and accounting records of IAC and
using the historical results of operations and historical bases of the assets and liabilities of the Tree.com Businesses with the exception of accounting for income taxes. For purposes of these
financial statements, income taxes have been computed for Tree.com on an as if stand-alone, separate tax return basis. Intercompany transactions and accounts have been eliminated.
In the opinion of Tree.com's management, the assumptions underlying the historical consolidated financial statements of Tree.com are reasonable. However, this financial information does
not necessarily reflect what the historical financial position, results of operations and cash flows of Tree.com would have been had Tree.com been a stand-alone company during the periods presented.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and
with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles
for complete financial statements. In the opinion of Tree.com's management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Interim results are not necessarily indicative of the results that may be expected for a full year. The accompanying unaudited consolidated financial statements should be read in conjunction with
Tree.com's audited consolidated financial statements and notes thereto for the year ended December 31, 2007.
D-40
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1ORGANIZATION (Continued)
Company Overview
Lending
Lending consists of online networks (principally LendingTree.com and GetSmart.com) and call centers that connect consumers and financial providers in the lending
industry. Tree.com also originates, processes, approves and funds various residential real estate loans through Home Loan Center ("HLC"), which does business as LendingTree Loans in certain
jurisdictions. The HLC and LendingTree Loans brand names are collectively referred to in these consolidated financial statements as "LendingTree Loans." Additionally, Tree.com provides mortgage
settlement services, including title search, appraisals, flood certification and closing transactions, under the name "LendingTree Settlement Services."
Real Estate
Real Estate consists of a proprietary full service real estate brokerage that operates in fourteen U.S. markets, www.RealEstate.com, an
online network that connects consumers with real estate brokerages around the country, iNest, an online network that matches
buyers and builders of new homes, and Domania, an online lead provider for banks, mortgage lenders and real estate professionals.
NOTE 2SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
Tree.com's management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with
U.S. generally accepted accounting principles. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial statements include: reserves for losses associated with loans held for sale and loans that have been previously
sold; the fair value of loans held for sale and related derivatives; the recoverability of long-lived assets; the recovery of goodwill and intangible assets; the determination of income
taxes payable and deferred income taxes, including related valuation allowances; various other allowances, reserves and accruals; and assumptions related to the determination of stock-based
compensation.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statementsan amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and
the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the
D-41
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SIGNIFICANT ACCOUNTING POLICIES (Continued)
interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. SFAS No. 160 will be applied prospectively, except as it
relates to disclosures, for which the effects will be applied retrospectively for all periods presented. Early adoption is not permitted. Tree.com is currently assessing the impact of SFAS
No. 160 on its consolidated financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces FASB Statement No. 141. SFAS No. 141R
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest
in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS
No. 141R applies prospectively to business combinations in fiscal years beginning after December 15, 2008. Early adoption is not permitted. Tree.com is currently assessing the impact of
the adoption of SFAS No. 141R on its consolidated financial position, results of operations and cash flows.
NOTE 3GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands):
|
|
March 31, 2008
|
|
December 31, 2007
|
Goodwill |
|
$ |
140,619 |
|
$ |
140,892 |
Intangible assets with indefinite lives |
|
|
88,607 |
|
|
88,607 |
Intangible assets with definite lives, net |
|
|
16,165 |
|
|
19,833 |
|
|
|
|
|
|
Total goodwill and intangible assets, net |
|
$ |
245,391 |
|
$ |
249,332 |
|
|
|
|
|
Intangible assets with indefinite lives relate principally to trade names and trademarks acquired in various acquisitions. At March 31, 2008, intangible assets with definite lives
relate to the following (in thousands):
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
Weighted
Average
Amortization Life
(Years)
|
Purchase agreements |
|
$ |
76,117 |
|
$ |
(62,544 |
) |
$ |
13,573 |
|
5.7 |
Technology |
|
|
29,100 |
|
|
(28,794 |
) |
|
306 |
|
3.0 |
Customer lists |
|
|
6,607 |
|
|
(6,607 |
) |
|
|
|
2.8 |
Other |
|
|
8,928 |
|
|
(6,642 |
) |
|
2,286 |
|
4.9 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
120,752 |
|
$ |
(104,587 |
) |
$ |
16,165 |
|
|
|
|
|
|
|
|
|
|
|
D-42
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3GOODWILL AND INTANGIBLE ASSETS (Continued)
At December 31, 2007, intangible assets with definite lives relate to the following (in thousands):
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Amortization Life
(Years)
|
Purchase agreements |
|
$ |
76,117 |
|
$ |
(59,212 |
) |
$ |
16,905 |
|
5.7 |
Technology |
|
|
29,100 |
|
|
(28,663 |
) |
|
437 |
|
3.0 |
Customer lists |
|
|
6,607 |
|
|
(6,607 |
) |
|
|
|
2.8 |
Other |
|
|
8,928 |
|
|
(6,437 |
) |
|
2,491 |
|
4.9 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
120,752 |
|
$ |
(100,919 |
) |
$ |
19,833 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on December 31, 2007 balances, such amortization for the next
five years is estimated to be as follows (in thousands):
Years Ending December 31,
|
|
|
2008 |
|
$ |
10,883 |
2009 |
|
|
4,138 |
2010 |
|
|
2,768 |
2011 |
|
|
1,218 |
2012 |
|
|
826 |
|
|
|
|
|
$ |
19,833 |
|
|
|
The following table presents the balance of goodwill by segment, including changes in the carrying amount of goodwill, for the three months ended March 31, 2008 (in thousands):
|
|
Balance as of
January 1, 2008
|
|
Additions
|
|
(Deductions)
|
|
Balance as of
March 31, 2008
|
Lending |
|
$ |
70,766 |
|
$ |
|
|
$ |
(262 |
) |
$ |
70,504 |
Real Estate |
|
|
70,126 |
|
|
|
|
|
(11 |
) |
|
70,115 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
140,892 |
|
$ |
|
|
$ |
(273 |
) |
$ |
140,619 |
|
|
|
|
|
|
|
|
|
Deductions principally relate to the establishment of deferred tax assets related to acquired tax attributes and the income tax benefit realized pursuant to the exercise of stock options
assumed in a business acquisition that were vested at the transaction date and are treated as a reduction in goodwill when the income tax deductions are realized.
D-43
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
|
March 31, 2008
|
|
December 31, 2007
|
|
Computer equipment and capitalized software |
|
$ |
35,278 |
|
$ |
35,183 |
|
Leasehold improvements |
|
|
3,204 |
|
|
3,076 |
|
Furniture and other equipment |
|
|
3,923 |
|
|
3,737 |
|
Projects in progress |
|
|
4,728 |
|
|
5,002 |
|
|
|
|
|
|
|
|
|
|
47,133 |
|
|
46,998 |
|
Less: accumulated depreciation and amortization |
|
|
(26,551 |
) |
|
(25,532 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
20,582 |
|
$ |
21,466 |
|
|
|
|
|
|
|
NOTE 5SEGMENT INFORMATION
The overall concept that Tree.com employs in determining its operating segments and related financial information is to present them in a manner consistent with
how the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the
types of products or services offered or the target market.
Tree.com's primary metric is Operating Income Before Amortization, which is defined as operating income excluding, if applicable: (1) non-cash compensation expense,
(2) amortization of intangibles and goodwill impairment, (3) pro forma adjustments for significant acquisitions, and (4) one-time items. Tree.com believes this measure
is useful to investors because it represents the operating results from Tree.com's segments taking into account depreciation, which it believes is an ongoing cost of doing business, but excluding the
effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to Tree.com's statement of operations
of certain expenses, including non-cash compensation, and acquisition related accounting.
The following tables reconcile Operating Income Before Amortization to operating loss for Tree.com's operating segments and to net loss in total (in thousands):
|
|
For the Three Months Ended March 31, 2008:
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization of
Intangibles
|
|
Operating
Loss
|
|
Lending |
|
$ |
(1,298 |
) |
$ |
(391 |
) |
$ |
(2,560 |
) |
$ |
(4,249 |
) |
Real Estate |
|
|
(3,966 |
) |
|
(165 |
) |
|
(1,108 |
) |
|
(5,239 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(5,264 |
) |
$ |
(556 |
) |
$ |
(3,668 |
) |
|
(9,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(9,590 |
) |
Income tax provision |
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(9,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
D-44
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5SEGMENT INFORMATION (Continued)
|
|
For the Three Months Ended March 31, 2007:
|
|
|
|
Operating
Income Before
Amortization
|
|
Non-Cash
Compensation
Expense
|
|
Amortization of
Intangibles
|
|
Operating
Loss
|
|
Lending |
|
$ |
3,239 |
|
$ |
(742 |
) |
$ |
(2,890 |
) |
$ |
(393 |
) |
Real Estate |
|
|
(6,248 |
) |
|
(379 |
) |
|
(1,384 |
) |
|
(8,011 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(3,009 |
) |
$ |
(1,121 |
) |
$ |
(4,274 |
) |
|
(8,404 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(8,613 |
) |
Income tax benefit |
|
|
3,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense in the tables above is included in the following line items in the accompanying consolidated statements of operations for the three months ended
March 31, 2008 and 2007 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
Cost of revenue |
|
$ |
37 |
|
$ |
79 |
Selling and marketing expense |
|
|
41 |
|
|
85 |
General and administrative expense |
|
|
477 |
|
|
956 |
Product development |
|
|
1 |
|
|
1 |
|
|
|
|
|
Non-cash compensation expense |
|
$ |
556 |
|
$ |
1,121 |
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
Revenue: |
|
|
|
|
|
|
Gain on sales of loans held for sale |
|
$ |
23,573 |
|
$ |
48,617 |
Transmit fees |
|
|
19,858 |
|
|
23,749 |
Closed loan fees |
|
|
10,741 |
|
|
18,823 |
Other |
|
|
7,639 |
|
|
5,579 |
|
|
|
|
|
Lending |
|
|
61,811 |
|
|
96,768 |
|
|
|
|
|
Real Estate |
|
|
8,382 |
|
|
13,231 |
|
|
|
|
|
|
Total |
|
$ |
70,193 |
|
$ |
109,999 |
|
|
|
|
|
Tree.com maintains operations solely in the United States.
NOTE 6FAIR VALUE MEASUREMENTS
Effective January 1, 2008, Tree.com adopted SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). In accordance with SFAS No. 157,
Tree.com categorizes its assets and liabilities measured at
D-45
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6FAIR VALUE MEASUREMENTS (Continued)
fair value into a fair value hierarchy that prioritizes the assumptions used in pricing the asset or liability into the following three levels:
-
- Level 1:
Observable inputs such as quoted prices for identical assets and liabilities in active markets obtained from independent sources.
-
- Level 2:
Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active and inputs that are derived principally from or corroborated by observable market data.
-
- Level 3:
Unobservable inputs for which there is little or no market data and require Tree.com to develop its own assumptions, based on the best information available
in the circumstances, about the assumptions market participants would use in pricing the asset or liability.
The following table presents Tree.com's assets and liabilities that are measured at fair value on a recurring basis at March 31, 2008 (in thousands):
|
|
Recurring Fair Value Measurements Using
|
|
|
Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total Fair Value
Measurements
|
Loans held for sale |
|
$ |
|
|
$ |
87,532 |
|
$ |
|
|
$ |
87,532 |
Net derivatives related to loans held for sale and interest rate lock commitments |
|
|
|
|
|
(1,612 |
) |
|
5,264 |
|
|
3,652 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
85,920 |
|
$ |
5,264 |
|
$ |
91,184 |
|
|
|
|
|
|
|
|
|
The following table presents the changes in Tree.com's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
(in thousands):
|
|
Net Derivatives
Related to Loans Held
for Sale and Interest
Rate Lock
Commitments
|
|
Balance at January 1, 2008 |
|
$ |
3,465 |
|
Total net gains or losses (realized and unrealized): |
|
|
|
|
|
Included in earnings |
|
|
15,361 |
|
|
Included in other comprehensive income |
|
|
|
|
Transfers of IRLCs to closed loans |
|
|
(13,094 |
) |
Transfers in and/or out of Level 3 |
|
|
(468 |
) |
|
|
|
|
Balance at March 31, 2008 |
|
$ |
5,264 |
|
|
|
|
|
D-46
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6FAIR VALUE MEASUREMENTS (Continued)
The following table presents the gains and losses included in earnings for the three months ended March 31, 2008 relating to Tree.com's assets and liabilities that are measured at
fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
|
|
Net Derivatives
Related to Loans Held
for Sale and Interest
Rate Lock
Commitments
|
Total gains included in earnings for the three months ended March 31, 2008, which are included in revenue |
|
$ |
15,361 |
|
|
|
Change in unrealized gains relating to assets and liabilities still held at March 31, 2008, which are included in revenue |
|
$ |
5,264 |
|
|
|
Net derivatives related to loans held for sale and interest rate lock commitments
LendingTree Loans hedges the changes in fair value of certain loans held for sale primarily by entering into mortgage forward delivery contracts. Although
LendingTree Loans continues to enter into forward delivery contracts for risk management purposes, effective April 1, 2007 it no longer designates these derivatives as hedges for accounting
purposes. When hedge accounting was discontinued, the affected loans held for sale were no longer adjusted for changes in fair value. However, the changes in fair value of the forward delivery
contracts continued to be recognized in current earnings as a component of revenue. The fair value of the forward delivery contracts is recorded in "Prepaid and other current assets" and/or "Accrued
expenses and other current liabilities" in the accompanying consolidated balance sheets. For the three months ended March 31, 2008, Tree.com recognized losses of less than $0.1 million
related to the changes in fair value of forward delivery contracts related to loans held for sale.
LendingTree Loans enters into commitments with consumers to originate loans at a locked in interest rate (interest rate lock commitments"IRLCs"). Tree.com reports IRLCs as
derivative instruments at fair value in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). Accordingly, LendingTree Loans
determines the fair value of IRLCs using current secondary market prices for underlying loans with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability, or
fallout factor. The fair value of IRLCs is subject to change primarily due to changes in interest rates and fallout factors. Under LendingTree Loans' risk management policy, LendingTree Loans hedges
the changes in fair value of IRLCs primarily by entering into mortgage forward delivery contracts which can reduce the volatility of economic outcomes. Neither the IRLCs nor the related hedging
instrument qualify for hedge accounting and both are recorded at fair value with changes in fair value being recorded in current earnings as a component of revenue in the statement of operations.
Prior to the adoption of SFAS No. 157 the recognition of gains and losses at the inception of a derivative contract were prohibited unless the fair value of the contract was
evidenced by a quoted price in an active market. As no active market exists for IRLCs, such day one gains and losses were not recognized until the related loan was sold. Prior to January 1,
2008, guidance also prohibited including the value of servicing the loan in calculating the fair value of an IRLC. Such guidance was rescinded by Staff Accounting Bulletin No. 109, "Written
Loan Commitments Recorded at Fair Value Through
D-47
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6FAIR VALUE MEASUREMENTS (Continued)
Earnings" ("SAB 109"). Accordingly, with the adoption of SFAS No. 157 and SAB 109 on January 1, 2008, the day one gains and servicing value, adjusted by the loan funding
probability, are included in the value of IRLCs.
The net change in fair value of the IRLCs and related forward delivery contracts for the three months ended March 31, 2008 and 2007 resulted in gains of $14.8 million and
losses of $0.3 million, respectively, which have been recognized in the accompanying consolidated statements of operations. The significant change year over year is due principally to the
inclusion of day one gains and the value of servicing the loan in 2008 associated with the adoption of SFAS No. 157 and SAB 109. The IRLCs are recorded in "Prepaid and other current
assets" and/or "Accrued expenses and other current liabilities" in the accompanying consolidated balance sheets. At March 31, 2008, there was $254.1 million of IRLCs notional value
outstanding.
Effective January 1, 2008 Tree.com adopted SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement
No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure certain financial instruments at fair value with the objective of reducing both the complexity in the
accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Upon adoption, Tree.com elected to account for loans held for sale
issued after January 1, 2008 at fair value. Electing the fair value option allows a better offset of the changes in fair values of the loans and the forward delivery contracts used to
economically hedge them without the burden of complying with the requirements for hedge accounting under SFAS No. 133.
Tree.com did not elect the fair value option on loans held for sale of $3.7 million originated prior to January 1, 2008. These loans are carried at the lower of cost or
market value determined on an aggregate basis except for loans that are impaired, which are assessed on an individual basis. The fair value of impaired loans at March 31, 2008, measured based
on significant unobservable inputs (Level 3) was $2.9 million. The fair value of impaired loans is measured on a non-recurring basis and is based on management's best
estimate of the market value of such loans and considers reprice bids received from the investors prior to repurchase, if applicable, or current bids in the secondary market for similar loans and
represent management's best estimate of the market value of such loans.
During the three months ended March 31, 2008, the change in fair value of loans held for sale for which the fair value option has been elected was a loss of $0.1 million
and is included as a component of revenue in the accompanying consolidated statement of operations.
The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale at March 31, 2008 for which the fair
value option has been elected (in thousands):
|
|
Aggregate
Fair Value
|
|
Aggregate Unpaid
Principal Balance
|
|
Difference
|
Loans held for sale |
|
$ |
87,532 |
|
$ |
84,952 |
|
$ |
2,580 |
For the quarter ended March 31, 2008 and 2007, LendingTree Loans sold approximately 3,100 and 12,700 loans, respectively, with initial loan values of $606.4 million and
$1.9 billion, respectively. From loans sold in those periods, LendingTree Loans has not experienced any repurchase and indemnification losses.
D-48
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7INCOME TAXES
Tree.com calculates its interim income tax provision in accordance with Accounting Principles Board Opinion No. 28 and FASB Interpretation No. 18.
At the end of each interim period, Tree.com makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date earnings or
loss. The tax or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized
in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates, tax status, or judgment on the realizability of a
beginning-of-the-year deferred tax asset in future years is recognized in the interim period in which the change occurs.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income
for the year, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income
taxes may change as new events occur, more experience is acquired, additional information is obtained or Tree.com's tax environment changes. To the extent that the estimated annual effective tax rate
changes during a quarter, the effect of the change on prior quarters is included in tax expense for the current quarter.
For the three months ended March 31, 2008, Tree.com recorded a tax provision of $0.2 million despite a loss from operations, due principally to an increase in valuation
allowance on deferred tax assets. For the three months ended March 31, 2007, Tree.com recorded a tax benefit of $3.5 million on a pre-tax loss of $8.6 million, which
represents an effective tax rate of 41%. This tax benefit is higher than the federal statutory rate of 35% due principally to state taxes.
As of December 31, 2007 and March 31, 2008, Tree.com had unrecognized tax benefits of approximately $4.4 million. Included in unrecognized tax benefits at
March 31, 2008 is approximately $3.6 million for tax positions included in IAC's consolidated tax return filings that will remain a liability of IAC after the spin-off.
Tree.com recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There were no material accruals for interest for the quarter ended
March 31, 2008. At March 31, 2008, Tree.com has accrued $1.5 million for the payment of interest. There are no material accruals for penalties.
By virtue of previously filed separate company and consolidated tax returns with IAC, Tree.com is routinely under audit by federal, state, local and foreign authorities in the area of
income tax. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered
sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between
the reserves for tax contingencies and the amounts owed by Tree.com are recorded in the period they become known.
The Internal Revenue Service is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2003, which includes the operations of Tree.com
from August 8, 2003, the date which Tree.com joined the IAC consolidated tax return. The statute of limitations for these years has been extended to December 31, 2008. Various IAC
consolidated tax returns filed with state, local and foreign jurisdictions are currently under examination, the most significant of which are California, Florida, New York state and New York City, for
various tax years after December 31, 2001. These examinations are expected to be completed by late 2008.
D-49
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7INCOME TAXES (Continued)
Tree.com believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $2.7 million within twelve months of the current reporting date
due to the reversal of deductible temporary differences which will result in a corresponding increase in net deferred tax liabilities. An estimate of other changes in unrecognized tax benefits cannot
be made, but are not expected to be significant.
NOTE 8CONTINGENCIES
On November 24, 2003, IMX, Inc. ("IMX") filed suit against Tree.com alleging infringement of a patent held by IMX and seeking damages related to the
alleged infringement. A trial was conducted in January 2006 and a verdict was returned finding infringement by Tree.com and awarding IMX $5.8 million in damages. Tree.com established a reserve
of $5.8 million in its 2005 financial statements related to this claim. In January 2007, the court enhanced the damages award and rejected Tree.com's counterclaim. During 2006, Tree.com
increased the reserve by $6.3 million to $12.1 million at December 31, 2006. During 2007, the court awarded IMX supplemental damages and pre-judgment and
post-judgment interest. During 2007, Tree.com increased the reserve by $0.8 million to $12.8 million at December 31, 2007. During 2008, Tree.com increased the reserve
by $0.1 million to $12.9 million at March 31, 2008. Tree.com has appealed this judgment to the U.S. Court of Appeals for the Federal Circuit. Tree.com intends to continue to
contest this case through all available means. In connection with the appeal, Tree.com's parent, IAC, executed a guarantee of $13.5 million in lieu of posting a bond. Before IAC completes the
spin-off, Tree.com will be required to post a bond in a like amount.
HLC is party to various employment related lawsuits. During 2006, Tree.com established a reserve of $0.4 million for certain of these actions. During 2007, an additional reserve
of $2.1 million was recorded. The balance of the related liability was $2.5 million at March 31, 2008 and December 31, 2007, respectively.
In the ordinary course of business, Tree.com is a party to various lawsuits. Tree.com establishes reserves for specific legal matters when it determines that the likelihood of an
unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not probable and,
therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against Tree.com, including claims where an unfavorable outcome is reasonably
possible, will not have a material impact on the liquidity, results of operations, or financial condition of Tree.com, these matters are subject to inherent uncertainties and management's view of
these matters may change in the future. It is possible that an
unfavorable outcome of one or more of these lawsuits could have a material impact on the liquidity, results of operations, or financial condition of Tree.com. Tree.com also evaluates other contingent
matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 7 for discussion related to income tax contingencies.
NOTE 9RELATED PARTY TRANSACTIONS
Tree.com's expenses include allocations from IAC of costs associated with IAC's accounting, treasury, legal, tax, corporate support, human resources and internal
audit functions. These expenses were allocated based on the ratio of Tree.com's revenue as a percentage of IAC's total revenue. Allocated costs were $0.2 million and $0.3 million for the
three months ended March 31, 2008 and 2007, respectively, and are included in "General and administrative expense" in the accompanying
D-50
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9RELATED PARTY TRANSACTIONS (Continued)
consolidated statements of operations. It is not practicable to determine the amounts of these expenses that would have been incurred had Tree.com operated as an unaffiliated entity. In the opinion of
management, the allocation method is reasonable.
An analysis of Tree.com's payables to IAC and subsidiaries is as follows (in thousands):
|
|
March 31, 2008
|
|
Payables to IAC and subsidiaries at December 31, 2007 |
|
$ |
(20,067 |
) |
Cash transfers related from IAC's centrally managed U.S. treasury function |
|
|
(17,402 |
) |
Interest expense |
|
|
(32 |
) |
Employee equity instruments and associated tax withholdings |
|
|
330 |
|
Taxes (excludes tax withholdings associated with employee equity instruments) |
|
|
73 |
|
Allocation of non-cash compensation expense |
|
|
(471 |
) |
Administrative expenses and other |
|
|
(4,668 |
) |
|
|
|
|
Payables to IAC and subsidiaries at March 31, 2008 |
|
$ |
(42,237 |
) |
|
|
|
|
Relationship Between IAC and Tree.com after the Spin-Off
For purposes of governing certain of the ongoing relationships between Tree.com and IAC at and after the spin-off, and to provide for an orderly
transition, Tree.com and IAC are expected to enter into a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement (the "Spin-Off
Agreements"), among other agreements. See Tree.com's consolidated financial statements for the year ended December 31, 2007 for descriptions of the Spin-Off Agreements.
D-51
QuickLinks
TABLE OF CONTENTS
SPINCO COMPANY INFORMATION
FORWARD-LOOKING STATEMENTS
SUMMARY
QUESTIONS AND ANSWERS ABOUT THE SPINCOS AND THE SPIN-OFFS
RISK FACTORS
THE SEPARATION
TREATMENT OF OUTSTANDING IAC COMPENSATORY EQUITY-BASED AWARDS
DIVIDEND POLICY
TRANSFERS TO IAC AND FINANCING
CERTAIN INFORMATION WITH RESPECT TO HSNi
BUSINESS OF HSNi
RISK FACTORS RELATING TO THE BUSINESS OF HSNi FOLLOWING THE SPIN-OFFS
CAPITALIZATION
SELECTED HISTORICAL FINANCIAL DATA
HSN, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
HSN, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET MARCH 31, 2008
HSN, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS MARCH 31, 2008
HSN, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2007
HSN, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HSNi
MANAGEMENT'S OVERVIEW
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
HSNi'S PRINCIPLES OF FINANCIAL REPORTING
RECONCILIATION OF OPERATING INCOME BEFORE AMORTIZATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HSNi Security Ownership of Certain Beneficial Owners and Management
CERTAIN INFORMATION WITH RESPECT TO ILG
BUSINESS OF ILG
RISK FACTORS RELATING TO THE BUSINESS OF ILG FOLLOWING THE SPIN-OFFS
CAPITALIZATION
SELECTED HISTORICAL FINANCIAL DATA
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET MARCH 31, 2008
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS MARCH 31, 2008
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2007
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ILG
MANAGEMENT OVERVIEW
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
ILG'S PRINCIPLES OF FINANCIAL REPORTING
RECONCILIATION OF OPERATING INCOME BEFORE AMORTIZATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ILG Security Ownership of Certain Beneficial Owners and Management
CERTAIN INFORMATION WITH RESPECT TO TICKETMASTER
BUSINESS OF TICKETMASTER
CAPITALIZATION
SELECTED HISTORICAL FINANCIAL DATA
TICKETMASTER AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
TICKETMASTER AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET MARCH 31, 2008
TICKETMASTER AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2008
TICKETMASTER AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2007
TICKETMASTER AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TICKETMASTER
MANAGEMENT OVERVIEW
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
TICKETMASTER'S PRINCIPLES OF FINANCIAL REPORTING
RECONCILIATION OF OPERATING INCOME BEFORE AMORTIZATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management of Ticketmaster
TICKETMASTER SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN INFORMATION WITH RESPECT TO TREE.COM
BUSINESS OF TREE.COM
RISK FACTORS RELATING TO THE BUSINESS OF TREE.COM FOLLOWING THE SPIN-OFFS
CAPITALIZATION
SELECTED HISTORICAL FINANCIAL DATA
TREE.COM, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TREE.COM, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET MARCH 31, 2008
TREE.COM, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2008
TREE.COM, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2007
TREE.COM, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TREE.COM
MANAGEMENT OVERVIEW
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
TREE.COM'S PRINCIPLES OF FINANCIAL REPORTING
RECONCILIATION OF OPERATING INCOME BEFORE AMORTIZATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Tree.com Security Ownership of Certain Beneficial Owners and Management
DESCRIPTION OF CAPITAL STOCK OF THE SPINCOS
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
SPINCO STOCK AND ANNUAL INCENTIVE PLANS
WHERE YOU CAN FIND MORE INFORMATION
HSN, INC. AND SUBSIDIARIES COMBINED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
HSN, INC. AND SUBSIDIARIES COMBINED STATEMENTS OF OPERATIONS
HSN, INC. AND SUBSIDIARIES COMBINED BALANCE SHEETS
HSN, INC. AND SUBSIDIARIES COMBINED STATEMENTS OF INVESTED EQUITY
HSN, INC. AND SUBSIDIARIES COMBINED STATEMENTS OF CASH FLOWS
HSN, INC. AND SUBSIDIARIES NOTES TO COMBINED FINANCIAL STATEMENTS
HSN, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
HSN, INC. AND SUBSIDIARIES COMBINED STATEMENTS OF OPERATIONS (Unaudited)
HSN, INC. AND SUBSIDIARIES COMBINED BALANCE SHEETS
HSN, INC. AND SUBSIDIARIES COMBINED STATEMENTS OF INVESTED EQUITY (Unaudited)
HSN, INC. AND SUBSIDIARIES COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
HSN, INC. AND SUBSIDIARIES NOTES TO COMBINED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TICKETMASTER AND SUBSIDIARIES COMBINED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
TICKETMASTER AND SUBSIDIARIES COMBINED STATEMENTS OF OPERATIONS
TICKETMASTER AND SUBSIDIARIES COMBINED BALANCE SHEETS
TICKETMASTER AND SUBSIDIARIES COMBINED STATEMENTS OF INVESTED EQUITY
TICKETMASTER AND SUBSIDIARIES COMBINED STATEMENTS OF CASH FLOWS
TICKETMASTER AND SUBSIDIARIES NOTES TO COMBINED FINANCIAL STATEMENTS
TICKETMASTER AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
TICKETMASTER AND SUBSIDIARIES COMBINED STATEMENTS OF OPERATIONS (Unaudited)
TICKETMASTER AND SUBSIDIARIES COMBINED BALANCE SHEETS
TICKETMASTER AND SUBSIDIARIES COMBINED STATEMENTS OF INVESTED EQUITY (Unaudited)
TICKETMASTER AND SUBSIDIARIES COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
TICKETMASTER AND SUBSIDIARIES NOTES TO COMBINED FINANCIAL STATEMENTS
TREE.COM, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
TREE.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
TREE.COM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
TREE.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TREE.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
TREE.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TREE.COM AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
TREE.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
TREE.COM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
TREE.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
TREE.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
TREE.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EX-99.2
16
a2186551zex-99_2.htm
EXHIBIT 99.2
QuickLinks
-- Click here to rapidly navigate through this document
Exhibit 99.2
HSN, Inc. and Subsidiaries
Combined Statements of Operations
Year Ended December 31, 2007
(In thousands)
|
|
Quarter Ended
March 31
|
|
Quarter Ended
June 30
|
|
Quarter Ended
September 30
|
|
Quarter Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
Revenue |
|
$ |
666,705 |
|
$ |
681,506 |
|
$ |
680,763 |
|
$ |
879,268 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
418,706 |
|
|
421,474 |
|
|
424,468 |
|
|
555,400 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
247,999 |
|
|
260,032 |
|
|
256,295 |
|
|
323,868 |
|
Selling and marketing expense |
|
|
136,453 |
|
|
153,556 |
|
|
139,066 |
|
|
166,836 |
|
General and administrative expense |
|
|
53,966 |
|
|
51,074 |
|
|
52,222 |
|
|
54,693 |
|
Production and programming expense |
|
|
14,880 |
|
|
13,867 |
|
|
13,630 |
|
|
16,674 |
|
Amortization of non-cash marketing |
|
|
|
|
|
450 |
|
|
3,992 |
|
|
|
|
Amortization of intangibles |
|
|
4,085 |
|
|
2,701 |
|
|
2,197 |
|
|
3,698 |
|
Depreciation |
|
|
8,468 |
|
|
8,621 |
|
|
8,760 |
|
|
8,514 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
30,147 |
|
|
29,763 |
|
|
36,428 |
|
|
73,453 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
69 |
|
|
120 |
|
|
36 |
|
|
27 |
|
|
Other expense |
|
|
(108 |
) |
|
(148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income, net |
|
|
(39 |
) |
|
(28 |
) |
|
36 |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
30,108 |
|
|
29,735 |
|
|
36,464 |
|
|
73,480 |
|
Income tax provision |
|
|
(11,456 |
) |
|
(11,315 |
) |
|
(13,874 |
) |
|
(27,909 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
18,652 |
|
|
18,420 |
|
|
22,590 |
|
|
45,571 |
|
Gain (loss) on sale of discontinued operations, net of tax |
|
|
|
|
|
34,795 |
|
|
(4,223 |
) |
|
|
|
(Loss) income from discontinued operations, net of tax |
|
|
(1,566 |
) |
|
21,391 |
|
|
(1,711 |
) |
|
10,885 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,086 |
|
$ |
74,606 |
|
$ |
16,656 |
|
$ |
56,456 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the combined statements of operations: |
|
|
Cost of sales |
|
$ |
231 |
|
$ |
249 |
|
$ |
190 |
|
$ |
267 |
|
|
Selling and marketing expense |
|
|
253 |
|
|
272 |
|
|
209 |
|
|
291 |
|
|
General and administrative expense |
|
|
2,549 |
|
|
2,698 |
|
|
2,073 |
|
|
2,869 |
|
|
Production and programming expense |
|
|
2 |
|
|
2 |
|
|
3 |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
3,035 |
|
$ |
3,221 |
|
$ |
2,475 |
|
$ |
3,429 |
|
|
|
|
|
|
|
|
|
|
|
1
HSN, Inc. and Subsidiaries
Combined Statements of Operations (Continued)
Year Ended December 31, 2007
(In thousands)
|
|
Quarter Ended
March 31
|
|
Six Months
Ended
June 30
|
|
Nine Months
Ended
September 30
|
|
Year Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(audited)
|
|
Revenue |
|
$ |
666,705 |
|
$ |
1,348,211 |
|
$ |
2,028,974 |
|
$ |
2,908,242 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
418,706 |
|
|
840,180 |
|
|
1,264,648 |
|
|
1,820,048 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
247,999 |
|
|
508,031 |
|
|
764,326 |
|
|
1,088,194 |
|
Selling and marketing expense |
|
|
136,453 |
|
|
290,009 |
|
|
429,075 |
|
|
595,911 |
|
General and administrative expense |
|
|
53,966 |
|
|
105,040 |
|
|
157,262 |
|
|
211,955 |
|
Production and programming expense |
|
|
14,880 |
|
|
28,747 |
|
|
42,377 |
|
|
59,051 |
|
Amortization of non-cash marketing |
|
|
|
|
|
450 |
|
|
4,442 |
|
|
4,442 |
|
Amortization of intangibles |
|
|
4,085 |
|
|
6,786 |
|
|
8,983 |
|
|
12,681 |
|
Depreciation |
|
|
8,468 |
|
|
17,089 |
|
|
25,849 |
|
|
34,363 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
30,147 |
|
|
59,910 |
|
|
96,338 |
|
|
169,791 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
69 |
|
|
189 |
|
|
225 |
|
|
252 |
|
|
Other expense |
|
|
(108 |
) |
|
(256 |
) |
|
(256 |
) |
|
(256 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(39 |
) |
|
(67 |
) |
|
(31 |
) |
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
30,108 |
|
|
59,843 |
|
|
96,307 |
|
|
169,787 |
|
Income tax provision |
|
|
(11,456 |
) |
|
(22,771 |
) |
|
(36,645 |
) |
|
(64,554 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
18,652 |
|
|
37,072 |
|
|
59,662 |
|
|
105,233 |
|
Gain on sale of discontinued operations, net of tax |
|
|
|
|
|
34,795 |
|
|
30,572 |
|
|
30,572 |
|
(Loss) income from discontinued operations, net of tax |
|
|
(1,566 |
) |
|
19,825 |
|
|
18,114 |
|
|
28,999 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,086 |
|
$ |
91,692 |
|
$ |
108,348 |
|
$ |
164,804 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the combined statements of operations: |
|
|
Cost of sales |
|
$ |
231 |
|
$ |
480 |
|
$ |
670 |
|
$ |
937 |
|
|
Selling and marketing expense |
|
|
253 |
|
|
525 |
|
|
734 |
|
|
1,025 |
|
|
General and administrative expense |
|
|
2,549 |
|
|
5,247 |
|
|
7,320 |
|
|
10,189 |
|
|
Production and programming expense |
|
|
2 |
|
|
4 |
|
|
7 |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
3,035 |
|
$ |
6,256 |
|
$ |
8,731 |
|
$ |
12,160 |
|
|
|
|
|
|
|
|
|
|
|
2
HSN, Inc. and Subsidiaries
Combined Statements of Operations
Year Ended December 31, 2006
(In thousands)
|
|
Quarter Ended
March 31
|
|
Quarter Ended
June 30
|
|
Quarter Ended
September 30
|
|
Quarter Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
Revenue |
|
$ |
665,587 |
|
$ |
682,349 |
|
$ |
671,753 |
|
$ |
858,265 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
410,741 |
|
|
410,870 |
|
|
413,563 |
|
|
530,029 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
254,846 |
|
|
271,479 |
|
|
258,190 |
|
|
328,236 |
|
Selling and marketing expense |
|
|
131,771 |
|
|
148,890 |
|
|
135,761 |
|
|
168,575 |
|
General and administrative expense |
|
|
44,222 |
|
|
45,192 |
|
|
45,936 |
|
|
50,911 |
|
Production and programming expense |
|
|
14,547 |
|
|
13,971 |
|
|
13,783 |
|
|
14,499 |
|
Amortization of intangibles |
|
|
15,355 |
|
|
8,557 |
|
|
5,156 |
|
|
5,156 |
|
Depreciation |
|
|
10,281 |
|
|
9,816 |
|
|
8,830 |
|
|
8,346 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
38,670 |
|
|
45,053 |
|
|
48,724 |
|
|
80,749 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
148 |
|
|
148 |
|
|
104 |
|
|
186 |
|
|
Other expense |
|
|
(163 |
) |
|
(310 |
) |
|
(253 |
) |
|
(314 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(15 |
) |
|
(162 |
) |
|
(149 |
) |
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
38,655 |
|
|
44,891 |
|
|
48,575 |
|
|
80,621 |
|
Income tax provision |
|
|
(14,392 |
) |
|
(16,715 |
) |
|
(18,086 |
) |
|
(30,017 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
24,263 |
|
|
28,176 |
|
|
30,489 |
|
|
50,604 |
|
Income (loss) from discontinued operations, net of tax |
|
|
469 |
|
|
(7,934 |
) |
|
(3,963 |
) |
|
713 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,732 |
|
$ |
20,242 |
|
$ |
26,526 |
|
$ |
51,317 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the combined statements of operations: |
|
|
Cost of sales |
|
$ |
109 |
|
$ |
302 |
|
$ |
107 |
|
$ |
237 |
|
|
Selling and marketing expense |
|
|
410 |
|
|
330 |
|
|
117 |
|
|
260 |
|
|
General and administrative expense |
|
|
2,692 |
|
|
3,311 |
|
|
1,252 |
|
|
2,612 |
|
|
Production and programming expense |
|
|
|
|
|
3 |
|
|
1 |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
3,211 |
|
$ |
3,946 |
|
$ |
1,477 |
|
$ |
3,112 |
|
|
|
|
|
|
|
|
|
|
|
3
HSN, Inc. and Subsidiaries
Combined Statements of Operations (Continued)
Year Ended December 31, 2006
(In thousands)
|
|
Quarter Ended
March 31
|
|
Six Months Ended
June 30
|
|
Nine Months Ended
September 30
|
|
Year Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(audited)
|
|
Revenue |
|
$ |
665,587 |
|
$ |
1,347,936 |
|
$ |
2,019,689 |
|
$ |
2,877,954 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
410,741 |
|
|
821,611 |
|
|
1,235,174 |
|
|
1,765,203 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
254,846 |
|
|
526,325 |
|
|
784,515 |
|
|
1,112,751 |
|
Selling and marketing expense |
|
|
131,771 |
|
|
280,661 |
|
|
416,422 |
|
|
584,997 |
|
General and administrative expense |
|
|
44,222 |
|
|
89,414 |
|
|
135,350 |
|
|
186,261 |
|
Production and programming expense |
|
|
14,547 |
|
|
28,518 |
|
|
42,301 |
|
|
56,800 |
|
Amortization of intangibles |
|
|
15,355 |
|
|
23,912 |
|
|
29,068 |
|
|
34,224 |
|
Depreciation |
|
|
10,281 |
|
|
20,097 |
|
|
28,927 |
|
|
37,273 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
38,670 |
|
|
83,723 |
|
|
132,447 |
|
|
213,196 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
148 |
|
|
296 |
|
|
400 |
|
|
586 |
|
|
Other expense |
|
|
(163 |
) |
|
(473 |
) |
|
(726 |
) |
|
(1,040 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(15 |
) |
|
(177 |
) |
|
(326 |
) |
|
(454 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
38,655 |
|
|
83,546 |
|
|
132,121 |
|
|
212,742 |
|
Income tax provision |
|
|
(14,392 |
) |
|
(31,107 |
) |
|
(49,193 |
) |
|
(79,210 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
24,263 |
|
|
52,439 |
|
|
82,928 |
|
|
133,532 |
|
Income (loss) from discontinued operations, net of tax |
|
|
469 |
|
|
(7,465 |
) |
|
(11,428 |
) |
|
(10,715 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,732 |
|
$ |
44,974 |
|
$ |
71,500 |
|
$ |
122,817 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the combined statements of operations: |
|
|
Cost of sales |
|
$ |
109 |
|
$ |
411 |
|
$ |
518 |
|
$ |
755 |
|
|
Selling and marketing expense |
|
|
410 |
|
|
740 |
|
|
857 |
|
|
1,117 |
|
|
General and administrative expense |
|
|
2,692 |
|
|
6,003 |
|
|
7,255 |
|
|
9,867 |
|
|
Production and programming expense |
|
|
|
|
|
3 |
|
|
4 |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
3,211 |
|
$ |
7,157 |
|
$ |
8,634 |
|
$ |
11,746 |
|
|
|
|
|
|
|
|
|
|
|
4
Interval Leisure Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31, 2007
(In thousands)
|
|
Quarter Ended
March 31
|
|
Quarter Ended
June 30
|
|
Quarter Ended
September 30
|
|
Quarter Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
Revenue |
|
$ |
86,433 |
|
$ |
85,885 |
|
$ |
96,019 |
|
$ |
92,070 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
18,944 |
|
|
22,508 |
|
|
30,266 |
|
|
29,081 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
67,489 |
|
|
63,377 |
|
|
65,753 |
|
|
62,989 |
|
Selling and marketing expense |
|
|
11,662 |
|
|
11,413 |
|
|
11,580 |
|
|
11,180 |
|
General and administrative expense |
|
|
15,805 |
|
|
17,260 |
|
|
19,021 |
|
|
19,827 |
|
Amortization of intangibles |
|
|
6,305 |
|
|
6,305 |
|
|
7,851 |
|
|
6,418 |
|
Depreciation |
|
|
1,888 |
|
|
1,965 |
|
|
2,247 |
|
|
2,315 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
31,829 |
|
|
26,434 |
|
|
25,054 |
|
|
23,249 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2,641 |
|
|
2,637 |
|
|
2,416 |
|
|
2,651 |
|
|
Interest expense |
|
|
(46 |
) |
|
(70 |
) |
|
(49 |
) |
|
(40 |
) |
|
Other (expense) income |
|
|
(113 |
) |
|
(736 |
) |
|
233 |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
2,482 |
|
|
1,831 |
|
|
2,600 |
|
|
2,621 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
34,311 |
|
|
28,265 |
|
|
27,654 |
|
|
25,870 |
|
Income tax provision |
|
|
(13,162 |
) |
|
(10,843 |
) |
|
(11,103 |
) |
|
(9,924 |
) |
Minority interest in income of consolidated subsidiaries |
|
|
|
|
|
(3 |
) |
|
(5 |
) |
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,149 |
|
$ |
17,419 |
|
$ |
16,546 |
|
$ |
15,942 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the consolidated statements of operations: |
|
|
Cost of sales |
|
$ |
29 |
|
$ |
78 |
|
$ |
67 |
|
$ |
108 |
|
|
Selling and marketing expense |
|
|
32 |
|
|
85 |
|
|
74 |
|
|
117 |
|
|
General and administrative expense |
|
|
304 |
|
|
829 |
|
|
744 |
|
|
1,162 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
365 |
|
$ |
992 |
|
$ |
885 |
|
$ |
1,387 |
|
|
|
|
|
|
|
|
|
|
|
5
Interval Leisure Group, Inc. and Subsidiaries
Consolidated Statements of Operations (Continued)
Year Ended December 31, 2007
(In thousands)
|
|
Quarter Ended
March 31
|
|
Six Months
Ended
June 30
|
|
Nine Months
Ended
September 30
|
|
Year Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(audited)
|
|
Revenue |
|
$ |
86,433 |
|
$ |
172,318 |
|
$ |
268,337 |
|
$ |
360,407 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
18,944 |
|
|
41,452 |
|
|
71,718 |
|
|
100,799 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
67,489 |
|
|
130,866 |
|
|
196,619 |
|
|
259,608 |
|
Selling and marketing expense |
|
|
11,662 |
|
|
23,075 |
|
|
34,655 |
|
|
45,835 |
|
General and administrative expense |
|
|
15,805 |
|
|
33,065 |
|
|
52,086 |
|
|
71,913 |
|
Amortization of intangibles |
|
|
6,305 |
|
|
12,610 |
|
|
20,461 |
|
|
26,879 |
|
Depreciation |
|
|
1,888 |
|
|
3,853 |
|
|
6,100 |
|
|
8,415 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
31,829 |
|
|
58,263 |
|
|
83,317 |
|
|
106,566 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2,641 |
|
|
5,278 |
|
|
7,694 |
|
|
10,345 |
|
|
Interest expense |
|
|
(46 |
) |
|
(116 |
) |
|
(165 |
) |
|
(205 |
) |
|
Other expense |
|
|
(113 |
) |
|
(849 |
) |
|
(616 |
) |
|
(606 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
2,482 |
|
|
4,313 |
|
|
6,913 |
|
|
9,534 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
34,311 |
|
|
62,576 |
|
|
90,230 |
|
|
116,100 |
|
Income tax provision |
|
|
(13,162 |
) |
|
(24,005 |
) |
|
(35,108 |
) |
|
(45,032 |
) |
Minority interest in income of consolidated subsidiaries |
|
|
|
|
|
(3 |
) |
|
(8 |
) |
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,149 |
|
$ |
38,568 |
|
$ |
55,114 |
|
$ |
71,056 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the consolidated statements of operations: |
|
|
Cost of sales |
|
$ |
29 |
|
$ |
107 |
|
$ |
174 |
|
$ |
282 |
|
|
Selling and marketing expense |
|
|
32 |
|
|
117 |
|
|
191 |
|
|
308 |
|
|
General and administrative expense |
|
|
304 |
|
|
1,133 |
|
|
1,877 |
|
|
3,039 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
365 |
|
$ |
1,357 |
|
$ |
2,242 |
|
$ |
3,629 |
|
|
|
|
|
|
|
|
|
|
|
6
Interval Leisure Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31, 2006
(In thousands)
|
|
Quarter Ended
March 31
|
|
Quarter Ended
June 30
|
|
Quarter Ended
September 30
|
|
Quarter Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
Revenue |
|
$ |
78,676 |
|
$ |
71,377 |
|
$ |
70,359 |
|
$ |
68,234 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
17,457 |
|
|
17,096 |
|
|
16,349 |
|
|
15,391 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
61,219 |
|
|
54,281 |
|
|
54,010 |
|
|
52,843 |
|
Selling and marketing expense |
|
|
11,191 |
|
|
10,539 |
|
|
10,313 |
|
|
9,592 |
|
General and administrative expense |
|
|
15,500 |
|
|
16,331 |
|
|
15,553 |
|
|
14,154 |
|
Amortization of intangibles |
|
|
6,305 |
|
|
6,305 |
|
|
6,305 |
|
|
6,305 |
|
Depreciation |
|
|
2,044 |
|
|
1,933 |
|
|
1,926 |
|
|
1,929 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
26,179 |
|
|
19,173 |
|
|
19,913 |
|
|
20,863 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,790 |
|
|
2,235 |
|
|
2,361 |
|
|
2,528 |
|
|
Interest expense |
|
|
(102 |
) |
|
(120 |
) |
|
(75 |
) |
|
(60 |
) |
|
Other (expense) income |
|
|
(134 |
) |
|
674 |
|
|
(831 |
) |
|
(483 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
1,554 |
|
|
2,789 |
|
|
1,455 |
|
|
1,985 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
27,733 |
|
|
21,962 |
|
|
21,368 |
|
|
22,848 |
|
Income tax provision |
|
|
(10,492 |
) |
|
(8,706 |
) |
|
(8,075 |
) |
|
(8,595 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,241 |
|
$ |
13,256 |
|
$ |
13,293 |
|
$ |
14,253 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the consolidated statements of operations: |
|
|
Cost of sales |
|
$ |
80 |
|
$ |
57 |
|
$ |
38 |
|
$ |
50 |
|
|
Selling and marketing expense |
|
|
52 |
|
|
62 |
|
|
41 |
|
|
55 |
|
|
General and administrative expense |
|
|
1,327 |
|
|
601 |
|
|
396 |
|
|
527 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
1,459 |
|
$ |
720 |
|
$ |
475 |
|
$ |
632 |
|
|
|
|
|
|
|
|
|
|
|
7
Interval Leisure Group, Inc. and Subsidiaries
Consolidated Statements of Operations (Continued)
Year Ended December 31, 2006
(In thousands)
|
|
Quarter Ended
March 31
|
|
Six Months
Ended
June 30
|
|
Nine Months
Ended
September 30
|
|
Year Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(audited)
|
|
Revenue |
|
$ |
78,676 |
|
$ |
150,053 |
|
$ |
220,412 |
|
$ |
288,646 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
17,457 |
|
|
34,553 |
|
|
50,902 |
|
|
66,293 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
61,219 |
|
|
115,500 |
|
|
169,510 |
|
|
222,353 |
|
Selling and marketing expense |
|
|
11,191 |
|
|
21,730 |
|
|
32,043 |
|
|
41,635 |
|
General and administrative expense |
|
|
15,500 |
|
|
31,831 |
|
|
47,384 |
|
|
61,538 |
|
Amortization of intangibles |
|
|
6,305 |
|
|
12,610 |
|
|
18,915 |
|
|
25,220 |
|
Depreciation |
|
|
2,044 |
|
|
3,977 |
|
|
5,903 |
|
|
7,832 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
26,179 |
|
|
45,352 |
|
|
65,265 |
|
|
86,128 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,790 |
|
|
4,025 |
|
|
6,386 |
|
|
8,914 |
|
|
Interest expense |
|
|
(102 |
) |
|
(222 |
) |
|
(297 |
) |
|
(357 |
) |
|
Other (expense) income |
|
|
(134 |
) |
|
540 |
|
|
(291 |
) |
|
(774 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
1,554 |
|
|
4,343 |
|
|
5,798 |
|
|
7,783 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
27,733 |
|
|
49,695 |
|
|
71,063 |
|
|
93,911 |
|
Income tax provision |
|
|
(10,492 |
) |
|
(19,198 |
) |
|
(27,273 |
) |
|
(35,868 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,241 |
|
$ |
30,497 |
|
$ |
43,790 |
|
$ |
58,043 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the consolidated statements of operations: |
|
|
Cost of sales |
|
$ |
80 |
|
$ |
137 |
|
$ |
175 |
|
$ |
225 |
|
|
Selling and marketing expense |
|
|
52 |
|
|
114 |
|
|
155 |
|
|
210 |
|
|
General and administrative expense |
|
|
1,327 |
|
|
1,928 |
|
|
2,324 |
|
|
2,851 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
1,459 |
|
$ |
2,179 |
|
$ |
2,654 |
|
$ |
3,286 |
|
|
|
|
|
|
|
|
|
|
|
8
Ticketmaster and Subsidiaries
Combined Statements of Operations
Year Ended December 31, 2007
(In thousands)
|
|
Quarter Ended
March 31
|
|
Quarter Ended
June 30
|
|
Quarter Ended
September 30
|
|
Quarter Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
Revenue |
|
$ |
303,577 |
|
$ |
293,416 |
|
$ |
292,466 |
|
$ |
351,018 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
184,784 |
|
|
183,860 |
|
|
181,186 |
|
|
216,708 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
118,793 |
|
|
109,556 |
|
|
111,280 |
|
|
134,310 |
|
Selling and marketing expense |
|
|
7,073 |
|
|
8,158 |
|
|
8,560 |
|
|
19,696 |
|
General and administrative expense |
|
|
34,258 |
|
|
39,892 |
|
|
39,108 |
|
|
36,220 |
|
Amortization of intangibles |
|
|
6,853 |
|
|
6,667 |
|
|
6,081 |
|
|
6,599 |
|
Depreciation |
|
|
9,121 |
|
|
9,471 |
|
|
9,495 |
|
|
10,371 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
61,488 |
|
|
45,368 |
|
|
48,036 |
|
|
61,424 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
5,378 |
|
|
8,499 |
|
|
8,533 |
|
|
10,655 |
|
|
Interest expense |
|
|
(266 |
) |
|
(133 |
) |
|
(242 |
) |
|
(362 |
) |
|
Equity in income of uncombined affiliates |
|
|
865 |
|
|
960 |
|
|
1,196 |
|
|
3,280 |
|
|
Other income (expense) |
|
|
83 |
|
|
(208 |
) |
|
230 |
|
|
1,015 |
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
6,060 |
|
|
9,118 |
|
|
9,717 |
|
|
14,588 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
67,548 |
|
|
54,486 |
|
|
57,753 |
|
|
76,012 |
|
Income tax provision |
|
|
(24,637 |
) |
|
(19,873 |
) |
|
(18,671 |
) |
|
(25,826 |
) |
Minority interest in losses of combined subsidiaries |
|
|
14 |
|
|
191 |
|
|
1,459 |
|
|
895 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
42,925 |
|
$ |
34,804 |
|
$ |
40,541 |
|
$ |
51,081 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the combined statements of operations: |
|
|
Cost of sales |
|
$ |
148 |
|
$ |
242 |
|
$ |
211 |
|
$ |
199 |
|
|
Selling and marketing expense |
|
|
163 |
|
|
265 |
|
|
230 |
|
|
218 |
|
|
General and administrative expense |
|
|
1,568 |
|
|
2,556 |
|
|
4,082 |
|
|
2,690 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
1,879 |
|
$ |
3,063 |
|
$ |
4,523 |
|
$ |
3,107 |
|
|
|
|
|
|
|
|
|
|
|
9
Ticketmaster and Subsidiaries
Combined Statements of Operations (Continued)
Year Ended December 31, 2007
(In thousands)
|
|
Quarter Ended
March 31
|
|
Six Months
Ended
June 30
|
|
Nine Months
Ended
September 30
|
|
Year Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(audited)
|
|
Revenue |
|
$ |
303,577 |
|
$ |
596,993 |
|
$ |
889,459 |
|
$ |
1,240,477 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
184,784 |
|
|
368,644 |
|
|
549,830 |
|
|
766,538 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
118,793 |
|
|
228,349 |
|
|
339,629 |
|
|
473,939 |
|
Selling and marketing expense |
|
|
7,073 |
|
|
15,231 |
|
|
23,791 |
|
|
43,487 |
|
General and administrative expense |
|
|
34,258 |
|
|
74,150 |
|
|
113,258 |
|
|
149,478 |
|
Amortization of intangibles |
|
|
6,853 |
|
|
13,520 |
|
|
19,601 |
|
|
26,200 |
|
Depreciation |
|
|
9,121 |
|
|
18,592 |
|
|
28,087 |
|
|
38,458 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
61,488 |
|
|
106,856 |
|
|
154,892 |
|
|
216,316 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
5,378 |
|
|
13,877 |
|
|
22,410 |
|
|
33,065 |
|
|
Interest expense |
|
|
(266 |
) |
|
(399 |
) |
|
(641 |
) |
|
(1,003 |
) |
|
Equity in income of uncombined affiliates |
|
|
865 |
|
|
1,825 |
|
|
3,021 |
|
|
6,301 |
|
|
Other income (expense) |
|
|
83 |
|
|
(125 |
) |
|
105 |
|
|
1,120 |
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
6,060 |
|
|
15,178 |
|
|
24,895 |
|
|
39,483 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
67,548 |
|
|
122,034 |
|
|
179,787 |
|
|
255,799 |
|
Income tax provision |
|
|
(24,637 |
) |
|
(44,510 |
) |
|
(63,181 |
) |
|
(89,007 |
) |
Minority interest in losses of combined subsidiaries |
|
|
14 |
|
|
205 |
|
|
1,664 |
|
|
2,559 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
42,925 |
|
$ |
77,729 |
|
$ |
118,270 |
|
$ |
169,351 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the combined statements of operations: |
|
|
Cost of sales |
|
$ |
148 |
|
$ |
390 |
|
$ |
601 |
|
$ |
800 |
|
|
Selling and marketing expense |
|
|
163 |
|
|
428 |
|
|
658 |
|
|
876 |
|
|
General and administrative expense |
|
|
1,568 |
|
|
4,124 |
|
|
8,206 |
|
|
10,896 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
1,879 |
|
$ |
4,942 |
|
$ |
9,465 |
|
$ |
12,572 |
|
|
|
|
|
|
|
|
|
|
|
10
Ticketmaster and Subsidiaries
Combined Statements of Operations
Year Ended December 31, 2006
(In thousands)
|
|
Quarter Ended
March 31
|
|
Quarter Ended
June 30
|
|
Quarter Ended
September 30
|
|
Quarter Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
Revenue |
|
$ |
240,722 |
|
$ |
287,595 |
|
$ |
258,497 |
|
$ |
275,858 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
140,932 |
|
|
171,998 |
|
|
158,384 |
|
|
165,838 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
99,790 |
|
|
115,597 |
|
|
100,113 |
|
|
110,020 |
|
Selling and marketing expense |
|
|
4,247 |
|
|
5,116 |
|
|
5,091 |
|
|
5,669 |
|
General and administrative expense |
|
|
21,737 |
|
|
29,450 |
|
|
34,136 |
|
|
32,994 |
|
Amortization of intangibles |
|
|
6,898 |
|
|
7,036 |
|
|
6,571 |
|
|
6,604 |
|
Depreciation |
|
|
8,765 |
|
|
8,780 |
|
|
8,782 |
|
|
8,753 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
58,143 |
|
|
65,215 |
|
|
45,533 |
|
|
56,000 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
4,230 |
|
|
7,621 |
|
|
9,236 |
|
|
12,895 |
|
|
Interest expense |
|
|
(44 |
) |
|
(75 |
) |
|
(67 |
) |
|
(116 |
) |
|
Equity in income of uncombined affiliates |
|
|
872 |
|
|
612 |
|
|
835 |
|
|
678 |
|
|
Other income |
|
|
412 |
|
|
70 |
|
|
61 |
|
|
439 |
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
5,470 |
|
|
8,228 |
|
|
10,065 |
|
|
13,896 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
63,613 |
|
|
73,443 |
|
|
55,598 |
|
|
69,896 |
|
Income tax provision |
|
|
(23,977 |
) |
|
(27,682 |
) |
|
(20,921 |
) |
|
(13,387 |
) |
Minority interest in losses of combined subsidiaries |
|
|
|
|
|
|
|
|
29 |
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
39,636 |
|
$ |
45,761 |
|
$ |
34,706 |
|
$ |
56,598 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the combined statements of operations: |
|
|
Cost of sales |
|
$ |
149 |
|
$ |
63 |
|
$ |
269 |
|
$ |
173 |
|
|
Selling and marketing expense |
|
|
92 |
|
|
70 |
|
|
294 |
|
|
190 |
|
|
General and administrative expense |
|
|
1,206 |
|
|
667 |
|
|
2,836 |
|
|
1,830 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
1,447 |
|
$ |
800 |
|
$ |
3,399 |
|
$ |
2,193 |
|
|
|
|
|
|
|
|
|
|
|
11
Ticketmaster and Subsidiaries
Combined Statements of Operations (Continued)
Year Ended December 31, 2006
(In thousands)
|
|
Quarter Ended
March 31
|
|
Six Months
Ended
June 30
|
|
Nine Months
Ended
September 30
|
|
Year Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(audited)
|
|
Revenue |
|
$ |
240,722 |
|
$ |
528,317 |
|
$ |
786,814 |
|
$ |
1,062,672 |
|
Cost of sales (exclusive of depreciation shown separately below) |
|
|
140,932 |
|
|
312,930 |
|
|
471,314 |
|
|
637,152 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
99,790 |
|
|
215,387 |
|
|
315,500 |
|
|
425,520 |
|
Selling and marketing expense |
|
|
4,247 |
|
|
9,363 |
|
|
14,454 |
|
|
20,123 |
|
General and administrative expense |
|
|
21,737 |
|
|
51,187 |
|
|
85,323 |
|
|
118,317 |
|
Amortization of intangibles |
|
|
6,898 |
|
|
13,934 |
|
|
20,505 |
|
|
27,109 |
|
Depreciation |
|
|
8,765 |
|
|
17,545 |
|
|
26,327 |
|
|
35,080 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
58,143 |
|
|
123,358 |
|
|
168,891 |
|
|
224,891 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
4,230 |
|
|
11,851 |
|
|
21,087 |
|
|
33,982 |
|
|
Interest expense |
|
|
(44 |
) |
|
(119 |
) |
|
(186 |
) |
|
(302 |
) |
|
Equity in income of uncombined affiliates |
|
|
872 |
|
|
1,484 |
|
|
2,319 |
|
|
2,997 |
|
|
Other income |
|
|
412 |
|
|
482 |
|
|
543 |
|
|
982 |
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
5,470 |
|
|
13,698 |
|
|
23,763 |
|
|
37,659 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
63,613 |
|
|
137,056 |
|
|
192,654 |
|
|
262,550 |
|
Income tax provision |
|
|
(23,977 |
) |
|
(51,659 |
) |
|
(72,580 |
) |
|
(85,967 |
) |
Minority interest in losses of combined subsidiaries |
|
|
|
|
|
|
|
|
29 |
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
39,636 |
|
$ |
85,397 |
|
$ |
120,103 |
|
$ |
176,701 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the combined statements of operations: |
|
|
Cost of sales |
|
$ |
149 |
|
$ |
212 |
|
$ |
481 |
|
$ |
654 |
|
|
Selling and marketing expense |
|
|
92 |
|
|
162 |
|
|
456 |
|
|
646 |
|
|
General and administrative expense |
|
|
1,206 |
|
|
1,873 |
|
|
4,709 |
|
|
6,539 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
1,447 |
|
$ |
2,247 |
|
$ |
5,646 |
|
$ |
7,839 |
|
|
|
|
|
|
|
|
|
|
|
12
Tree.com, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31, 2007
(In thousands)
|
|
Quarter Ended
March 31
|
|
Quarter Ended
June 30
|
|
Quarter Ended
September 30
|
|
Quarter Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
Revenue |
|
$ |
109,999 |
|
$ |
110,639 |
|
$ |
74,953 |
|
$ |
50,787 |
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
|
20,496 |
|
|
20,942 |
|
|
18,279 |
|
|
13,397 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
89,503 |
|
|
89,697 |
|
|
56,674 |
|
|
37,390 |
|
Selling and marketing expense |
|
|
56,478 |
|
|
56,852 |
|
|
43,755 |
|
|
30,527 |
|
General and administrative expense |
|
|
30,046 |
|
|
27,514 |
|
|
23,166 |
|
|
18,518 |
|
Product development |
|
|
4,270 |
|
|
3,896 |
|
|
3,844 |
|
|
2,981 |
|
Proceeds from a legal settlement |
|
|
|
|
|
|
|
|
(15,000 |
) |
|
|
|
Amortization of intangibles |
|
|
4,274 |
|
|
6,013 |
|
|
3,993 |
|
|
20,189 |
|
Restructuring expense |
|
|
|
|
|
4,598 |
|
|
6,401 |
|
|
11,868 |
|
Depreciation |
|
|
2,839 |
|
|
2,580 |
|
|
2,431 |
|
|
2,208 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
459,463 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(8,404 |
) |
|
(11,756 |
) |
|
(11,916 |
) |
|
(508,364 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
70 |
|
|
207 |
|
|
368 |
|
|
526 |
|
|
Interest expense |
|
|
(280 |
) |
|
(241 |
) |
|
(236 |
) |
|
(229 |
) |
|
Other income |
|
|
1 |
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income, net |
|
|
(209 |
) |
|
(34 |
) |
|
145 |
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(8,613 |
) |
|
(11,790 |
) |
|
(11,771 |
) |
|
(508,067 |
) |
Income tax benefit (provision) |
|
|
3,490 |
|
|
4,298 |
|
|
5,478 |
|
|
(23,427 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,123 |
) |
$ |
(7,492 |
) |
$ |
(6,293 |
) |
$ |
(531,494 |
) |
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the consolidated statements of operations: |
|
|
Cost of revenue |
|
$ |
79 |
|
$ |
97 |
|
$ |
85 |
|
$ |
(13 |
) |
|
Selling and marketing expense |
|
|
85 |
|
|
107 |
|
|
93 |
|
|
(13 |
) |
|
General and administrative expense |
|
|
956 |
|
|
1,153 |
|
|
295 |
|
|
(1 |
) |
|
Product development |
|
|
1 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
1,121 |
|
$ |
1,358 |
|
$ |
473 |
|
$ |
(27 |
) |
|
|
|
|
|
|
|
|
|
|
13
Tree.com, Inc. and Subsidiaries
Consolidated Statements of Operations (Continued)
Year Ended December 31, 2007
(In thousands)
|
|
Quarter Ended
March 31
|
|
Six Months
Ended
June 30
|
|
Nine Months
Ended
September 30
|
|
Year Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(audited)
|
|
Revenue |
|
$ |
109,999 |
|
$ |
220,638 |
|
$ |
295,591 |
|
$ |
346,378 |
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
|
20,496 |
|
|
41,438 |
|
|
59,717 |
|
|
73,114 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
89,503 |
|
|
179,200 |
|
|
235,874 |
|
|
273,264 |
|
Selling and marketing expense |
|
|
56,478 |
|
|
113,330 |
|
|
157,085 |
|
|
187,612 |
|
General and administrative expense |
|
|
30,046 |
|
|
57,560 |
|
|
80,726 |
|
|
99,244 |
|
Product development |
|
|
4,270 |
|
|
8,166 |
|
|
12,010 |
|
|
14,991 |
|
Proceeds from a legal settlement |
|
|
|
|
|
|
|
|
(15,000 |
) |
|
(15,000 |
) |
Amortization of intangibles |
|
|
4,274 |
|
|
10,287 |
|
|
14,280 |
|
|
34,469 |
|
Restructuring expense |
|
|
|
|
|
4,598 |
|
|
10,999 |
|
|
22,867 |
|
Depreciation |
|
|
2,839 |
|
|
5,419 |
|
|
7,850 |
|
|
10,058 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
459,463 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(8,404 |
) |
|
(20,160 |
) |
|
(32,076 |
) |
|
(540,440 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
70 |
|
|
277 |
|
|
645 |
|
|
1,171 |
|
|
Interest expense |
|
|
(280 |
) |
|
(521 |
) |
|
(757 |
) |
|
(986 |
) |
|
Other income |
|
|
1 |
|
|
1 |
|
|
14 |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(209 |
) |
|
(243 |
) |
|
(98 |
) |
|
199 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(8,613 |
) |
|
(20,403 |
) |
|
(32,174 |
) |
|
(540,241 |
) |
Income tax benefit (provision) |
|
|
3,490 |
|
|
7,788 |
|
|
13,266 |
|
|
(10,161 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,123 |
) |
$ |
(12,615 |
) |
$ |
(18,908 |
) |
$ |
(550,402 |
) |
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the consolidated statements of operations: |
|
|
Cost of revenue |
|
$ |
79 |
|
$ |
176 |
|
$ |
261 |
|
$ |
248 |
|
|
Selling and marketing expense |
|
|
85 |
|
|
192 |
|
|
285 |
|
|
272 |
|
|
General and administrative expense |
|
|
956 |
|
|
2,109 |
|
|
2,404 |
|
|
2,403 |
|
|
Product development |
|
|
1 |
|
|
2 |
|
|
2 |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
1,121 |
|
$ |
2,479 |
|
$ |
2,952 |
|
$ |
2,925 |
|
|
|
|
|
|
|
|
|
|
|
14
Tree.com, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31, 2006
(In thousands)
|
|
Quarter Ended
March 31
|
|
Quarter Ended
June 30
|
|
Quarter Ended
September 30
|
|
Quarter Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
Revenue |
|
$ |
122,658 |
|
$ |
120,747 |
|
$ |
120,230 |
|
$ |
112,843 |
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
|
17,909 |
|
|
18,837 |
|
|
19,386 |
|
|
17,085 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
104,749 |
|
|
101,910 |
|
|
100,844 |
|
|
95,758 |
|
Selling and marketing expense |
|
|
60,293 |
|
|
58,094 |
|
|
52,473 |
|
|
48,050 |
|
General and administrative expense |
|
|
28,920 |
|
|
28,711 |
|
|
30,560 |
|
|
31,093 |
|
Product development |
|
|
3,890 |
|
|
3,547 |
|
|
3,879 |
|
|
3,852 |
|
Amortization of intangibles |
|
|
7,266 |
|
|
7,284 |
|
|
5,157 |
|
|
4,311 |
|
Depreciation |
|
|
3,458 |
|
|
2,819 |
|
|
2,964 |
|
|
2,469 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
922 |
|
|
1,455 |
|
|
5,811 |
|
|
5,983 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
107 |
|
|
89 |
|
|
136 |
|
|
975 |
|
|
Interest expense |
|
|
(419 |
) |
|
(388 |
) |
|
(378 |
) |
|
(371 |
) |
|
Other income (expense) |
|
|
|
|
|
9 |
|
|
(212 |
) |
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Total other (expense) income, net |
|
|
(312 |
) |
|
(290 |
) |
|
(454 |
) |
|
600 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
610 |
|
|
1,165 |
|
|
5,357 |
|
|
6,583 |
|
Income tax provision |
|
|
(224 |
) |
|
(419 |
) |
|
(2,117 |
) |
|
(2,262 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
386 |
|
$ |
746 |
|
$ |
3,240 |
|
$ |
4,321 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the consolidated statements of operations: |
|
|
Cost of revenue |
|
$ |
54 |
|
$ |
71 |
|
$ |
72 |
|
$ |
66 |
|
|
Selling and marketing expense |
|
|
59 |
|
|
79 |
|
|
78 |
|
|
73 |
|
|
General and administrative expense |
|
|
(1,059 |
) |
|
741 |
|
|
989 |
|
|
932 |
|
|
Product development |
|
|
20 |
|
|
|
|
|
1 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
(926 |
) |
$ |
891 |
|
$ |
1,140 |
|
$ |
1,072 |
|
|
|
|
|
|
|
|
|
|
|
15
Tree.com, Inc. and Subsidiaries
Consolidated Statements of Operations (Continued)
Year Ended December 31, 2006
(In thousands)
|
|
Quarter Ended
March 31
|
|
Six Months
Ended
June 30
|
|
Nine Months
Ended
September 30
|
|
Year Ended
December 31
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(audited)
|
|
Revenue |
|
$ |
122,658 |
|
$ |
243,405 |
|
$ |
363,635 |
|
$ |
476,478 |
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
|
17,909 |
|
|
36,746 |
|
|
56,132 |
|
|
73,217 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
104,749 |
|
|
206,659 |
|
|
307,503 |
|
|
403,261 |
|
Selling and marketing expense |
|
|
60,293 |
|
|
118,387 |
|
|
170,860 |
|
|
218,910 |
|
General and administrative expense |
|
|
28,920 |
|
|
57,631 |
|
|
88,191 |
|
|
119,284 |
|
Product development |
|
|
3,890 |
|
|
7,437 |
|
|
11,316 |
|
|
15,168 |
|
Amortization of intangibles |
|
|
7,266 |
|
|
14,550 |
|
|
19,707 |
|
|
24,018 |
|
Depreciation |
|
|
3,458 |
|
|
6,277 |
|
|
9,241 |
|
|
11,710 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
922 |
|
|
2,377 |
|
|
8,188 |
|
|
14,171 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
107 |
|
|
196 |
|
|
332 |
|
|
1,307 |
|
|
Interest expense |
|
|
(419 |
) |
|
(807 |
) |
|
(1,185 |
) |
|
(1,556 |
) |
|
Other income (expense) |
|
|
|
|
|
9 |
|
|
(203 |
) |
|
(207 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(312 |
) |
|
(602 |
) |
|
(1,056 |
) |
|
(456 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
610 |
|
|
1,775 |
|
|
7,132 |
|
|
13,715 |
|
Income tax provision |
|
|
(224 |
) |
|
(643 |
) |
|
(2,760 |
) |
|
(5,022 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
386 |
|
$ |
1,132 |
|
$ |
4,372 |
|
$ |
8,693 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense is included in the following line items in the consolidated statements of operations: |
|
|
Cost of revenue |
|
$ |
54 |
|
$ |
125 |
|
$ |
197 |
|
$ |
263 |
|
|
Selling and marketing expense |
|
|
59 |
|
|
138 |
|
|
216 |
|
|
289 |
|
|
General and administrative expense |
|
|
(1,059 |
) |
|
(318 |
) |
|
671 |
|
|
1,603 |
|
|
Product development |
|
|
20 |
|
|
20 |
|
|
21 |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense |
|
$ |
(926 |
) |
$ |
(35 |
) |
$ |
1,105 |
|
$ |
2,177 |
|
|
|
|
|
|
|
|
|
|
|
16
QuickLinks
HSN, Inc. and Subsidiaries Combined Statements of Operations Year Ended December 31, 2007 (In thousands)
HSN, Inc. and Subsidiaries Combined Statements of Operations (Continued) Year Ended December 31, 2007 (In thousands)
HSN, Inc. and Subsidiaries Combined Statements of Operations Year Ended December 31, 2006 (In thousands)
HSN, Inc. and Subsidiaries Combined Statements of Operations (Continued) Year Ended December 31, 2006 (In thousands)
Interval Leisure Group, Inc. and Subsidiaries Consolidated Statements of Operations Year Ended December 31, 2007 (In thousands)
Interval Leisure Group, Inc. and Subsidiaries Consolidated Statements of Operations Year Ended December 31, 2006 (In thousands)
Ticketmaster and Subsidiaries Combined Statements of Operations Year Ended December 31, 2007 (In thousands)
Ticketmaster and Subsidiaries Combined Statements of Operations (Continued) Year Ended December 31, 2007 (In thousands)
Ticketmaster and Subsidiaries Combined Statements of Operations Year Ended December 31, 2006 (In thousands)
Ticketmaster and Subsidiaries Combined Statements of Operations (Continued) Year Ended December 31, 2006 (In thousands)
Tree.com, Inc. and Subsidiaries Consolidated Statements of Operations Year Ended December 31, 2007 (In thousands)
Tree.com, Inc. and Subsidiaries Consolidated Statements of Operations (Continued) Year Ended December 31, 2007 (In thousands)
Tree.com, Inc. and Subsidiaries Consolidated Statements of Operations Year Ended December 31, 2006 (In thousands)
Tree.com, Inc. and Subsidiaries Consolidated Statements of Operations (Continued) Year Ended December 31, 2006 (In thousands)
GRAPHIC
18
g327670.jpg
G327670.JPG
begin 644 g327670.jpg
M_]C_X``02D9)1@`!`0$%$`40``#__@`T35),3%]'4D%02$E#4SI;24%#7TE.
M5$5204-4259%74E!0U]-0T],3U)?3$]'3RY%4%/_VP!#``<%!@8&!0<&!@8(
M"`<)"Q(,"PH*"Q<0$0T2&Q<<'!H7&AD=(2HD'1\H(!D:)3(E*"PM+S`O'2,T
M.#0N-RHN+R[_VP!#`0@("`L*"Q8,#!8N'AH>+BXN+BXN+BXN+BXN+BXN+BXN
M+BXN+BXN+BXN+BXN+BXN+BXN+BXN+BXN+BXN+BXN+B[_P``1"`!(`,8#`2(`
M`A$!`Q$!_\0`'``!``(#`0$!``````````````<(!`4&`@,!_\0`2A```0,#
M`00$!PL*!`<``````0(#!``%$08'$B$Q"$%1@1,4(E)A<9$5(S(U-V)T=8*A
MLA
MO/W5P]\VLRK`TT]>M#7B$V\HH;4\ZT-X@9(V5*]0=TF_B2Q?2W/Y=.I"LP
M4B+L)521,B#MVA3YC$*'I>Y/27UAMIM#S>5J/("NOM^L]02IT:,]L^O<9IUU
M*%ON+:W6@3@J.#G`YU6+9K\H&F_K!K\576`'91WHE9P!`I=G&29^TI2IH^*^
M)R1@@GU5(]4ZV0:A.G
M==V]]QSO6*4I2(Z*XG66TC3FE
M73"?>?'$Q4'ECYY'
M+L''K%:KH^:0;7%=UG>`>VGK4`N]^(HV9;
M8LZIF^[4[ND/V[2=JM,=7%'NK*4IS'I2C&/4:]/7C:M:QX69I:S79A.2H6V4
MI#A'H2OGZJDFE+WCL(6T]Y%$3;=I<+5'N\&ZVN6V=UUEZ/O;A[/)X^T"L_9[
MM'.M=2WB%%A)9MD1E"X[B\AUS*L$J&<`=@K+VH;/X&LK4XXTTVS>F4$QI(`!
M61R;6>M)^X\>W,7]&QEV/J;4##[:FW6XR$+0H8*5!P@@^HTX+6U98YPX!
MXEC:4I4T?%*4KIT4I43ZVVB/RKRSHK0ZT2+U*<\"[,`WFXGG$>0QUG
MA1*I8X$%F"\R56W6W"XEMQ*BVK=6$G.Z<`X/8<$>VE8-@M,>R6F/;8REK2TG
MRG7#E;JSQ4M1ZU*)))]-*&%-C4'=)OXDL7TMS^74XU!W2;^)+%]+<_ETZC]0
M15WD,AG9K\H&F_K!K\577'*J4;-?E`TW]8-?BJZXY4W5^81>E\IBE*5)*8JO
MFU^)-UE?;\B"LF)I2WI<4E(R%O+(4L=R$GO34ZWNXQ[1:)MTE*`8B,K>7QQP
M2,X_I7%[(K2XG1SESNC>_-O[SD^4%C.0Y\%/JW<>VFUG9[\6XW>[*B=?`X](
MJZ.S+4/^)M%VRY+6%2?!^!D]H=1Y*L^O`/?51]865>G=3W.RK!Q%?4ELG]9L
M\4'O214J]&W4/BUWN&FWE^]S$>,,`G_F(&%`>M.#]FK-2N^O<)+0VU]IECZU
MFI+O'L-BGWB5^AB,J=(\X@<$^LG`[ZV=1'TCKDJ+HB/`0H@SIB$J`ZT(!6?O
M":AK7PK2*O<*JU9QA1)M+UR8I2E12
MN*B_2-J5;ML>LW6X[B(TF,P^E900E2E<58/(^5FI0I1*V`1WF$9Q%*4H9L5Y
M=<;:;6ZZM*&T`J4I1P$@YW"%:H+UPN,EN-$93O..N*PE(_P#>KKJ'
MHU]5M8NEQ@_G4724)*0IMM?@W)KA/#?(XA&`3N#T9[`%MBTUFU_*.9G)"CDS
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MD4K'\*3Q3'
M;(4X?_'WU(C#3;#+;+*`AIM(2A(Y)`&`*A5K6FEORM7J\7V\L16;7'%N@)<2
MH[RB275C=!Z\I[Z[3\K&SS_J>+_`Y_;5Q5BH`'V8E6&229%O24L/@;G;-1LH
M`1)08KY'GIXH)]:21]FH@TY=G[#?;?>8^2Y#?2[@?K`'RD]XR.^K#;2M9:"U
M;H^=9XFHXCDY02Y$3NK&7DG*1DIP,\4\>VH7_)KKG/\`PY)_C;_NJA-156@6
MY@OS./K)K:V+[D&9<:!*8G0H\V*O?8D-I=;5VI4,@^PU!_2>)\1TX,\/#/\`
M#[*:[/8\;S;=',VG4D)V'(A.*;9+A!WVCQ3Q!/+)'<*U.W:P3M3V&VBR1S,F
M1I946D$`[BD$$\<=834%>LTR6C\Q?42FQ':OB5ZT(`K6VG4J`(-RCY!_[B:N
M_50]/[/M;0K]:YCNGI*6V);+JB%HX!*P3^MV"K>"J;[ZK2#6P;'8YB].C*#N
M&(I2E(E$4I7X2`0"1D\JZ=/VM3J6_P!MTU9W[O=7BW&9Q\$94M1Y)2.LDUMJ
MB[I"?)T]]+8_$:)%W,`8+G"DR!MHFO[MK6?E]1C6QI1,>&E60GYRC^LKT\AU
M>F==DEC-DT5!0XWNRIGYT\,</8VGRE
M_<".^KF6V.DD+"0E"."0.0_^5YWM\FUJ]#5\>I^7WF#HOW6M,V(SX%H`_"/%
M5?>E*KJJ6I`B\"-)).3%*4IDR*A3I)R9,:S6-4>0\R3+T%)4^H@C/(@FKE!"/,
M3[*I5LU^4#3?U@U^*KKCE1ZNM=PZ1>F)*F>=Q'F)]E:+6MY9TWI6Z7I:4[T5
MA2FQ@<7#P0/XB*W]1IM)'^(-4Z6T2GRF7G_=&>!U,-?!!]"E9'<*G2M">HCV
M8@38[-=)P[7HRVM7'>N#Z/&9+CK25*+CAWB"2.K('=75>XMH_=<+_3H_VK
M8"E$6).9P4`8FO\`<6T?NJ%_IT?[54;:1%N>FM:76UHGS4QP[X6/^<+QX)?E
M)Z^K..ZKDU`W25L&_%M>I64>4THQ)!'FG*D$^H[P^T*;IR-^&^,3>ON9$X/8
MWJN5:]=06I\UYR'/_-'`\X5A)5\!7$\/*`&>PFK-:NLWN[IJY6II98>D,E+3
MB%;I0X.*3DJI4$.!`TSD@J93:1/O4.2ZP_.G-R&%E"T*D+RE:3@CGU$5=RPW!%
MULEON;9!1*CMO#!\Y(/]:A';ML[>=>=U?9&"X2,W".VG)X#]*!U\/A#O[:W?
M1YU4S<-.JTU(=`FVXE3*2>+C"CD$=NZ20?04UMH5ZPZB;5E'*M)CI2E22F*B
M[7,]"MK>@+6E1WVE2'UISU*04I_"JN_O]ZMVG[5(NMUDI8BLIRI1YD]20.LG
MJ%5HTCJ.1JK;C;+W(24!Z0H--$Y\$V&EA*?9S])-/I0G+=@8JUP,"6I'(5%W
M2$^3I[Z6Q^(U*(Y"HOZ084K9VZE*2I1F,``<0K/*9P?1WL"G%W&_
M.(XG$1@D>I3A_"/;5BFD!M`0GD!7+[.M/C3FD[;;E)`>;9!=_P`ZO*6?:3[!
M755#4OB7/J6Y;C_(X]>8:C:@3M]8I2E53HI2E=.F@U2UJQU$8:6E6MA8*O#F
M>TM8(P-W=W3PZ\YJ-M::!VB:RC18UXN^G0W&<+B/%V7D')&..;,9$1Y+S8<2Z4[P.1D8Y5*%OB[4$SHRI]STRN&'4E]
M+,9X+*,^4$DG&<5D
MI..?*N4C:2VF1]2S=2B[Z:7<)3"(Y*V'BEMM/'=0.K)XGG2E8+"(17,[72[.
MM&I#YU1,LS[!0/`B`RXA05GCG>/+%=-2E"3F:!,"]INJ[7(39'8K5Q*1X%)C+
MF1[^0'4O[ZM/L<_MKM-&Z(VDZ/M[UNM5[T\J,Z[X8ID-.KW5$`'&,8S@4I3&
MU#L,&`M*J]*5_E'P<]>.!ZP:4I:N5.1#*@C!GWC77:M;$B//TM:[WN\!)A3A'
M*_24K'#NQ7I^_P"U*5[U!T)`@J(_33+FEQ*>Y&":4K=X["9M/>:*7LLU'JR2
MB9KK5JG=PY;B6]O#;6?-*N`[,[N?36#9]DDW2VT2PW6T/N3K0VM:GUO%*7
MN*`SRW@
GRAPHIC
19
g133354kk05i001.jpg
G133354KK05I001.JPG
begin 644 g133354kk05i001.jpg
M_]C_X``02D9)1@`!`0$`8`!@``#_VP!#``H'!P@'!@H("`@+"@H+#A@0#@T-
M#AT5%A$8(Q\E)"(?(B$F*S7J#A(6&AXB)BI*3E)66EYB9FJ*CI*6FIZBI
MJK*SM+6VM[BYNL+#Q,7&Q\C)RM+3U-76U]C9VN'BX^3EYN?HZ>KQ\O/T]?;W
M^/GZ_]H`"`$!```_`/9:Q+#QAH6JZV^CZ=>K=7<2NTHB!*QA"%.3TZL`,9K)
MUCQ7X@M/&UIHNG^&KBZT^1XEGOS%)L3:(9^1RH++SZ'(JS16
M?SL%CMO,!D)()'RCD#@\GBM"BBBBBBJMEJ>GZEYOV&^M
MKKR6V2>1*K[&]#@\'VJU1117+>/SXDAT47GA[5[/3/LVZ2YDN@N&0#@#ZG]I\-:1YC1HD,?SEI"L"`A=WS>O(XYZYINEZ_P#%'QT+C5=!FL])TY2R
MPQR(A#D=@61BS<@%OE7([#=!\6W"I?;FFU%RRA%CDFV@MLPH
MVHAR0>.>>YV?^$^\5^.O$C6G@V1-*TRS4M<7MQ&C#;V=RRG;D#Y5'/4DX!VK
M;^,_&GC'4FT?P9/&EO8A1<:K>)'ND;#.UU/4_
M"&JK&^OM;LUD^V(,DNP.%)7]V1LRPSWX)YXY#PC)XTU7Q?>Z]HUE!JFJ0AO/
MED\L(C."NX?,JYP#C''7J*[:_P#'GB[3_'MEX?L3'K$RVL:3VH6./S+CR6+Y
M<9V@,0Q&1]W'`R3!:?$OQQH>OR:'XAT:*\OITS;00;0X=@-@RA(*<$GOSUP,
M5./BIXOT/Q3::1XKT&R@%P4RMN2'"LVT.&WLIQSQ[8R*WO%&N?$0Z[?Z;X6T
M&&2T@B11>3H$.YUSF-G<*^/H<$E4XOBGXL\3Z_=6?@O0K.[MH%W`W60Y7.-Q)D4#)/`Z_KA/&
M_C#QUI_A*);K2+>T-U;R1W\Z(P$+-(R*L9WGG:`<\]<@XZ9_PLO]=\,:$U_>
M:7;VWAMWEN;K4)F`E8!`J*@W`G+@`<'.XXJY-\5_&>J&>^\-^%1)I,98+-/;
MR2,0H)))5@HX'(&<'C)R,]#%\5K=_ATWBH::TDT,XMI;42;1YG&<-@\;2#T/
MI[UD:;\8=3U_5-+M=+\/!(9KN&*]F9GF$*NY7&0J@':"P)R.O'!KU>N(^,%W
M<6GP[O?LYQYSQQ2';G"%N?IZ?C7+^`?%6CZ!\+)X[2Y0ZM%;W-W+$JY*.&VH
M6X[_`+L=^M&[EO@I?ZO#%(C2:FDLAR<2V\:E!@#L'D8G_=]J[OX;>//"
M^D^`K2SO;Z"RN+;S!)$22SG<6W#USG^E(?M/@'Q!X6AMUAU"WL;B6`Q#;).65@2?5@=H]<8]*R?!
M$VBOX8^QW7BZ[\,WD%W*TOV>5HSN?'2VB:(30:4B;U'1A$K3,#GW)'Z4_P`-
MZMK?Q!6]O]8\;3:);VCGRH;.18#@C)SC!8`#C.3U]:H?#J:T/Q(U'7;S4Y+N
MSL$91J%](2[;B(HV)/J#CV!%+XPT./X=:@GB3P9KT<*32>0+9)%E9-RL2#G(
M9/E'WL\X[@&M3XMZ[=7WP[\,&8XDU-$NIM@(4D1*2/IF3./;VJ?XA+!:?!?2
M;+3;B.6&&2W28I)NS^[8G.#U+8.*TH]'\176@P'P[XTLK3P]]CABCCFM8\JI
MB4-O;;PS$DD9R"U<)XLT1_!7@J'0EU"*^DU>^^T%X$.TQQKM`!/Z>
M&M$M_#WA^TTRWB6,0QC?C'S/_$21U.>]:M17-M!>6[V]S"DT,@PZ.,AA]*P8
M_A_X2A658]"M469-D@`(W+D'!YZ9`/X5K6.EV6F6$>F65E'%8JK`1`?*,G)&
M#USEC7'R^`-"M]7^U6O@V*;9;KA?M*K%OW9/RG^(>OI5_3],DTO4[C4[/P='
M%>W1%=;O%O;G1KI)IMS.;8[,G(Y89ZG/'XU8T32M$\/6$]EIWA?4$BN4$=P6B
M5C,!D?,=W/WC^=9FF^!_#&GZPU_:^'-6BEDWJ`P&R,."#@;N,`G'I6GX8TW2
M_"%K-;Z3H.K(L[[Y&D168D#`&=W0?U-,T'2-)\.:C>ZA8:#J_P!IOCF:250Y
MZECCYN,D\_05#8>']&T[Q+<>(8-#UDWURTC2%P&4[SEN-W2J$GPX\(SZK+>/
MX=U0,)#*8\@1.0<[0N>A]*EC\"^&YFOH#HNLQKJLBFX9B%4?/NSP>!GFJ
4V[#L"CXYP>>0"G&&7`QD<=*R-,\+>'/#WAZ]\/7%AK.I6]\OGR2_V=*^'A(-8MHM
M.6&"UMGLI%&`N[YF*X!P%SSQL/O7HU%%%-=$D1HY%#HP(96&01Z&DEB69=K%
MP.?N.5/((Z@^_P#7J*SY?#]E-:P6S3ZB$@W;"FIW*N=QR=S!]S^VXG';%1/X
M7T^1V=KC5@6))VZQ=@?@!)@4W_A%-._Y^=7_`/!S=_\`QVC_`(133O\`GYU?
M_P`'-W_\=H_X133O^?G5_P#P.K9)YYY-)=6-Q<*
MXBU6[M2VW#0K$2F"2<;T;KD`YSPHQ@Y)IMHFH$*!XIU9=HP2(K3YN3R?W'X<
M>E-_L+4?^ALU?_OU:?\`QBC^PM1_Z&S5_P#OU:?_`!BC^PM1_P"ALU?_`+]6
MG_QBC^PM1_Z&S5_^_5I_\8JQ9:7>6EP)9M>U"]3!'E3I;A3[_)$I_6M*BO_9
`
end
GRAPHIC
20
g133354kk07i001.jpg
G133354KK07I001.JPG
begin 644 g133354kk07i001.jpg
M_]C_X``02D9)1@`!`0$`8`!@``#_VP!#``H'!P@'!@H("`@+"@H+#A@0#@T-
M#AT5%A$8(Q\E)"(?(B$F*S7J#A(6&AXB)BI*3E)66EYB9FJ*CI*6FIZBI
MJK*SM+6VM[BYNL+#Q,7&Q\C)RM+3U-76U]C9VN'BX^3EYN?HZ>KQ\O/T]?;W
M^/GZ_]H`"`$!```_`/9:**XG_A:NB-XJ;PW!9:C/>K%I!#J-\//)'[F$;W`.>2!T'!K,T[XN>%-4U*VT^U
MENVGNI5BC!MR!N8X&?0#716?BG1;_0IM;M;Z.6R@C,DK
M@\H`,D$=C[5X_P#$?XJ_VPMC#X5U.^M(TWFY="86[LM/%S=90X+?*9#N[G>Y_6K6G_`!9\):E]I,=Y+$MK"9I&FB*C
M;N5>/4Y8#%&E?%GPEJ^HQ6$%Y+'+,P5#-$44L3@#/J36AXC\?^'/"T@AU&^'
MGDC]S"-[@'/)`Z#@U;\.>*]&\5VAN=)NA*%.'C8;73G'([=*@\2>.-`\*,L>
MJWFR=E#K`BEG*DD9QZ9!_*L2V^,O@VYN$A^V3Q;SC?+`55?J:[E'21%DC8.C
M`%64Y!'J*Y/5OBCX1T>0QRZH)Y%Z-M+J!GD4E6^SH9
M`I!P036OX>\7:'XHB9])ODF=%#/$>'0'ID?A3-7\:>'M!OC9:GJ<5M.%1]CY
MSAB0#^G-5]3^(7AC2KQ+.;4EDNGE2+R80692PR,CL.GYUTM9NOZ%9>)-(ETK
M4/,-M,5+B-]I."".?J!^5?.5GX=T_6/BBF@Z8&;3FOB@W.0QA3E^2,YVJU>D
M^,_".@^`_A_K4^D1.EQ?K%;;I7WG!<$@9Z9&?R'I7+^`M7?P9\.=<\1I!_I-
MW<1VEHSXPSA2<@'J!N)XZXQV.(_AM\.O^$V>XUS7)YC9"1D`#$//)CD[NP&1
MSW/'8UZ;IGPQ\(^&;^/6XEEB>R#2^9/(@"G+'/&`,G/M7@NA^(A8>+AXCU
M"(W4Z2R7.P``/,02I/H-Y!./2NM\(^!M8^)&KR>)-=D:/3I9R9)"2K3]"%,SL%&>Y"YSGN3[5/I]K\&]/
MT^2RO-5:\N'4))<&"?(89R4PF!GVSVK#^$T<>H>(=0\.7#-+I^I6CI+M)4G:
M00P]/_KU0U+PYI*]8O?!_A[X=>'
M]:U[3$GCN/[/D@!DFW#+D;>O^T%KR[X8>!!XRU.XDO&DCTVU4><4.#(QZ(#^
M!)],#UIOQ1\+:9X/\26UII+RJDMLLQ5VR4.Y@"#_`,!KO;#X065UH,VJ^)+F
M[N-8NH3<2DMM\J0J6(([D$\_2N&^#<]Q'\1[*.'=Y+-:*W0@6&.V@+%H0I+?,$!(SY@(W8XZ5Y]XML?AFNAR2^
M&=7N6U&,J4A>.7$H+`$990!@9/7M73Z9J>IK^SM=2VL\BRV[F)73.\1&4;@#
M]&(]A7'?#C3/!VL7L]CXGN9()Y2HM#YGEQGKN!;H">,9QZ#DXKVB#X8>&[?0
M;K1(X[D6=W*LLJ^>%>#M!L?%?CZWTP)/%ITTLCE5.62)0S`$]LX"
MY]ZZSXB2V7@"U;PEX:$\`U!5N;R5IMQ*\J$'IG!)_#UI-$T7X:Z#8O:>*M5$
M^K21?OECCF9(`P5E"E4QN`QSZDBL+P/=06'Q22Q>^DAA/0O`Q903NQ
M_"0>>>.F:D^*DLVM?%&[M+13-(K0VL**.6;:ORC/^TQ%=SHWP0$=Y#J6M:V\
M]XMPL\BPI\KG(8C<>3DYYP/I7K-5=3FDM]*NYXFVR1P.ZG&<$*2*\$^#NHZ9
M;^,[W4]:U*VM9/LSF-KB01*[LZ[CDD#.,\>_M72_'+7H;KPYHUM83PW-I>SR
M3?:()0ZMY0"X!'!&7.?=:R_$N@RV'P#T8PQR,#=17LY)!V+(C@'CMET'KS6W
M\&_%NAV7A"33M1U2SL;BWN6.VYG6/>K`$,"V`>=PP,XQSU%=%XV\8Z/)X%\0
M?V9>6^I/'9B.06\NY4$S&($N,KD9)VYSQVSFO-/AMX$7Q/X2\273IF66(6MD
MP<#$JXD(.0<`D1#/H6%:7P1\6/97\WA>]?9%.QDMP^`5DXW+DGOCH!US5*^N
MX?#OQ^>^U9!%;"Z+EY!\H5XR%?H>A(/L1VQ78_\`"*?!O_GYTC_P'?!5G)+J_A2W3)WVKSI/*ZL`PW`;V((RHY'7L<5Y'\.[VR7XNR7VHW*1`R
MW#)+62[9`SNQ\QW$8///K7>_&3Q!:R?#R-+"ZANHM3N5C$D+AT94)9B&&
M0<,JCK_(U9^".G+:>`5NMF&O;F27<<9(!V#\,J>#[^M>>^.I8M?^-45D4V1_
M:[:S8N`P;E03CTY/'>O9_'-^FF^!]:N7?9BSD13Q]]AM7K_M,*\1^'+76E>&
M_%OB.R@FDNK6Q6WA,8.5\QOF<'G[@57/'0=1UI?ACH?A/7;G4+GQ9?QB2+!C
M@GN_)$F0Q=RZ='<);W#_`.M\TY(&>#EW("]3S@'!
MKS3XQ>$=!\.WUM=:2\=O-=LS2V"L,(#G#JNHVUE_HGE1FXG6
M-6RZD_>QD_**A^-BF3QG!>QOYMK=V,4D$JD,CKD_=(ZCO^/H17:W>B?"OQ1J
M0\0W.MV\;W:AY;>345BW-G)+*3N4XX(!`QTYYJWX1\%_#ZWUF?4M%O)+Z73"
MK-*UP6AA8Y8$.`%;"\'D@`#//)\]^&5L?%/Q6_M*ZC#['FU"13@_,3\I[='=
M3P.W2OHJBD95=2K*&5A@@C((KS36O@GX?U+56N+6\GT\2@N8(E#+G/)&>@Y'
M%6?$_@CP:/[+@U.*^"VMN+>W6%F(*+N8DX[\Y)]Q6F/'7@:2R&ERZM;20")H
MFCE!(VKQ@\>G/X5YQK'A?X6S2ONR):2W:37""1A),<%`&]%!(?_@-;'A_QQ\._">C"RTN^D$!N2"I4LY9@"7/
M^ST&?;%92CX37>O?VRNJR6UW)(;K<)FC57W<\`<$GG'H:W?$NL?#/Q;;QQ:M
MJ]I(8CE)$?$IRT?"[AZ9`XKT?1_&/@+0M)M]
M+L->M$MK==J`N2>N>3CU)KA/$VD_"S4=1;4H_$)MWE>2:>.V^<2'[V`"/ES@
MXQW-4ME:+IQUO4+:#2[5HXQ':#YB?O,?1F*Y_&NMT3XJ>`]`T:UTJ
MSFO?(MDV+FW.3W)/U))KG](U_P"%VD:\FNI/J6.:0ONW*%(Z=,*.*XFY\'?"^6],L'C+R("01!G=@8&1N(SSS^=:&JZ#\*
MM0CL(;?Q'#9168(<1G+3@D'YF(SGKS[U;\9VWPY\9:@FH3^+4MKE4"%D;<"H
MZ``CCDDUSMKX?^%NF.MU>>))]2C*;A`B;2",'G'XC%=HOQ7^'ZZ3_92I<"Q\
MDP>0+8[?+(P5Z],5PC^'_AC?:I*EMXGO+&+C:)(LH/EYPQZ\C]:]`U'4OA?J
MVAVFCWVJV&QUPHKCCX/^%QU#SAXQQ;;\_9]W;TW8S^-=
M9I][\-M(\,:EH&F^(((;?44D61VD+L"Z;"02.P[59^&'A/P[H[7VJ:%J[:J)
M"+2027#W#S2-`25.0`.2`>BCM75T45Q?BI_%*:XQT*.3[/##!,+8X8UELKZ*V>VM(IPUS)-<1,'>1V3C#$JVPDG(PNIDF%M'`NQG
MD>;E90WSY$A9OX`!U-_PTOB.76XTU-KQ;*WMVN8WEPOFF<@K$X_O1;77J>JD
MXX!RTOM5:VN[JW_X2!9+F60W)DM9\V\3W4:Q^5&ZXW+`9#\BMR"3GBNBT<,U
MIJCZ*NJ(X41VXUIIS$TH4D,!*3*%RP#=!\ORCJ34\:WOB"VT&QCTR&5]1:19
M9C:?=/E*9&1<\G>5"@&*7S?*D<.T<*(H^5=OD!\CYG$
M_(P>;-HVLZ+?:HBG4=8O$@MXH/.25()I6+-))DYC5)?)LVUE6AU$(TE
MV]P;?[%'"J-GS`$=W=205RV6W9P#GL(#JYUFY^T+9#2PB_9S&7,Y?^+?D;0/
M3&:XOSO%CW^K7D:HVD$D\$GF&4ZE9VMX-+A\
M2ZCI[1PQJMW-<1SS3KEW*DJ)(U*H%+<*2^`.,5"0`U=9XE?5$U:P@TYIU7489K1W0G;`Y*,)3G@%8UFQZL5'3IRT2>*9-9G9(
MM8`@$QMIY;B81L(VD,:M%C#&16CRQ!P5QM'0KI5YK-LLTYM->?R8X6DEN;F?
M9*?-WN2DL:;"$1@?+R@#@-4=%(5&*@84[EP,XQU/4[]%%%
7%%%%%%%%%%%%%%%%%%%%%%%%%%%?_]D_
`
end
GRAPHIC
21
g133354kn01i001.jpg
G133354KN01I001.JPG
begin 644 g133354kn01i001.jpg
M_]C_X``02D9)1@`!`0$`8`!@``#_VP!#``H'!P@'!@H("`@+"@H+#A@0#@T-
M#AT5%A$8(Q\E)"(?(B$F*S7J#A(6&AXB)BI*3E)66EYB9FJ*CI*6FIZBI
MJK*SM+6VM[BYNL+#Q,7&Q\C)RM+3U-76U]C9VN'BX^3EYN?HZ>KQ\O/T]?;W
M^/GZ_]H`"`$!```_`/7+_4;/2[22ZOKF.WAB4L[N<8`K)B\;:)=:/>:K9327
MEM9ML8P1DLYXX4'&>HJ&T\=6%W9I=_V=JD,3R%`9K7;C&.3STYJ4>,;)H8Y4
ML;^1)"0NR)6/'J`V1^-4M.^)&B:MKL^C6$-[/8L<#CKUK0>YB1F#-@(,N>R<9Y]*D!SG@\4B/OS\K#!(Y&,T
MZBBJ\-_9W-Q+;P74,LT(!D1'!*9Z9`Z9JQ117E_QMT:YU33=..GZ1=7UVLC#
MS+=&?RDP"05'J<=?2N,UGPVVG^`=,M]'T;5/[3O)%_M!FMY0NVMM;1.()I9B(+@G*)\K#B#GCT#%B"?:M3Q"MO8:/HD7A(75G9:@/\`3+V3>)/,#?@K:T*QNO$/Q,U&UCU/48-(TJ-HVD6=@6"*$&2>[IJGX'BGUFX\2W,VN:K;Z':1,P:.Z(8@,2HRW^R#5#PMXWU#0O"6JS7&HW[_
M`&R=(+9U.]XF`)=@6X'RD#'OGM5'4-2U5(M/6UU>6ZU2^N?-6>"_D=^2-J,O
MW0^!7J7@^+R_#T+G77U
MLRDN;QCD-[#T`QTK
M#;BSAE&F6NB:;-(,>?:VK+(OT8GC\*M67@^+^S[FPU""Q\F:(Q[[6+9*N>2<@'Z]
GRAPHIC
22
g133354kn03i001.jpg
G133354KN03I001.JPG
begin 644 g133354kn03i001.jpg
M_]C_X``02D9)1@`!`0$`8`!@``#_VP!#``H'!P@'!@H("`@+"@H+#A@0#@T-
M#AT5%A$8(Q\E)"(?(B$F*S7J#A(6&AXB)BI*3E)66EYB9FJ*CI*6FIZBI
MJK*SM+6VM[BYNL+#Q,7&Q\C)RM+3U-76U]C9VN'BX^3EYN?HZ>KQ\O/T]?;W
M^/GZ_]H`"`$!```_`/8HI1,F]0P&2/FP:*.1(WD17D)"*6`+8&3
M@=^*S-9\5:%X>DBCU?4X;1Y0617SE@._`KGX_&?A!-2?7)]2)25C:V]S(28@
M%4,P08XSD9/<]Z+KXO>#+6Z2#^TGF#`'S(8F9%R<#--F#OJ9O)Y5
MPTMM`V-H)(!_,U$/C5X+7.V6[&3DXMCR?SJEI?Q9\&:8+L"^U"?[3#?^>UY_X#G_`!H_X79X-_Y[7G_@.?\`&H#\;7
M9N@\/7;`LN"\@`(_BZ#K@'%2P_'C3+B988-`U"61SA40JS,?8"M"U^+,EY?K
M80>#M9:Y9=PB*!3CU.>@X/--N_BU+9Z@^GR>#]7%W&`SP@!B%/?C/%13_%76
M#IDES;>!M4+B78OF*0OKS@9SCVQ[U/=?$?7897DC\'WYMIX"UEOC;>[C&=X`
M.T>*;9_$O6[F2%Y/!]S;VX$:3O.YC".P8@[F&`G`R3TS4=E\3[NXO!8O
M;VL^I3,Z0V%F6E(/RX+R=`%PY.,Y&,5T<7B/Q!]OC@F\(W0@9@AG2="`=VTM
M@G.W'([D=JGL=8UR31C>W6A2K=[$M-RAXX2P`9CG!(&2<5T%%%%>2?$CQ_
MXCL+.\MK/2Y+"S:Y-M#J/FE9&93\VT#L<'FN2\!:YXPOO$+ZK!9W'B*:T@,:
M_:K@X@WD<@GN0"/Q-;OCGQ]8VOBFXLM1\*Z7J,UO;*@DF02,LQ`)&?[H)(QU
M]ZT]?UOPMX8\-:0FM>%]-N=2N(/.%G!;*D<.[!/#9V]@?7%8^B>+]0N+6XUS
M3/ASI7D6:%3>`,$9/M6;J/Q9UG1_$;VD]GHE];0$J
MQM(R%F!QA@Q)P1_4_AO?$GQ#XFT33/MVFPV-IIMZL:0SQ\7,;,NXX(QCN.]<
M!\--'\17FKS:KH%K9SR62887HRA+`\#WZUVOC'XG:QX;ET[3OL&F27PM%EO8
MI(&*P2-SL7#=AC]*N:?X@\?ZYX*O-;@M='TZ-$+PL8#NE0#YBH8D`8SU!S7+
M^%OB?XOU+5%T\V-GK-Q<#;$LD"QF,^N5`^4=\U/XU\7^/?"FKQVMU?6$7G1"
M58K:TC*)V(&Y2?7J:[/1/%NL:E\/X=;Q5XEM)+FXUGQUI=HFQC`EC!%<%VQD*/ER%Y[FJ?P]^)/BO6O&UII]]<)
M?6\X=9`+=$95`)W94`\8_6J?B7XH^)K_`%^32Q=G0+'SO*+I$?,10WWBW7M_
M#CBM#2F\1SWTLV@?$J&_9'V007DIS-GL5?(S[U;^+P\3V>@12ZAK\0M;AHXC
M96L)0.^W+$MG)7@G!..E)?B7K%E91>'=*U>>0VH*76I%CYL\@8YVD\A1TXZU-KFMQV7AV*?2_B#K]
M]JK;=T6]Q&<]>.HQ]35_PEXXU>/X?>))]:]>\(>![GPYJ=SJ=_K=QJMUH]<;?U-;7P9UK0]+\+SV
MKZBGV^5Y;J6$H?W:*`,YQTPN?QKS"S\WQ1X_A+H)FO[\%@.`5+9/X8KH?B[;
M7B>)+B6[MA$#-^Z<1L/.3:OSYZ=1C%=#HGQ&T/PS\-[#3=,@;4=08$7%I(IP
M"22Y)QTYP*VK7Q]K$OA6^U/4-`31=/CM\6LV#NDE880(I'(YZUY1X*T.XUSQ
MMIUMFZ=<2SVDC1WMO'&2T;[1\P`_A..MALP$;@&_P!GVQ6CH/A;7-?OH1'X+M;2TE8,9[B)T14/.02?FX]*Z[XT:)K.
MI6^CV6CZ==W=M`'W);Q%PI``&<>U+\([>_\`#-O/IM]H&IQW-Y=*6F:W98E0
M+U+'ICG\ZX'Q5H_B7QAXLOM9LM!OY;:ZFVP2K:L%:-?D4YQZ`9KU#X@_:/#G
MPICTBPM9W+11VK&-2XC7@-DCUZ?C7)?`_0;B/Q-?7MY92Q-:VX5&E0KAF/;/
M7@&LSXD:5K_B?QO?W.FZ1J-W:V["W5XX&97&?+$K`[\D<;B03^-.CL;FX^'Z6.D>`KUKR8+Y^H/;E]XYY3OU]/
M>K?PZ\)>*])?6-5ATR>TU""RV6:74!42.S`G&['("D?\"K1_MKQ9J-U+'XJ^
M'DFI0[&3,-BRN#[/Z9]*YSPO\,_$NJ>(8KB72Y]*M(KA9&:<%"JALX4'DFNT
M^-7AW7]6]O')N\D;BK''4?0<54^&%SXET$Q^'9/#!@AGN#)TL=1BCNRR0M,G[Q:W:/R5B6,3`_PL1@X-8]M:WNE20^1X;M
M'N$WJ)X;*./#;L`@ALA-N0.I]?2L6XU7XBZA;?9+SPH@A`#,Q6&4R'^[M9MH
M'7GGH*R+63XHZ=),UEX2TZ.1AM2:.V@C8#/LW<=JF.H_%ZXPM[H,$B*=RCRH
M6PPZ'EJGMK[XRWM'3(_BS>-#+=S:/8JX
M.\O%ODC'/!`X/Y]ZDEM?BT9)$34-$\L/A)!&067/7&...U1Z9HOQ447S7?B/
M3T:3F(-%Y@!Y^[P-O;U_2M2#2OB&L$:R>)=+WA0&S8DG./7(S4%_X=^(5\J*
M/&-I:["3FWLMI;ZY)K.7P?\`$AF8?\)W@!\9,`Y&.H_EBHAX1^*!BF8^-$#K
M(5B79PZ9'S$XX/7CGIUJW#X,^('VF/S_`!\Y@S^\*6X#8]!GCUK3E\&^(C&?
M)\>:F'[%X8R/Y5DS_#OQ9=30S3^/KTND@)V(5&`G2I9?A%KAG'
MD^.=1$6>0[N6QGV;T_6IG^$>I9/E^.-7`VG&Z1OO9X_BZ8J)_A%K7V0A/'.I
M?:A>&-`A\,:!;Z1!.\\=ONP[@`G))[?6M:H[@RBVE,`4S!#
MY8;H6QQG\:\XT_XH7=],5-O;1QVMO'<7;MNP%"GS=OJ=X"`>IJ0?$#7+GP]I
MFJ6MMIZ^?>R6UWYDAQ!\P"=.>G7ZBK%W\0KZ*1([>SARG//IBH/^$HURVT+6P?$-K>
MZI9Q(0D=IM6*0OMVANC`G('TI7\1^*HUGF_M6Q_XE=REH]L8?WM[+D;\#^$'
M/RX[58TWQKK&HZ_!I?D,B7FHLUM,
M36<]K!#IT2`F=G(,F[O@*?PJ7PCJU]KVIP7\WB>%YG#F;2($!2).0`>X8'&2
M?I74QW^JMXCDLFTK9IJQY6]\T'>V!QMZCN/PKSBY\<>*"VJ6=A;W+2SZ@'M)
M'A)\JUW;6(X_O`#\36D/&^NWNJZ\D-AK:O:^";JTL-1NM4UBYOI;
M.S>1,/'@D`MQ@?*A;)]:J2^)O$\=CIFJK]HFAM--5M2A2/YI)'9X]P&.JE=U
M&BZWK5YKEI;K>WDE^+U!B!]3_MDH8;?^S?)&)-Y
M\SS,],=,8KS[5=?\60>(+V*"TO?LUU>E;,;<"-8$R_;[LG7\*@;Q!J[Z?,="
MUB^U2\>R+W!>("."5R`BKQPP)/'H.:+-=;$&G:G?7^K22VMAWGV6)H=\T(DV,!'EMQ7YB2S8/..!5JV@\3W
M5QJ%U;W6I6@NHF-OF1I5!>78O!X78HSQUW5M>'X=?USPYK@U2YGM+Z>1[6(Q
M.5\HQJ$WIZ;F!/%8NI0>/(])MG)G%U'+2RU9Q)=VZF)Y`Y;S`#@-D\\C%:]%8Q\)Z`9O-.EP;R%!.#SA_,'_CW-
M.D\*Z#)=I<-I5OYB2F52%P`Y`!;`XSA1^53-H&DR&,26$3B.,1H&&0%#;L8^
MO-2RZ/ILRRK)90D2P?9W&W&Z/LOTJOI?AO1=(LWM+#38(89'#N@7.YAT)SGI
M5AM(TZ345U%[*$W:J0)B@W8./\!5B*"&"-8X8DC1/NJJ@`?2HETRP6]-ZME`
M+H]9A&-Y_'K1!IMC:W$EQ;V<$,TO^LD2,*S\YY(Z\U9I`J_W1Z=*-J@`!1@#
M`&.E&!Z"@*H.0H'T%&U<8P/RH"J#D*`3W`I:*8D,46[RXD3>=S;5`R?4T[`Q
/C%+UH''`HZ4444445__9
`
end
GRAPHIC
23
g133354kq01i001.jpg
G133354KQ01I001.JPG
begin 644 g133354kq01i001.jpg
M_]C_X``02D9)1@`!`0$`8`!@``#_VP!#``H'!P@'!@H("`@+"@H+#A@0#@T-
M#AT5%A$8(Q\E)"(?(B$F*S7J#A(6&AXB)BI*3E)66EYB9FJ*CI*6FIZBI
MJK*SM+6VM[BYNL+#Q,7&Q\C)RM+3U-76U]C9VN'BX^3EYN?HZ>KQ\O/T]?;W
M^/GZ_]H`"`$!```_`/9:BAMH;_8_L
M_P"Y>7SYUB^7^'/<^W%6J****@O+RVT^SEO+R9(+>%2\DCG`4"O&O$OQVN3=
M>5X;M(U@4C]_=*2S]+_33_P#P'/\`\579>#?C5::D8[+Q
M%&MI=.P5+B,?NFSZ_P!WO[5ZHK!E#*001D$=Z6BBBBBBBBBN!\;^+-0MKJ"#
MPUXA\/1/$9$NX[R\B5T<$`#!/&/FR*R=,\3>--5UM;=?$?A6*.5R8X8KJ.9C
MSD(`IR>.,UM>(_$OB72=0G:VD\/_`-GF54AEN[Y82"N"Z')^]_+-9%OXY\67
M&K*(;GPI.DP$<5HFK1EC(2,8(.23TQ[UK?\`"1^.O*N9O[(T'R[0L+A_[2XA
M*C)#G^'`()SV-9T/CKQY=AFL/"EA?Q(Q4RVMZLB9ZCD'N"&'LP/>MFV\7^*/
MLZ?:O`E_Y^/G\JXBVY]LG-4
MVNH6J75E01^%3U\]_$;POI`\<6/ASPI8R?VA,,W(
M\YY07
M.1FJFN6_P\T6R2^\+:[JU[JT4RM`&^18B#D.=T0S@@<`YR16':V=Y:ZD-,\0
M:E>Z'9:FBSW,LD4CB5<%HV:,$%_FX![$GT-='X\U#0O#^G?\(?X3`>VD,<^H
M7N\2-='`:-=XX*C.<`8STQSGSZNBL?!6IWGC&V\-;&2>7RS*X4,(D*AF?KA@
MH)P0<-@8ZBNZ\7R)>:KHGPO\*S![*V8)>#?E9)`=S"3`&=N&=MIZL>`5&-G5
M?$&HKXJT[P#\/2EC!8_+>7$,23+",C?D-D?+DEB3EF;'7KIZKXOUR]^*VG^&
M-!>-;6V_>:BQ4.&3@L"0"4P/E'3YF`/:K%[\4M)L/%M_IUQY\P+Y:+GYL#.<`X/4@#G@/&'CKQ?X@TN76].>?1/#\5P([5DD,4URWS#[PY
M;HQ(!VC&.2N:M^-?%7CFP\*>';FWN)X;*YT^*6XO8D&YYB0P#./N\!".F[
(@,W126C7!Q@^@!!S4-]\6/'OAZ6?1M3^PO?0,/,E
M>$%T)`./D(0\''3\:MZ3\8/&VOZI!ING:/H]Q>2EC%&8W7)"DGEI0!\H/>JF
MK?%FXM=0,%AHWARYB2*/=*+-R#)L7S`#N&5#[@#Z`=>M:/P]\66/BGQ.NC:E
MX,T`)TVUM;V=NEM:P1P01C"11(%51Z`#@5
MS6L)XX-]=2:9>Z1;V:`>0L\3,SG'-+2\DU.SN_"\NH2NMO-.M
MGYQL#9S]XGCUS4%[
MH_CN[8W%_H7@Z8QCRS)/!&VT*/NY/3`[=J=:Z#XLA'F'PEX,9TD7$B01+M8X
MVC@=>1CZBKVNGQ3K<`L=7\'Z!JDT:X*"[S+&"!EACYDSA>01VKG5\%WDD2J/
MAG8E>6##4I^<@=]_/3C_`.O5-/#=[&ZNOPE!*D$;KV0@2#D9X`(QC-5OLGA#_H4?$_\`W]'_`,16A!CGCC)-:.D6/P[TO5+/5([#Q&9K5A*L4ELY42`@J3@#."/H?
MI5C0]8\!:#XJN=?N+K6+F]E<[);VV;]P6R&)/J0</4``CO
M@`\5V>AI\)M%TA;(WND7TW+-=7D"RNS'O\P.`..!@?B2:KZ>VF_!O2!>7B?V
MK?:PY?S+51&HA7'3/`&7'`ZY']VO5;2ZBO;."[@):*>-9$)&,JPR/T-4/$\%
M[<>';N/3K<7%WM5H8BP4.P8$#)(`Z5P0\)>+;6^G@@BCFB%ZMW'=22KA[F2%
M5DG*YSMC97*KC)+KCA"M9L[2*V?3_[7BMKMI;:3[1&T$T4PA\S.Y@P(
M(=@1SG/8Y-O5_"OBZ_TY+4R>9'?3W,]Y$@B7RBP*(`2W.5?/_`?I2KX5\5VV
M?L,<"C4KK[3=)/-N2T>"Y76=+_`.*>F6^BC)U*
M\E2:*0L$V2`R']W*&9CM"DC`!XQ2:9HJ:-HSFO/?%'P.L=1O!L"&"WT>&1V10KPR,CN\H#8X"M'CMGZ5SUAKOBW3]-L]-2]-WJU]8QW:M>A
M1M>>1$1.QPJI*Q[Y-:5QXZL=8ETJ/2;"WFCO&62^FFBW+$!'Y\D0.,/($4@_
MW2RYYZ.%Q=61T[6]1LM#.CZB\,*V\,`W1>:1MD\PC!`R,]L9K/7Q3':I+=W.
MDZ;=6YM1=+';V+[H5D!^SAFV[29"5`'4[TJR1RY"@6#P
M\<=5E4-USVQ5_4]"TK68H8M1L(+E+=P\2R+G81Z5>50JA5```P`.U,FA6=/+
MDPT;9#H5!612""I!'3G]*CDT^RF!$MG!("+S2P;S-@W9`*@Y]<$CZ$U#;:3
MIMF+=;73[6`6H<0"*%5\H,3CK699^"/#>GW$D]KIHC:0.-HE&M(GMA;-:E(UAAA40S/$52)M\0!4@C:W(/4<^IK
:0MK=+2W2"-I&2,8!EE:1C]68DG\34M%?_]D_
`
end
-----END PRIVACY-ENHANCED MESSAGE-----