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EX-31.2 - EXHIBIT 31.2 - TICKETMASTER ENTERTAINMENT, INC. | a2195184zex-31_2.htm |
EX-31.1 - EXHIBIT 31.1 - TICKETMASTER ENTERTAINMENT, INC. | a2195184zex-31_1.htm |
EX-32.1 - EXHIBIT 32.1 - TICKETMASTER ENTERTAINMENT, INC. | a2195184zex-32_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended March 31, 2009 |
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Or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File No. 001-34064
TICKETMASTER ENTERTAINMENT, INC.
(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.) |
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8800 Sunset Blvd., West Hollywood, CA 90069 (Address of Registrant's principal executive offices) |
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(310) 360-3300 (Registrant's telephone number, including area code) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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 definition of "accelerated filer," "large 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 |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of May 8, 2009, the following shares of the Registrant's common stock were outstanding: 57,331,248
The Registrant hereby amends and restates in its entirety Item 1, Consolidated Financial Statements, and Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of Part I of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, as described herein. On January 1, 2009, the Registrant adopted FASB Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Financial Statementsan amendment of Accounting Research Bulletin No. 51, effective January 1, 2009 ("SFAS No. 160"). The Registrant subsequently determined that, during its adoption of SFAS No. 160 on January 1, 2009, it incorrectly classified certain redeemable noncontrolling interests in permanent equity rather than temporary equity on its consolidated balance sheet as of March 31, 2009 and the related consolidated statement of temporary equity and equity.
As a result of the correction of the retrospective application of the presentation and disclosure requirements of SFAS No. 160, the Registrant's consolidated balance sheet as of March 31, 2009 and the related consolidated statement of temporary equity and equity have been restated as set forth herein. This restatement resulted in the reclassification of $41.7 million of noncontrolling interests to redeemable noncontrolling interests and the accretion of $2.0 million in fair value attributable to certain redeemable noncontrolling interests as of March 31, 2009.
Further, this Amendment is being filed to make certain changes to Items 1 and 2 pursuant to recent comment letters received from the Securities and Exchange Commission and includes additional disclosures in order to provide a more expansive and detailed presentation.
This Amendment only reflects the changes discussed above. All other information included in the Original Form 10-Q (including without limitation any statements about our pending merger with Live Nation, Inc. or the matters discussed in the Legal Proceedings section) has not been amended by this Form 10-Q/A to reflect any information or events subsequent to the filing of the Original Form 10-Q.
TICKETMASTER ENTERTAINMENT, INC.
FORM 10-Q/A
For the Quarterly Period Ended March 31, 2009
TABLE OF CONTENTS
i
Item 1. Consolidated Financial Statements
TICKETMASTER ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended March 31, | |||||||
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2009 | 2008 | ||||||
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(In thousands, except per share data) |
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Revenue |
$ | 372,815 | $ | 344,817 | ||||
Interest on funds held for clients |
1,001 | 4,164 | ||||||
Total revenue |
373,816 | 348,981 | ||||||
Cost of sales (exclusive of depreciation shown separately below) |
232,560 | 221,022 | ||||||
Gross profit |
141,256 | 127,959 | ||||||
Selling and marketing expense |
24,295 | 19,393 | ||||||
General and administrative expense |
64,203 | 41,853 | ||||||
Amortization of intangibles |
15,058 | 8,868 | ||||||
Depreciation |
12,400 | 11,055 | ||||||
Operating income |
25,300 | 46,790 | ||||||
Other (expense) income, net: |
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Interest income |
641 | 3,290 | ||||||
Interest expense |
(18,156 | ) | (735 | ) | ||||
Equity in income of unconsolidated affiliates |
1,343 | 666 | ||||||
Other (expense) income |
(191 | ) | 944 | |||||
Total other (expense) income, net |
(16,363 | ) | 4,165 | |||||
Earnings before income taxes and noncontrolling interests |
8,937 | 50,955 | ||||||
Income tax provision |
(4,201 | ) | (18,821 | ) | ||||
Net income |
4,736 | 32,134 | ||||||
Plus: Loss attributable to noncontrolling interests, net |
2,513 | 573 | ||||||
Net income attributable to Ticketmaster Entertainment, Inc. |
$ | 7,249 | $ | 32,707 | ||||
Net earnings per share available to common stockholders: |
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Basic |
$ | 0.13 | $ | 0.58 | ||||
Diluted |
$ | 0.12 | $ | 0.58 | ||||
Weighted average number of shares of common and common equivalent stock outstanding: |
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Basic |
57,321 | 56,171 | ||||||
Diluted |
59,219 | 56,171 |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
1
TICKETMASTER ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
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March 31, 2009 | December 31, 2008 | ||||||
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(Unaudited) |
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(as restated) |
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(In thousands, except per share data) |
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ASSETS |
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Cash and cash equivalents |
$ | 624,033 | $ | 464,618 | ||||
Marketable securities |
| 1,495 | ||||||
Accounts receivable, client accounts |
105,498 | 70,121 | ||||||
Accounts receivable, trade, net of allowance of $3,385 and $3,662, respectively |
48,276 | 46,459 | ||||||
Deferred income taxes |
14,055 | 14,038 | ||||||
Contract advances |
49,938 | 44,927 | ||||||
Prepaid expenses and other current assets |
37,800 | 37,758 | ||||||
Total current assets |
879,600 | 679,416 | ||||||
Property and equipment, net |
109,786 | 111,291 | ||||||
Goodwill |
455,492 | 455,751 | ||||||
Intangible assets, net |
314,924 | 330,061 | ||||||
Long-term investments |
18,897 | 17,487 | ||||||
Other non-current assets |
112,955 | 112,561 | ||||||
TOTAL ASSETS |
$ | 1,891,654 | $ | 1,706,567 | ||||
LIABILITIES, TEMPORARY EQUITY AND EQUITY |
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LIABILITIES: |
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Accounts payable, client accounts |
$ | 505,752 | $ | 324,164 | ||||
Accounts payable, trade |
29,560 | 29,251 | ||||||
Accrued compensation and benefits |
49,108 | 39,683 | ||||||
Deferred revenue |
35,105 | 33,244 | ||||||
Income taxes payable |
3,810 | 7,522 | ||||||
Other accrued expenses and current liabilities |
68,752 | 82,435 | ||||||
Total current liabilities |
692,087 | 516,299 | ||||||
Long-term debt |
865,000 | 865,000 | ||||||
Income taxes payable |
2,930 | 1,680 | ||||||
Other long-term liabilities |
11,857 | 10,286 | ||||||
Deferred income taxes |
64,335 | 67,300 | ||||||
Commitments and contingencies |
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TEMPORARY EQUITY: |
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Series A convertible redeemable preferred stock, $0.01 par value, 25,000 shares authorized, 1,750 non-vested shares issued and outstanding at March 31, 2009 and December 31, 2008 |
11,449 | 9,888 | ||||||
Redeemable noncontrolling interests |
43,744 | 42,483 | ||||||
EQUITY: |
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Ticketmaster Entertainment, Inc. stockholders' equity: |
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Common stock, $0.01 par value, 300,000 shares authorized; 57,329 shares issued and outstanding at March 31, 2009 and 57,213 shares issued and outstanding at December 31, 2008 |
573 | 572 | ||||||
Additional paid-in capital |
1,237,393 | 1,235,019 | ||||||
Accumulated deficit |
(1,051,509 | ) | (1,058,758 | ) | ||||
Accumulated other comprehensive loss |
(13,331 | ) | (11,374 | ) | ||||
Total Ticketmaster Entertainment, Inc. stockholders' equity |
173,126 | 165,459 | ||||||
Noncontrolling interests |
27,126 | 28,172 | ||||||
Total equity |
200,252 | 193,631 | ||||||
TOTAL LIABILITIES, TEMPORARY EQUITY AND EQUITY |
$ | 1,891,654 | $ | 1,706,567 | ||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
2
TICKETMASTER ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF TEMPORARY EQUITY AND EQUITY
(Unaudited)
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Temporary Equity | Ticketmaster Entertainment, Inc. Stockholders' Equity | |
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Redeemable Preferred Stock $0.01 Par Value |
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Common Stock $0.01 Par Value |
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Accumulated Other Comprehensive Income |
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Redeemable Noncontrolling Interests |
Additional Paid-in Capital |
Retained Deficit |
Noncontrolling Interests |
Total Equity |
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Amount | Shares | Amount | Shares | |||||||||||||||||||||||||||
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(In thousands) |
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Balance as of December 31, 2008 |
$ | 9,888 | 1,750 | $ | 42,483 | $ | 572 | 57,213 | $ | 1,235,019 | $ | (1,058,758 | ) | $ | (11,374 | ) | $ | 28,172 | $ | 193,631 | |||||||||||
Comprehensive income: |
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Net income (loss) (as restated) |
| | (1,467 | ) | | | | 7,249 | | (1,046 | ) | 6,203 | |||||||||||||||||||
Foreign currency translation |
| | (21 | ) | | | | | (1,957 | ) | | (1,957 | ) | ||||||||||||||||||
Comprehensive (loss) income (as restated) |
(1,488 | ) | (1,046 | ) | 4,246 | ||||||||||||||||||||||||||
Issuance of common stock |
| | | 1 | 116 | 762 | | | | 763 | |||||||||||||||||||||
Stock-based compensation (as restated) |
1,561 | | 1,108 | | | 3,602 | | | | 3,602 | |||||||||||||||||||||
Fair value of redeemable noncontrolling interests adjustment (as restated) |
| | 1,990 | | | (1,990 | ) | | | | (1,990 | ) | |||||||||||||||||||
Distributions to noncontrolling interests (as restated) |
| | (349 | ) | | | | | | | | ||||||||||||||||||||
Balance as of March 31, 2009 (as restated) |
$ | 11,449 | 1,750 | $ | 43,744 | $ | 573 | 57,329 | $ | 1,237,393 | $ | (1,051,509 | ) | $ | (13,331 | ) | $ | 27,126 | $ | 200,252 | |||||||||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
3
TICKETMASTER ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31, | |||||||
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2009 | 2008 | ||||||
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(In thousands) |
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Cash flows from operating activities: |
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Net income |
$ | 4,736 | $ | 32,134 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Amortization of intangibles |
15,058 | 8,868 | ||||||
Depreciation |
12,400 | 11,055 | ||||||
Amortization of debt issuance costs |
1,114 | | ||||||
Provision for doubtful accounts |
433 | 580 | ||||||
Stock-based compensation expense |
6,271 | 4,765 | ||||||
Deferred income taxes |
(2,998 | ) | 1,111 | |||||
Equity in income of unconsolidated affiliates, net of dividends |
(1,343 | ) | (666 | ) | ||||
Excess tax benefits from stock-based awards |
| (28 | ) | |||||
Changes in current assets and liabilities, excluding acquisition effects: |
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Accounts receivable |
(2,410 | ) | 6,542 | |||||
Prepaid expenses and other current assets |
(6,890 | ) | (18,692 | ) | ||||
Accounts payable and other current liabilities |
(777 | ) | 4,964 | |||||
Income taxes payable |
(2,512 | ) | (3,227 | ) | ||||
Deferred revenue |
2,114 | (581 | ) | |||||
Funds collected on behalf of clients, net |
147,995 | 18,958 | ||||||
Other, net |
(54 | ) | 52 | |||||
Net cash provided by operating activities |
173,137 | 65,835 | ||||||
Cash flows from investing activities: |
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Transfers to IAC |
| (135,481 | ) | |||||
Cash paid for acquisitions, net of cash acquired |
(36 | ) | (394,999 | ) | ||||
Purchases of property and equipment |
(10,913 | ) | (9,487 | ) | ||||
Proceeds from sales and maturities of marketable securities |
1,497 | | ||||||
Cash paid for long-term investments |
(67 | ) | (158 | ) | ||||
Net cash used in investing activities |
(9,519 | ) | (540,125 | ) | ||||
Cash flows from financing activities: |
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Capital contributions from IAC |
| 394,999 | ||||||
Principal payments on long-term obligations |
(577 | ) | (345 | ) | ||||
Distributions to noncontrolling interests |
(349 | ) | | |||||
Excess tax benefits from equity awards |
| 28 | ||||||
Net cash (used in) provided by financing activities |
(926 | ) | 394,682 | |||||
Effect of exchange rate changes on cash and cash equivalents |
(3,277 | ) | 12,943 | |||||
Net increase (decrease) in cash and cash equivalents |
159,415 | (66,665 | ) | |||||
Cash and cash equivalents at beginning of period |
464,618 | 568,417 | ||||||
Cash and cash equivalents at end of period |
$ | 624,033 | $ | 501,752 | ||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
4
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
Company Overview
Ticketmaster Entertainment, Inc., a Delaware corporation ("Ticketmaster Entertainment," "we," "our," "us" or the "Company"), consists of Ticketmaster and Front Line Management Group, Inc. ("Front Line"). Ticketmaster operates in 20 global markets, providing ticket sales, ticket resale services, marketing and distribution through www.ticketmaster.com, numerous retail outlets and worldwide call centers. Established in 1976, Ticketmaster serves clients worldwide across multiple event categories, providing exclusive ticketing services for leading arenas, stadiums, professional sports franchises and leagues, college sports teams, performing arts venues, museums, and theaters. Ticketmaster Entertainment acquired a controlling interest in Front Line in October 2008. Founded by Irving Azoff and Howard Kaufman in 2004, Front Line is an artist management company.
Spin-off from IAC/InterActiveCorp
On July 1, 2008, the Board of Directors of IAC/InterActiveCorp ("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 four wholly-owned subsidiaries (the "Spincos"), including Ticketmaster Entertainment.
On August 20, 2008, IAC distributed to its stockholders all of the outstanding shares of common stock, par value $0.01 per share, of Ticketmaster Entertainment (the "spin-off"). Ticketmaster Entertainment's businesses include the businesses that formerly comprised IAC's Ticketmaster segment (which, at the time of spin-off, included IAC's domestic and international ticketing and ticketing related businesses, subsidiaries and investments, and excluded Ticketmaster Entertainment's Reserve America subsidiary and its investment in Active.com). At the time of spin-off, Ticketmaster Entertainment also included IAC's minority investment in Front Line. On October 29, 2008, the Company acquired additional equity interests in Front Line, giving Ticketmaster Entertainment a controlling interest in Front Line.
Upon completion of the spin-off (and for a short period prior to that, on a "when issued" basis), Ticketmaster Entertainment shares began trading on The Nasdaq Global Select Market ("NASDAQ") under the symbol "TKTM." In conjunction with the spin-off, Ticketmaster Entertainment completed the following transactions: (1) extinguished all intercompany receivable balances due from IAC and its subsidiaries, which totaled $604.4 million by recording a non-cash distribution to IAC, (2) recapitalized the invested equity balance with common stock, whereby holders of IAC stock received one fifth of a share of Ticketmaster Entertainment common stock for each share of common and class B common stock of IAC held, as described in our Post Effective Amendment No. 1 to Form S-1 (Commission File Number 333-152702) filed with the Securities and Exchange Commission ("SEC") on August 20, 2008, and (3) distributed $752.9 million in cash to IAC in connection with Ticketmaster Entertainment's separation from IAC, which included the net proceeds of $723.6 million from our financings through a combination of privately issued debt securities and bank borrowings. Refer to Note 5Long Term Debt.
Pending Merger with Live Nation
On February 10, 2009, the Company entered into a definitive agreement to merge with Live Nation, Inc. ("Live Nation") in a stock transaction pursuant to which the Company will merge with and into an indirect, wholly-owned subsidiary of Live Nation ("Merger Sub"), with Merger Sub continuing
5
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)
as the surviving entity and an indirect, wholly-owned subsidiary of Live Nation and Live Nation continuing as the public parent of the combined companies (the "Merger"). Pursuant to the terms of the merger agreement, the aggregate number of shares of Live Nation common stock that the holders of securities representing 100% of the voting power of the Company's equity interests issued and outstanding immediately prior to the consummation of the Merger are entitled to receive in the Merger will represent 50.01% of the total voting power of the Live Nation equity interests issued and outstanding immediately following the consummation of the Merger. The Merger requires, among other customary closing conditions, approval by a majority of the outstanding shares of the Company's common stock and Series A Preferred Stock, voting together as a single class, approval by a majority of the shares of Live Nation's common stock, represented in person or by proxy, domestic and foreign regulatory approvals, and receipt of the necessary consent of lenders party to the Company's credit facility to allow the facility to remain in effect after the consummation of the Merger with no default or event of default there under resulting from the Merger. Liberty Media Corporation, which beneficially owns approximately 29% of the Company's outstanding common stock, has agreed to vote in favor of the proposed transaction, subject to the terms of a voting agreement.
The proposed transaction is subject to antitrust/competition regulatory review in the United States and four other countries. Ticketmaster Entertainment expects the Merger to close before 2009 year end. In the United States, Ticketmaster Entertainment and Live Nation are engaged in discussions with the U.S. Department of Justice, Antitrust Division ("DOJ") regarding the proposed transaction. The parties are also in the process of responding to the DOJ's "second request" for information related to the companies' respective businesses and the proposed Merger.
The other jurisdictions where the transaction is under regulatory review are Canada, the United Kingdom, Norway, and Turkey. The Canadian authorities recently issued a "second request" for additional information relating to the parties' respective businesses, and the parties are in the process of responding to the Canadian request. The U.K. authorities have issued several information requests to which the parties are in the process of responding. The Norwegian Competition Authority has advised that the parties are required to submit a full-form application for approval, which will require the parties to supplement the previously filed "short-form" application. Finally, the parties have recently submitted the required information to the Turkish competition authorities.
Basis of Presentation
These interim unaudited consolidated financial statements present our results of operations, financial position, temporary equity and equity, comprehensive income and cash flows, on a combined basis through the spin-off on August 20, 2008, and on a consolidated basis thereafter. Our pre spin-off financial statements were prepared on a combined basis rather than a consolidated basis because they excluded Ticketmaster Entertainment's former Reserve America subsidiary and its investment in Active.com, which were transferred to IAC, and included the investment in Front Line that was not owned prior to the spin-off by legal entities that comprise Ticketmaster Entertainment businesses.
Ticketmaster Entertainment's investment in Front Line was consolidated beginning October 29, 2008, when the Company increased its ownership interest from 39.4% to 82.3% (approximately 75% on a diluted basis). Prior to October 29, 2008, the investment in Front Line was accounted for using the equity method of accounting. The ownership of Reserve America and the investment in Active.com were retained by IAC after the spin-off.
6
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)
We prepared the interim unaudited consolidated financial statements from the historical results of operations and historical basis of the assets and liabilities of Ticketmaster Entertainment with the exception of income taxes. We computed income taxes using our stand-alone tax rate. Our income tax payable as well as deferred tax assets and liabilities represent the estimated impact of filing a consolidated income tax return with IAC through the spin-off, and filing a stand-alone consolidated income tax return thereafter.
Until the spin-off, we recorded expense allocations from IAC, which consisted of certain IAC general corporate overhead expenses, based on the ratio of our revenue as a percentage of IAC's total revenue. The general corporate overhead allocations primarily included expenses relating to accounting, treasury, legal, tax, corporate support, human resource functions and internal audit. Since the spin-off, we have been performing these functions using our own resources or purchased services, including services purchased from IAC pursuant to the transitional services agreement among IAC and the Spincos.
Interim results are not necessarily indicative of the results that may be expected for a full year. You should read these interim unaudited consolidated financial statements and notes in conjunction with our audited consolidated financial statements and notes for the year ended December 31, 2008, which are included in our Form 10-K, as amended.
The historical March 31, 2008 unaudited financial statements are based on certain assumptions about Ticketmaster Entertainment as a stand-alone company. Our management believes the assumptions underlying the historical combined financial statements of Ticketmaster Entertainment are reasonable. However, this financial information does not necessarily reflect what the historical financial position, results of operations and cash flows of Ticketmaster Entertainment would have been if Ticketmaster Entertainment had been a stand-alone company during the period presented.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the SEC. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for audited financial statements. In the opinion of Ticketmaster Entertainment's management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Reclassifications
Certain amounts in the prior year's financial statements and notes have been reclassified to conform to the current-year presentation, including redeemable noncontrolling interests in accordance with the disclosure requirements of SFAS No. 160, Noncontrolling Interests in Financial Statementsan amendment of Accounting Research Bulletin No. 51 ("SFAS No. 160") and FASB EITF Topic No. D-98, Classification and Measurement of Redeemable Securities ("EITF D-98").
7
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF ACCOUNTING STANDARDS
Recently Adopted Accounting Standards
Disclosures by Public Entities about Transfers of Financial Assets and Interests in Variable Interest Entities
In December 2008, the Financial Accounting Standards Board (the "FASB") issued FASB Staff Position ("FSP") FAS No.140-4 and FASB Interpretation No. 46(R)-8, Disclosures by Public Entities about Transfers of Financial Assets and Interests in Variable Interest Entities ("FSP FAS No. 140-4" and "FIN 46(R)-8"). FSP FAS No. 140-4 and FIN 46(R)-8 require additional disclosures about an entity's involvement with variable interest entities and transfers of financial assets. Ticketmaster Entertainment adopted FSP FAS No. 140-4 and FIN 46(R)-8 on January 1, 2009, and the standard did not have a material impact on the Company's consolidated financial statements.
Equity Method Investment Accounting Considerations
In November 2008, the FASB ratified the Emerging Issues Task Force ("EITF") consensus on Issue No. 08-6, Equity Method Investment Accounting Considerations ("EITF 08-6") which addresses certain effects of Statement of Financial Accounting Standards ("SFAS") No. 141 (revised 2007), Business Combinations ("SFAS No. 141R") and SFAS No. 160 on an entity's accounting for equity-method investments. The consensus indicates, among other things, that transaction costs for an investment should be included in the cost of the equity-method investment (and not expensed) and shares subsequently issued by the equity-method investee that reduce the investor's ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings. Ticketmaster Entertainment adopted EITF 08-6 on January 1, 2009 and the standard did not have a material impact on the Company's consolidated financial statements.
Accounting for Defensive Intangible Assets
In November 2008, the FASB ratified the EITF consensus on Issue No. 08-7, Accounting for Defensive Intangible Assets ("EITF 08-7"). EITF 08-7 addresses the accounting for an intangible asset acquired in a business combination or asset acquisition that an entity does not intend to use or intends to hold to prevent others from obtaining access (a defensive intangible asset). Under EITF 08-7, a defensive intangible asset would need to be accounted for as a separate unit of accounting and would be assigned a useful life based on the period over which the asset diminishes in value. Ticketmaster Entertainment adopted EITF 08-7 on January 1, 2009, and the standard did not have a material impact on the Company's consolidated financial statements.
Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities ("FSP No. EITF 03-6-1"). FSP No. EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities and included in the calculation of basic EPS. Ticketmaster Entertainment adopted EITF 03-06-1 on January 1, 2009, and the standard did not have a material impact on the Company's consolidated financial statements.
8
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF ACCOUNTING STANDARDS (Continued)
Determination of the Useful Life of Intangible Assets
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets ("FSP No. FAS 142-3"). FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intagible Assets. Ticketmaster Entertainment adopted FSP No. FAS 142-3 on January 1, 2009 on a prospective basis, and the standard did not have a material impact on the Company's consolidated financial statements.
Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 ("SFAS No. 161"). SFAS No. 161 requires enhanced disclosures on an entity's derivative and hedging activities. Entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedging items are accounted for under SFAS No. 133 and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The Company adopted SFAS No. 161 January 1, 2009. Because SFAS No. 161 amends only the disclosure requirements for derivative instruments and hedged items, the adoption of SFAS No. 161 did not have a material impact on the Company's consolidated financial statements.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160, which changes the accounting and reporting for minority interests. Noncontrolling (minority) interests will be reported as a component of equity separate from the parent's equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the statement of operations and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is applied prospectively, except for the presentation and disclosure requirements, which are applied retrospectively for all periods presented. Ticketmaster Entertainment adopted SFAS No. 160 on January 1, 2009. As a result of the adoption, we have reclassified certain noncontrolling interests from liabilities to a component of equity. In accordance with EITF D-98, securities that are redeemable at the option of the holder and not solely within the control of the issuer, must be classified outside of equity. Since the noncontrolling interests held by third parties in certain consolidated subsidiaries are exercisable outside the control of the Company, these interests are classified as temporary equity in the accompanying consolidated balance sheets.
Ticketmaster Entertainment determined that, during its adoption of SFAS No. 160 on January 1, 2009, it incorrectly classified certain noncontrolling interests in liabilities and permanent equity rather than temporary equity on its consolidated balance sheets as of March 31, 2009 and December 31, 2008 and the related consolidated statements of temporary equity and equity. As a result of the correction of the retrospective application of the presentation and disclosure requirements of SFAS No. 160, Ticketmaster Entertainment's unaudited consolidated balance sheet as of March 31, 2009, audited consolidated balance sheet as of December 31, 2008 and the consolidated statement of temporary
9
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF ACCOUNTING STANDARDS (Continued)
equity and equity for the three months ended March 31, 2009 have been restated. This restatement resulted in the reclassification of $41.7 million and $41.8 million to redeemable noncontrolling interests and the accretion of $2.0 million and $0.7 million in fair value attributable to certain redeemable noncontrolling interests as of March 31, 2009 and December 31, 2008, respectively.
Business Combinations
In December 2007, the FASB issued SFAS No. 141R, which replaces SFAS No. 141. SFAS No. 141R establishes revised principles and requirements for the recognition and measurement of assets and liabilities in a business combination. SFAS No. 141R requires (i) recognition of 100% of the fair values of acquired assets, including goodwill, and assumed liabilities upon obtaining control, (ii) contingent consideration to be fair valued at acquisition date, (iii) transaction costs to be expensed as incurred, (iv) pre-acquisition contingencies to be accounted for at acquisition date at fair value and (v) costs of a plan to exit an activity or terminate or relocate employees to be accounted for as post combination costs. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008 and early adoption was prohibited. SFAS No. 141R requires prospective application for all acquisitions after the adoption date. The Company expects SFAS No. 141R to have an impact on how acquisitions are reflected in the consolidated financial statements when effective, but the timing, nature and magnitude of the specific effects will depend on the nature, terms and size of any acquisitions that the Company consummates after the effective date. As of December 31, 2008, approximately $0.6 million of transaction costs related to deals not consummated were capitalized and included in prepaid expenses and other current assets. These costs were expensed during the first quarter of 2009.
Additionally, for business combinations for which the acquisition date is prior to the effective date of SFAS No. 141R, the acquirer is required to apply the requirements of SFAS No. 109, Income Taxes, as amended by SFAS No. 141R, prospectively. After the effective date of SFAS No. 141R, changes in the valuation allowance for acquired deferred tax assets and dispositions of uncertain income tax positions must be recognized as an adjustment to income tax expense, rather than through goodwill. The impact of the adoption of SFAS No. 141R on the Company's consolidated financial statements will largely be dependent on the size and nature of the business combinations completed after January 1, 2009.
Accounting by Lessees for Maintenance Deposits
In June 2008, the FASB issued EITF Issue No. 08-3, "Accounting by Lessees for Maintenance Deposits" ("EITF 08-3"). EITF 08-03 concluded that maintenance deposits should be considered a deposit when paid to the lessor if it is probable that the deposits will be refunded to the lessee. The cost of maintenance activities should be expensed or capitalized by the lessee, as appropriate, when the underlying maintenance is performed. If it is less than probable that a maintenance deposit will be refunded to the lessee, the deposit is recognized as additional rent expense. EITF 08-03 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Ticketmaster Entertainment adopted EITF 08-3 on January 1, 2009 and the standard did not have an impact on the Company's consolidated financial statements.
10
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SUMMARY OF ACCOUNTING STANDARDS (Continued)
Recent Accounting Pronouncements
Fair Value Accounting
In March 2009, the FASB issued proposals to improve guidance on fair value measurements and other-than-temporary impairment, specifically; proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20, "Recognition and Presentation of Other-Than-Temporary Impairments" defined as ("FSP FAS 115-a, FAS 124-a, EITF 99-20-b"), and FSP FAS 157-e, "Determining Whether a Market Is Not Active and a Transaction Is Not Distressed" ("FSP FAS 157-e"). The comment deadline for these proposals was April 1, 2009. We are currently evaluating the effects that these proposed FSP's will have on our consolidated financial statements.
NOTE 3SEGMENT INFORMATION
The overall concept employed by Ticketmaster Entertainment in determining its operating segments is to present the financial information in a manner consistent with how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance. Operating segments are consolidated for reporting purposes if they have similar economic characteristics and meet the aggregation criteria of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.
Prior to the acquisition of a controlling interest in Front Line, Ticketmaster Entertainment had one operating segment in accordance with its internal management structure and based upon how the chief operating decision maker viewed the business, its organizational structure and the type of service provided, which primarily was online and offline ticketing services.
After the October 29, 2008 acquisition of a controlling interest in Front Line, based upon changes in the internal management structure and how the chief operating decision maker viewed the business, the Company began reporting two segments: Ticketing and Artist Services.
The Ticketing segment is primarily an agency business that sells tickets for events on behalf of our clients and retains a convenience charge and order processing fee for our services. We sell tickets through a combination of websites, telephone services and ticket outlets.
The Artist Services segment primarily provides management services to music recording artists in exchange for a commission on the earnings of these artists. Artist Services also sells merchandise associated with musical artists at live musical performances, to retailers, and directly to consumers via a website.
Revenue and expenses earned and charged between segments are eliminated in consolidation. Corporate expenses, interest income, interest expense, equity in income of nonconsolidated affiliates, net loss attributable to noncontrolling interests, and other (expense) incomenet and income taxes
11
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3SEGMENT INFORMATION (Continued)
expense are managed on a total company basis. Corporate expenses primarily include compensation and other employee costs (including stock-based compensation), outside services and professional fees.
|
Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
|
(In thousands) |
||||||||
Revenue: |
|||||||||
Ticketing |
$ | 339,010 | $ | 348,981 | |||||
Artist services |
34,806 | | |||||||
Total revenue |
$ | 373,816 | $ | 348,981 | |||||
|
Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
|
(In thousands) |
||||||||
Operating income: |
|||||||||
Ticketing |
$ | 60,088 | $ | 66,494 | |||||
Artist services |
(6,760 | ) | | ||||||
Corporate and unallocated |
(28,028 | ) | (19,704 | ) | |||||
Total Operating income |
$ | 25,300 | $ | 46,790 | |||||
|
Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
|
(In thousands) |
||||||||
Adjusted EBITDA(a): |
|||||||||
Ticketing |
$ | 80,021 | $ | 88,005 | |||||
Artist services |
4,429 | | |||||||
Corporate and unallocated |
(25,421 | ) | (16,527 | ) | |||||
Total Adjusted EBITDA |
$ | 59,029 | $ | 71,478 | |||||
|
Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
|
(In thousands) |
||||||||
Capital expenditures: |
|||||||||
Ticketing |
$ | 9,721 | $ | 8,216 | |||||
Artist services |
271 | | |||||||
Corporate and unallocated |
921 | 1,271 | |||||||
Total Capital expenditures |
$ | 10,913 | $ | 9,487 | |||||
12
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3SEGMENT INFORMATION (Continued)
The following table reconciles Adjusted EBITDA for the Company's reportable segments to net income attributable to Ticketmaster Entertainment, Inc.:
|
Three Months Ended March 31, 2009 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Adjusted EBITDA(a) |
Non-cash compensation expense |
Amortization of intangibles |
Depreciation expense |
Operating income |
||||||||||||
|
(In thousands) |
||||||||||||||||
Ticketing |
$ | 80,021 | $ | (1,192 | ) | $ | (7,234 | ) | $ | (11,507 | ) | $ | 60,088 | ||||
Artist services |
4,429 | (3,230 | ) | (7,824 | ) | (135 | ) | (6,760 | ) | ||||||||
Corporate and unallocated |
(25,421 | ) | (1,849 | ) | | (758 | ) | (28,028 | ) | ||||||||
Total |
$ | 59,029 | $ | (6,271 | ) | $ | (15,058 | ) | $ | (12,400 | ) | 25,300 | |||||
Other expense, net |
(16,363 | ) | |||||||||||||||
Earnings before income taxes and noncontrolling interests |
8,937 | ||||||||||||||||
Income tax provision |
(4,201 | ) | |||||||||||||||
Net income |
4,736 | ||||||||||||||||
Plus: Loss attributable to noncontrolling interests, net |
2,513 | ||||||||||||||||
Net income attributable to Ticketmaster Entertainment, Inc. |
$ | 7,249 | |||||||||||||||
|
Three Months Ended March 31, 2008 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Adjusted EBITDA(a) |
Non-cash compensation expense |
Amortization of intangibles |
Depreciation expense |
Operating income |
||||||||||||
|
(In thousands) |
||||||||||||||||
Ticketing |
$ | 88,005 | $ | (2,283 | ) | $ | (8,868 | ) | $ | (10,360 | ) | $ | 66,494 | ||||
Artist services |
| | | | | ||||||||||||
Corporate and unallocated |
(16,527 | ) | (2,482 | ) | | (695 | ) | (19,704 | ) | ||||||||
Total |
$ | 71,478 | $ | (4,765 | ) | $ | (8,868 | ) | $ | (11,055 | ) | 46,790 | |||||
Other income, net |
4,165 | ||||||||||||||||
Earnings before income taxes and noncontrolling interests |
50,955 | ||||||||||||||||
Income tax provision |
(18,821 | ) | |||||||||||||||
Net income |
32,134 | ||||||||||||||||
Plus: Loss attributable to noncontrolling interests, net |
573 | ||||||||||||||||
Net income attributable to Ticketmaster Entertainment, Inc. |
$ | 32,707 | |||||||||||||||
- (a)
- Our primary operating metric for evaluating segment performance is Adjusted Earnings before Interest, Income Taxes, Depreciation and Amortization ("Adjusted EBITDA"), which is defined as Operating income excluding, if applicable: (1) depreciation expense, (2) non-cash compensation expense, (3) amortization and impairment of intangibles, (4) goodwill or other impairments, (5) pro forma adjustments for significant acquisitions, fair value adjustments to contingent consideration and compensation expense associated with significant transactions or the Merger and (6) one-time items. Ticketmaster Entertainment believes this measure is useful to investors because
13
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3SEGMENT INFORMATION (Continued)
it represents its consolidated operating results excluding the effects of non-cash expenses. The Adjusted EBITDA metric was referred to as Adjusted Operating Income in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2008. Adjusted EBITDA has certain limitations in that it does not take into account the impact to Ticketmaster Entertainment's statement of operations of certain expenses, including acquisition-related accounting. Ticketmaster Entertainment endeavors to compensate for the limitations of the supplemental measure presented by providing the comparable GAAP measure with equal or greater prominence, financial statements prepared in accordance with generally accepted accounting principles, and descriptions of the reconciling items, including quantifying such items, to derive the supplemental measure.
The Ticketing segment's largest client through 2008, Live Nation (including its subsidiary House of Blues), represented approximately 6% and 15% of Ticketmaster Entertainment's consolidated revenue for the three months ended March 31, 2009 and 2008, respectively.
NOTE 4INCOME TAXES
Ticketmaster Entertainment 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, the Company 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 our 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, 2009 and 2008, the Company recorded a tax provision of $4.2 million and $18.8 million, respectively, which represent effective tax rates of 47% and 37%, respectively. The tax rate for the three months ended March 31, 2009 is higher than the federal statutory rate of 35% due principally to losses in foreign jurisdictions for which no tax benefit can be recognized, adjustments to deferred taxes due to newly enacted state tax legislation, and increases in tax reserves, partially offset by foreign income taxed at lower rates including the effects of our international restructuring. The tax rate for the three months ended March 31, 2008 is higher than the federal statutory rate of 35% due principally to state taxes, partially offset by foreign income taxed at lower rates.
14
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4INCOME TAXES (Continued)
As of December 31, 2008 and March 31, 2009, the Company had unrecognized tax benefits of approximately $1.3 million and $2.3 million, respectively. During the three months ended March 31, 2009, the unrecognized tax benefits increased by approximately $1.0 million as a result of historical state tax positions and foreign income tax positions taken in the current year. The Company 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, 2009 is $0.2 million, net of related deferred taxes, for interest and penalties on unrecognized tax benefits. At March 31, 2009, the Company has accrued $0.6 million for the payment of interest and penalties.
By virtue of previously filed separate company tax returns, as well as consolidated tax returns with IAC, Ticketmaster Entertainment is routinely under audit by federal, state, local and foreign income tax authorities. 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 amounts recorded for unrecognized tax benefits and the amounts owed by Ticketmaster Entertainment are recorded in the period they become known.
The IRS is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2006, which include the operations of Ticketmaster Entertainment from January 17, 2003, the date which Ticketmaster Entertainment joined the IAC consolidated tax group. The statute of limitations for these years has been extended to December 31, 2011. Various IAC consolidated state and local jurisdictions are currently under examination, the most significant of which are California, Florida, New York and New York City, for various tax years after December 31, 2001. Ticketmaster Entertainment's operations were included in these returns from January 17, 2003. These examinations are expected to be completed by late 2009. See Note 14Related Party Transactions to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2008, for a description of the tax sharing arrangement with IAC and the Spincos.
Ticketmaster Entertainment believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $1.4 million within twelve months of the current reporting date due to settlements and expirations of applicable statute of limitations. An estimate of other changes in unrecognized tax benefits cannot be made, but such other changes are not expected to be significant.
NOTE 5LONG TERM DEBT
The balance of long-term debt is as follows (in thousands):
|
March 31, 2009 | December 31, 2008 | |||||
---|---|---|---|---|---|---|---|
10.75% Senior Notes, due July 28, 2016 |
$ | 300,000 | $ | 300,000 | |||
2008 Term Loan A, due July 25, 2013 |
100,000 | 100,000 | |||||
2008 Term Loan B, due July 25, 2014 |
350,000 | 350,000 | |||||
2008 Revolver, due July 25, 2013 |
115,000 | 115,000 | |||||
Total |
$ | 865,000 | $ | 865,000 | |||
The 10.75% Senior Notes ("Senior Notes") contain two incurrence-based financial covenants requiring a minimum fixed charge coverage ratio, as defined therein, of 2.0 to 1.0, and a maximum
15
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5LONG TERM DEBT (Continued)
secured indebtedness leverage ratio, as defined therein, of 2.25 to 1.0. As of March 31, 2009, the Company was in compliance with these incurrence based financial covenants.
Term Loan A, Term Loan B and the revolving credit facility (the "Revolver"), collectively the ("Senior Secured Credit Facilities") bear interest rates per annum based on fixed and variable interest rates specified in the credit agreement governing the Senior Secured Credit Facilities. The interest rates for the Term Loan A, Term Loan B and the Revolver at March 31, 2009 were 3.73%, 4.23% and 3.46%, respectively.
The Senior Secured Credit Facilities have two quarterly financial covenants requiring a maximum total leverage ratio, as defined therein, of 3.50 to 1.00 and a minimum interest coverage ratio, as defined therein, of 3.00 to 1.00. As of March 31, 2009, the Company was in compliance with both of these financial covenants, giving pro-forma effect, as required, to Adjusted EBITDA for Front Line.
As of March 31, 2009, the Company's long-term debt has scheduled principal repayments for each of the next five years and thereafter as follows (in thousands):
Years Ending December 31,
|
|
|||
---|---|---|---|---|
2009 |
$ | | ||
2010 |
| |||
2011 |
13,500 | |||
2012 |
18,500 | |||
2013 |
191,750 | |||
Thereafter |
641,250 | |||
Total |
$ | 865,000 | ||
NOTE 6EARNINGS PER SHARE
We compute earnings per share in accordance with SFAS No. 128, Earnings Per Share ("SFAS No. 128"). We compute basic earnings per share using the weighted average number of common shares outstanding for the period. Under the provisions of SFAS No. 128, basic net income per common share is computed by dividing the net income applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per common share adjusts basic net income per common share for the effects of stock options, restricted stock and other potentially dilutive financial instruments in the periods in which such effect is dilutive. For the three months ended March 31, 2008, we computed earnings per share using the number of shares of common stock outstanding immediately following the spin-off, as if such shares were outstanding for the entire period.
16
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6EARNINGS PER SHARE (Continued)
The following table presents our basic and diluted earnings per share:
|
Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
|
(In thousands, except for per share data) |
|||||||
Net income attributable to Ticketmaster Entertainment, Inc.: |
$ | 7,249 | $ | 32,707 | ||||
Net earnings per share available to common stockholders: |
||||||||
Basic |
$ | 0.13 | $ | 0.58 | ||||
Diluted |
$ | 0.12 | $ | 0.58 | ||||
Weighted average of number of shares outstanding: |
||||||||
Basic |
57,321 | 56,171 | ||||||
Diluted effect of: |
||||||||
Options to purchase common stock, restricted stock units and redeemable preferred stock |
1,898 | | ||||||
Diluted |
59,219 | 56,171 | ||||||
Weighted average common shares outstanding includes the incremental shares that would be issued upon the assumed exercise of stock options, vesting of restricted stock units ("RSUs") and conversion of the Company's Series A Convertible Preferred Stock if the effect is dilutive.
NOTE 7STOCK-BASED COMPENSATION
Stock-based compensation expense related to stock options, restricted stock, RSUs and performance stock units ("PSUs") is included in the following line items in the Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008 (in thousands):
|
Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
Cost of sales |
$ | 112 | $ | 235 | |||
Selling and marketing expense |
121 | 258 | |||||
General and administrative expense |
6,038 | 4,272 | |||||
Stock-based compensation expense |
$ | 6,271 | $ | 4,765 | |||
On January 22, 2009, the Company granted an aggregate of 28,184 of RSUs to eligible non-employee members of its Board of Directors with a grant date fair value of $0.2 million. Half of the RSUs vest in August 2009, with the remaining half vesting in August 2010.
On April 29, 2009, the Company granted an aggregate of 2,235,000 options and 113,000 RSUs to certain employees. The options and restricted stock units vest ratably over four years and have ten year terms.
17
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES
At March 31, 2009 and December 31, 2008 Ticketmaster Entertainment's equity investments in unconsolidated affiliates totaled $18.9 million and $12.9 million, respectively, and are included in Long-term investments in the Consolidated Balance Sheets.
On October 29, 2008, Ticketmaster Entertainment acquired additional interests in Front Line from certain stockholders of Front Line for an aggregate purchase price of $123.0 million. On this same date, the Company also acquired equity interests in Front Line in a transaction that, for accounting purposes, was treated as an exchange by a trust controlled by Mr. Azoff of certain Front Line equity awards for certain Ticketmaster Entertainment equity awards. The Company acquired additional ownership interests of 42.9%, in the aggregate, resulting in a controlling interest in Front Line of 82.3% (approximately 75% on a diluted basis). Ticketmaster Entertainment's 39.4% ownership interest in Front Line prior to the acquisition was accounted for under the equity method of accounting. Income related to the investment in Front Line, which totaled $0.2 million in the three months ended March 31, 2008, is included in equity in income of unconsolidated affiliates in the Consolidated Statements of Operations. The results of Front Line were consolidated with Ticketmaster Entertainment effective October 29, 2008.
The Company also maintains a 15% investment in Broadway China Ventures and accounts for its investment on a cost basis.
The following is a list of investments accounted for under the equity method, the principal market in which the investee operates, and the relevant ownership percentage at both March 31, 2009 and December 31, 2008:
iLike.com (United States) |
25.0 | % | ||
Beijing Gehua Ticketmaster Ticketing Co., Ltd. (China) |
40.0 | % | ||
TM Mexico (Mexico) |
33.3 | % |
The summarized aggregated financial information of Ticketmaster Entertainment's equity investments is as follows (in thousands):
|
Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
Net sales |
$ | 8,979 | $ | 72,149 | |||
Gross profit |
6,415 | 34,353 | |||||
Net income |
4,034 | 4,746 |
The summarized aggregated financial information for the three months ended March 31, 2008 includes Ticketmaster Entertainment's investment in Front Line which, prior to October 29, 2008, was accounted for under the equity method of accounting.
18
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9COMPREHENSIVE INCOME
Comprehensive income is comprised of (in thousands):
|
Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
Net income |
$ | 4,736 | $ | 32,134 | |||
Foreign currency translation |
(1,978 | ) | 12,361 | ||||
Total Comprehensive income |
2,758 | 44,495 | |||||
Loss attributable to noncontrolling interests, net |
2,513 | 573 | |||||
Foreign currency translation |
21 | (77 | ) | ||||
Comprehensive loss attributable to noncontrolling interests |
2,534 | 496 | |||||
Comprehensive income attributable to Ticketmaster Entertainment, Inc. |
$ | 5,292 | $ | 44,991 | |||
Accumulated other comprehensive income as of March 31, 2009 and March 31, 2008 is solely related to foreign currency translation.
NOTE 10RELATED PARTY TRANSACTIONS
Prior to the spin-off, our operating expenses included allocations from IAC for accounting, treasury, legal, tax, corporate support, human resource functions, and internal audit functions. These expenses were allocated based on the ratio of Ticketmaster Entertainment's revenue as a percentage of IAC's total revenue. The Company believes that the allocation methods used by IAC were reasonable. Expense allocations from IAC were $0.9 million for the three months ended March 31, 2008 and are included in general and administrative expense in our Consolidated Statements of Operations for the period. The expense allocations from IAC ceased upon consummation of the spin-off.
Ticketmaster Entertainment occupies office space in buildings in Los Angeles and New York City that are currently owned by IAC. Related rental expense charged to Ticketmaster Entertainment by IAC totaled $0.9 million and $0.6 million for the three months ended March 31, 2009 and 2008, respectively.
Interest income of $1.7 million was recorded in our Consolidated Statements of Operations for the three months ended March 31, 2008 which arose from intercompany receivables from IAC and its subsidiaries. The interest income from IAC ceased upon the extinguishment of all intercompany receivables upon consummation of the spin-off.
Relationship between IAC and Ticketmaster Entertainment after the spin-off
For purposes of governing certain of the ongoing relationships between IAC and Ticketmaster Entertainment at and after the spin-off, and to provide for an orderly transition, IAC and Ticketmaster Entertainment and the other Spincos entered into a separation agreement and a tax sharing agreement, among other agreements.
IAC and Ticketmaster Entertainment currently continue, and for the foreseeable future expect to continue, to work together pursuant to a variety of commercial relationships. In connection with the spin-off, IAC and Ticketmaster Entertainment entered into various commercial agreements between subsidiaries of IAC, on the one hand, and subsidiaries of Ticketmaster Entertainment, on the other
19
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10RELATED PARTY TRANSACTIONS (Continued)
hand, many of which memorialized (in most material respects) pre-existing arrangements in effect prior to the spin-off and all of which were negotiated at arms' length.
Agreements with Liberty Media Corporation
In connection with the spin-off, the Company assumed from IAC all of IAC's rights and obligations relating to Ticketmaster Entertainment under a Spinco Agreement between IAC and Liberty Media Corporation ("Liberty"), providing for post-spin-off governance arrangements at the Company. As of February 10, 2009, Liberty beneficially owned approximately 29.1% of the outstanding shares of common stock of the Company. Refer to the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2008 for a summary of the material terms of those governance agreements and related matters.
Liberty/Live Nation Stockholder Agreement
In connection with Ticketmaster Entertainment entering into a merger agreement with Live Nation, pursuant to which a merger of Ticketmaster Entertainment with and into a wholly owned subsidiary of Live Nation is pending, on February 10, 2009, Ticketmaster Entertainment entered into a certain Stockholder Agreement among Live Nation, Liberty, Liberty USA Holdings, LLC and Ticketmaster Entertainment, dated February 10, 2009 (the "Liberty Stockholder Agreement") regarding certain corporate governance rights, designation rights and registration rights with respect to the Live Nation common stock to be acquired by Liberty in connection with the Merger. Among other things, subject to certain restrictions and limitations set forth in the Liberty Stockholder Agreement, Liberty will have the right, following the closing of the Merger, to nominate up to two directors to serve on the Live Nation board of directors. In addition, if Liberty Media designates two directors to the Live Nation board of directors, one of them must meet the independence standards of the NYSE with respect to Live Nation, and Liberty would have the right to designate one of its nominees to serve on the Audit Committee and one nominee to serve on the Compensation Committee of the Live Nation board of directors, subject to such designee's satisfaction of the applicable standards for service on such committees. Furthermore, the Liberty Stockholder Agreement also contains provisions relating to limitations on the ownership of Live Nation equity securities by Liberty and its affiliates following the Merger and on transfers of Live Nation equity securities and rights and obligations under the Liberty Stockholder Agreement following the Merger.
Relationships Involving Executives
In connection with Ticketmaster Entertainment's entering into the Live Nation Merger agreement referred to above, on February 10, 2009, Ticketmaster Entertainment entered into a letter agreement, dated as of February 10, 2009, with Mr. Azoff, Chief Executive Officer of Ticketmaster Entertainment, pursuant to which Ticketmaster Entertainment agreed, prior to the consummation of the Live Nation Merger, to redeem the shares of Ticketmaster Entertainment series A convertible redeemable preferred stock held by or on behalf of Mr. Azoff for a note (i) having terms comparable to the Ticketmaster Entertainment series A convertible redeemable preferred stock (except that the note will not be convertible into shares of Ticketmaster Entertainment common stock) and (ii) resulting in legal, economic and tax treatment that, in the aggregate, will be no less favorable to Mr. Azoff than such treatment with respect to the Ticketmaster Entertainment series A convertible redeemable preferred stock.
20
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10RELATED PARTY TRANSACTIONS (Continued)
For a further discussion of related party relationships, see Item 13 of the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2008.
NOTE 11COMMITMENTS AND CONTINGIENCIES
In the ordinary course of business, Ticketmaster Entertainment is a party to various legal proceedings. Ticketmaster Entertainment 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 Entertainment, 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 Entertainment, 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 Entertainment. Ticketmaster Entertainment also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 4Income Taxes for discussion related to income tax contingencies. For a discussion of certain legal proceedings involving the Company, see Part II, Item 1 of this Form 10-Q.
In addition, pursuant to the Agreement and Plan of Merger dated as of February 10, 2009 (the "Merger Agreement"), among the Company, Live Nation, and Merger Sub, if the Merger Agreement is terminated before the Merger is completed, under some circumstances the Company may be obligated to pay to Live Nation a termination fee of $15 million plus Live Nation's expenses.
NOTE 12FAIR VALUE MEASUREMENTS
In accordance with SFAS No. 157, Fair Value Measurements ("SFAS No. 157"), the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters. If market observable inputs for model-based valuation techniques are not available, the Company will be required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument. Fair values of cash and cash equivalents, short-term accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts because of their short-term nature. Marketable securities are recognized in the balance sheets at their fair values based on quoted prices. Long-term debt is carried at cost. However, the Company is required to estimate the fair value of long-term debt under SFAS No. 107, Disclosures about Fair Values of Financial Instruments ("SFAS No. 107"). The fair value of long-term debt is estimated based on market prices or third-party quotes.
The provisions of SFAS No. 157 related to nonfinancial assets and liabilities became effective for the Company on January 1, 2009 in accordance with FSP FAS 157-2, Effective Date of FASB Statement No. 157, and will be applied prospectively. The application of SFAS No 157-2 did not have a material impact on the Company's consolidated financial statements.
21
TICKETMASTER ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12FAIR VALUE MEASUREMENTS (Continued)
SFAS No. 157 establishes a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2), and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).
The Company estimated the fair value of its long-term debt by using market prices or third party quotes. The table below summarizes the fair value estimates, at March 31, 2009 (in thousands):
|
Carrying Amount | Estimated Fair Value, (Level 2) |
|||||
---|---|---|---|---|---|---|---|
Long-term debt |
$ | 865,000 | $ | 688,700 |
NOTE 13RESTRUCTURING CHARGES
During the second quarter of 2008, Ticketmaster Entertainment 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 expiration of the various Live Nation ticketing agreements beginning in December 2008. As a result of this review, commencing in the third quarter of 2008, Ticketmaster Entertainment began to affect a series of actions expected to reduce 2009 annual operating expenses by approximately $35 million from reductions in personnel, consolidation of customer contact centers, and the balance from reductions in other operating costs and other discretionary costs. The cost-reduction efforts in the ticketing segment were substantially completed in the first quarter of 2009.
The following table summarizes the restructuring liabilities balance (included as a component of other accrued expenses within the Consolidated Balance Sheets) as of March 31, 2009.
|
Balance as of January 1, 2009 |
Credit to expense |
Cash payments |
Foreign Exchange Translation |
Balance as of March 31, 2009 |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(In thousands) |
||||||||||||||||
Employee termination costs |
$ | 5,687 | (43 | ) | (1,342 | ) | (19 | ) | $ | 4,283 | |||||||
Total |
$ | 5,687 | (43 | ) | (1,342 | ) | (19 | ) | $ | 4,283 | |||||||
During the first quarter of 2009, the Company recorded a severance and separation charge of $1.4 million for the resignation of an executive of Ticketmaster Entertainment. As of March 31, 2009, $1.4 million of this liability remains to be paid in bi-weekly installments for a period of twenty-four months through March 2011. The severance charge has been included in the general and administrative expense line item in the Consolidated Statements of Operations for the three months ended March 31, 2009.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Forward-looking statements in this Quarterly Report are subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company 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, as well as anticipated financial position, liquidity and capital needs and other similar matters, in each case relating to the Company.
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:
-
- our pending merger with Live Nation;
-
- adverse changes in economic conditions generally, including the current worldwide economic downturn, or in any of the
markets or industries in which the businesses of the Company operate;
-
- changes in senior management at the Company;
-
- adverse changes to, or interruptions in, relationships with third parties;
-
- changes affecting the ability of the Company 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 the Company;
-
- the rates of growth of the Internet and the e-commerce industry;
-
- changes adversely affecting the ability of the Company 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;
-
- regulatory legislative and legal actions and conditions affecting the Company, including:
-
- the promulgation of new, and/or the amendment of existing laws, rules and regulations applicable to the Company and its
businesses;
-
- changes in the application or interpretation of existing laws, rules and regulations in the case of the businesses of the
Company. 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; and
-
- the outcome of pending and future legal proceedings to which the Company is a party;
-
- competition from other companies;
-
- changes adversely affecting the ability of the Company and its businesses to adequately protect intellectual property rights, as well as to obtain licenses or other rights with respect to
23
-
- the substantial indebtedness of the Company and the possibility that the Company may incur additional indebtedness;
-
- third-party claims alleging infringement of intellectual property rights by the Company 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 licensing or other similar arrangements
with such third parties, which may or may not be available on favorable terms (if at all);
-
- the Company's ability to successfully integrate Front Line into its businesses;
-
- the Company's ability to successfully implement expense reduction measures; and
-
- natural disasters, acts of terrorism, war or political instability.
intellectual property in the future, which may or may not be available on favorable terms (if at all);
Certain of these factors and other factors, risks and uncertainties are discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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 the Company.
You should consider the areas of risk described above, as well as those set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2008, in connection with considering any forward-looking statements that may be made by the Company generally. Except for the ongoing obligations of the Company to disclose material information under the federal securities laws, the Company does 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.
Spin-Off from IAC/InterActive Corp
On July 1, 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 four wholly-owned subsidiaries, including Ticketmaster Entertainment, Inc., a Delaware corporation, formerly known as Ticketmaster.
On August 20, 2008, IAC distributed to its stockholders all of the outstanding shares of common stock, par value $0.01 per share, of Ticketmaster Entertainment. Our businesses include 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. At the time of spin-off, Ticketmaster Entertainment includes IAC's minority investment in Front Line. On October 29, 2008, the Company acquired an additional equity interest in Front Line, giving Ticketmaster Entertainment a controlling interest in Front Line. As a result, the Company consolidated the results of Front Line from the acquisition date.
Pending Merger with Live Nation
On February 10, 2009, the Company signed a definitive agreement to merge with Live Nation in a stock transaction pursuant to which the Company will merge with and into an indirect, wholly-owned subsidiary of Live Nation ("Merger Sub"), with Merger Sub continuing as the surviving entity and as an indirect, wholly-owned subsidiary of Live Nation and Live Nation continuing as the public parent of the combined companies. Pursuant to the terms of the merger agreement, the aggregate number of shares of Live Nation common stock that the holders of securities representing 100% of the voting power of the Company's capital stock issued and outstanding immediately prior to the consummation of the
24
Merger are entitled to receive in the Merger represents 50.01% of the total voting power of the Live Nation capital stock issued and outstanding immediately following the consummation of the Merger. The transaction requires, among other customary closing conditions, approval by a majority of the outstanding shares of the Company's common stock and Series A Preferred Stock, voting together as a single class, approval by a majority of the shares of Live Nation's common stock, represented in person or by proxy, domestic and foreign regulatory approvals, and receipt of the necessary consent of lenders party to the Company's credit facility to allow the facility to remain in effect after the consummation of the Merger with no default or event of default thereunder resulting from the Merger. Liberty Media Corporation, which beneficially owns approximately 29% of the Company's common stock, has agreed to vote in favor of the proposed transaction, subject to the terms of a voting agreement.
The proposed transaction is subject to antitrust/competition regulatory review in the United States and four other countries. Ticketmaster Entertainment expects the Merger to close before 2009 year end. In the United States, Ticketmaster Entertainment and Live Nation are engaged in discussions with the U.S. Department of Justice, Antitrust Division ("DOJ") regarding the proposed transaction. The parties are also in the process of responding to the DOJ's "second request" for information related to the companies' respective businesses and the proposed merger.
The other jurisdictions where the transaction is under regulatory review are Canada, the United Kingdom, Norway, and Turkey. The Canadian authorities recently issued a "second request" for additional information relating to the parties' respective businesses, and the parties are in the process of responding to the Canadian request. The U.K. authorities have issued several information requests, which the parties are in the process of responding to. The Norwegian Competition Authority has advised that the parties are required to submit a full-form application for approval, which will require the parties to supplement the previously filed "short-form" application. Finally, the parties have recently submitted the required information to the Turkish competition authorities.
Basis of Presentation
These interim unaudited consolidated financial statements of Ticketmaster Entertainment discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations present our results of operations, financial position, redeemable preferred stock and equity, comprehensive income and cash flows, on a combined basis through the spin-off on August 20, 2008, and on a consolidated basis thereafter. Our pre spin-off financial statements were prepared on a combined basis rather than a consolidated basis because they excluded Ticketmaster Entertainment's former Reserve America subsidiary and its investment in Active.com, which were transferred to IAC, and included the investment in Front Line that was not owned prior to the spin-off by legal entities that comprise Ticketmaster Entertainment businesses.
The Company's investment in Front Line was consolidated beginning October 29, 2008, when the Company increased its ownership interest from 39.4% to 82.3% (approximately 75% on a diluted basis). Prior to October 29, 2008, the investment in Front Line was accounted for using the equity method of accounting. The ownership of Reserve America and the investment in Active.com were retained by IAC after the spin-off. These consolidated financial statements present IAC's and its subsidiaries net investment in Ticketmaster Entertainment businesses as invested capital in lieu of stockholders' equity.
We prepared the interim unaudited consolidated financial statements from the historical results of operations and historical basis of the assets and liabilities of Ticketmaster Entertainment with the exception of income taxes. We computed income taxes using our stand-alone tax rate. Our income tax payable as well as deferred tax assets and liabilities represent the estimated impact of filing a consolidated income tax return with IAC through the spin-off, and filing a standalone consolidated
25
income tax return thereafter. We have eliminated all significant intercompany transactions and accounts for periods prior to the spin-off.
Until the spin-off, we recorded expense allocations from IAC, which consisted of certain IAC general corporate overhead expenses based on the ratio of our revenue as a percentage of IAC's total revenue. The general corporate overhead allocations primarily included expenses relating to accounting, treasury, legal, tax, corporate support, human resource functions and internal audit. Since the spin-off, we have been performing these functions using our own resources or purchased services, including services purchased from IAC pursuant to the transitional services agreement among IAC and the Spincos.
The historical interim unaudited financial statements for periods prior to the spin-off are based on certain assumptions about Ticketmaster Entertainment as a stand-alone company. Our management believes the assumptions underlying the historical consolidated financial statements of Ticketmaster Entertainment are reasonable. However, this financial information does not necessarily reflect what the historical financial position, results of operations and cash flows of Ticketmaster Entertainment would have been if Ticketmaster Entertainment had been a stand-alone company prior to the spin-off.
Management Overview
Ticketmaster Entertainment 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 7,100 independent sales outlets and 17 call centers worldwide. Ticketmaster Entertainment 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 Entertainment is also a party to joint ventures with third parties to provide ticket distribution services in Mexico and supplied ticketing services for the 2008 Beijing Olympic Games. Ticketmaster Entertainment licenses its technology in Mexico, Argentina, Brazil, Chile, China and Belgium.
Sources of Revenue
Ticketing
Ticketmaster Entertainment earns a majority of its revenue from primary ticketing 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 Entertainment 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 Entertainment; (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 Entertainment's websites, as well as the services to be rendered to the client.
26
Artist Services
Front Line secures work for the clients it represents, for which it receives a commission. Generally, commissions are payable by clients upon their receipt of payments for performance of services or upon the delivery or use of materials which they created. Revenue is recognized in the month of the artist event. Contingent commissions, such as those based on profits or gross receipts, are recorded upon determination of the amounts. Revenue is not recognized before persuasive evidence of an arrangement exists, services have been rendered, the amount to be received is fixed or determinable, and collectability is reasonably assured.
Other revenues consist of revenues from the sales of entertainment packages to consumers in connection with live performances. Entertainment packages are sold and cash is received from consumers in advance of the event. Revenue and related expenses incurred are deferred until the event occurs. In addition, Front Line sells entertainment related merchandise at live musical performances, to retailers, and directly to consumers via a website. For retail and internet sales, revenue is recognized upon shipment of the merchandise. Touring revenue, including the sale of merchandise, is recognized in the month of the event.
For a more detailed presentation of the Company's operating businesses, see the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2008.
Results of Operations for the Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008
Ticketmaster Entertainment Consolidated Results of Operations
Revenue
|
Three Months Ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | % Change | ||||||||
|
(Dollars in thousands) |
||||||||||
RevenueDomestic |
$ | 273,446 | $ | 239,940 | 14% | ||||||
RevenueInternational |
100,370 | 109,041 | (8)% | ||||||||
Total revenue |
$ | 373,816 | $ | 348,981 | 7% | ||||||
Consolidated
Revenue in 2009 increased $24.8 million, or 7%, from 2008 primarily due to contributions from The V.I.P. Tour Company ("TicketsNow") and Front Line, acquired in February 2008 and October 2008, respectively. These increases were partially offset by lower ticketing revenue attributable to our largest client, Live Nation (including its subsidiary, House of Blues) following the expiration on December 31, 2008 of the principal contract for primary ticketing services to Live Nation. On a world-wide basis, there was an 8% decrease in the number of primary tickets sold and a 1% decrease in average revenue per ticket. Excluding the impact of Live Nation, there was a 1% decrease in the number of primary tickets sold and a 3% increase in the average revenue per ticket.
Domestic revenue increased 14% primarily due to the acquisitions mentioned above. Excluding acquisitions, domestic revenue decreased 8%, due largely to the loss of a significant portion of Live Nation ticketing volumes following the expiration on December 31, 2008 of the principal contract for primary ticketing services to Live Nation. There was a 9% decrease in the number tickets sold, partially offset by a 1% increase in average revenue per ticket. Ticketing volumes were lower across all major categories, with the largest impact experienced in the Concerts category due to the expiration of the principal agreement for primary ticketing with Live Nation. International revenue decreased by 8% primarily due to a 5% decrease in the number of tickets sold along with a 6% decrease in average
27
revenue per ticket. Ticketing volumes were lower across all categories, with the largest impact experienced in the Sports and Arts categories. The decline in the average revenue per ticket is due largely to the volatility of foreign exchange rates. The decrease in the average revenue per ticket primarily resulted from sales activity in Australia, the Netherlands and Canada, partially offset by higher revenues in the United Kingdom and China. Excluding the impact of foreign exchange rates, international revenue increased by 13% compared to the same-prior year period.
Ticketmaster Entertainment's largest client through 2008, Live Nation (including its subsidiary House of Blues), represented approximately 6% and 15% of its consolidated revenue for the three months ended March 31, 2009 and 2008, respectively.
For the three months ended March 31, 2009 compared to the three months ended March 31, 2008:
|
Three Months Ended March 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | % Change | |||||||||
|
(Dollars in thousands) |
|||||||||||
Revenue: |
||||||||||||
Ticketing |
$ | 339,010 | $ | 348,981 | (3)% | |||||||
Artist services |
34,806 | | NM | |||||||||
Total revenue |
$ | 373,816 | $ | 348,981 | 7% | |||||||
Ticketing
Refer to "Consolidated," directly above, for a discussion of revenues in our Ticketing segment.
Artist Services
On October 29, 2008, the Company acquired additional equity interests in Front Line, giving Ticketmaster Entertainment a controlling interest in the business. The Company has consolidated the results of Front Line since the acquisition date and has entered into the artist services business by virtue of the acquisition. The artist services business focuses on artist management, merchandising, VIP ticketing and related artist marketing services activities. In the three months ended March 31, 2009, Front Line generated revenues of $34.8 million due to strong performance in VIP ticketing, core management services and strategic acquisitions.
Cost of Sales
For the three months ended March 31, 2009 compared to the three months ended March 31, 2008:
|
Three Months Ended March 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | % Change | |||||||||
|
(Dollars in thousands) |
|||||||||||
Cost of sales: |
||||||||||||
Ticketing |
$ | 214,793 | $ | 221,022 | (3)% | |||||||
Artist Services |
17,767 | | NM | |||||||||
Total cost of sales |
$ | 232,560 | $ | 221,022 | 5% | |||||||
As a percentage of total revenue |
62% | 63% | (112) bp | |||||||||
Gross margins |
38% | 37% | 112 bp |
- bp
- =
basis points
- NM
- = not meaningful
28
Consolidated
Cost of sales consists primarily of ticketing royalties, as well as compensation and other employee-related costs (including stock-based compensation) for personnel engaged in call center functions and credit card processing fees. Ticketing royalties relate to our client's share of convenience and order processing charges. In our Artist Services segment, merchandise inventory, related shipping costs and costs associated with VIP ticket packages are recorded as cost of sales.
Cost of sales in 2009 increased $11.5 million from 2008, primarily due to increases of $17.8 million of merchandise inventory and related shipping costs related to Front Line not in the same prior-year period, $2.7 million in other variable costs for commissions paid to search engine partners and express delivery costs, and $0.9 million in credit card processing fees. These increases were partially offset by decreases of $5.4 million in ticketing royalties and $5.3 million compensation and other employee-related costs associated, due in part, to a reduction in headcount. The decrease in ticketing royalties was primarily due to lower convenience and processing revenues.
Ticketing
Ticketing cost of sales decreased $6.2 million from 2008, primarily due to decreases of $5.4 million in ticketing royalties and $5.3 million in compensation and other employee-related costs, due in part, to headcount reductions. These decreases were partially offset by increases of $2.7 million in other variable costs for commissions paid to search engine partners and express delivery costs, and $0.9 million in credit card processing fees.
Artist Services
On October 29, 2008, Ticketmaster Entertainment acquired additional equity interests in Front Line, giving Ticketmaster Entertainment a controlling interest in the business. Ticketmaster Entertainment has consolidated the results of Front Line since the acquisition date and has entered into the artist services business by virtue of the acquisition. In the three months ended March 31, 2009, Front Line recorded cost of sales of $17.8 million. Of the total cost of sales in the first quarter of 2009, Front Line incurred $13.4 million of merchandise-related costs. The remaining $4.4 million is primarily due to costs related to fulfillment of VIP ticketing packages sold to customers.
Selling and marketing expense
For the three months ended March 31, 2009 compared to the three months ended March 31, 2008:
|
Three Months Ended March 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | % Change | |||||||||
|
(Dollars in thousands) |
|||||||||||
Selling and marketing expense: |
||||||||||||
Ticketing |
$ | 24,295 | $ | 19,393 | 25% | |||||||
Artist Services |
| | NM | |||||||||
Total selling and marketing expense |
$ | 24,295 | $ | 19,393 | 25% | |||||||
As a percentage of total revenue |
7% | 6% | 94 bp |
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.
29
Selling and marketing expense in 2009 increased $4.9 million from 2008, primarily due to the acquisition of TicketsNow, which contributed $4.8 million to the increase in advertising and promotional expenditures. The increase in advertising and promotional expenditures was due, in part, to an increase in sports sponsorship agreements intended to promote Ticketmaster Entertainment's ticket resale services and fees paid to search engine partners for online marketing.
General and administrative expense
For the three months ended March 31, 2009 compared to the three months ended March 31, 2008:
|
Three Months Ended March 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | % Change | |||||||||
|
(Dollars in thousands) |
|||||||||||
General and administrative expense: |
||||||||||||
Ticketing |
$ | 21,093 | $ | 22,844 | (8)% | |||||||
Artist Services |
15,840 | | NM | |||||||||
Corporate and unallocated |
27,270 | 19,009 | 43% | |||||||||
Total general and administrative expense |
$ | 64,203 | $ | 41,853 | 53% | |||||||
As a percentage of total revenue |
17% | 12% | 518 bp |
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 2009 increased $22.4 million from 2008, primarily due to increases of $9.6 million in compensation and other employee-related costs and $8.2 million in professional fees. The increase in compensation and other employee-related costs was primarily due to an increase of $12.2 million associated with the Front Line acquisition not in the prior year period, partially offset by cost savings from our restructuring plan. General and administrative expense includes non-cash compensation expense of $6.0 million in 2009 compared with $4.3 million in 2008. The increase in non-cash compensation was primarily due the modification of existing stock-based compensation awards in connection with the spin-off, the grant of new awards subsequent to the spin-off, and the grants of awards in connection with 2008 acquisitions. The increase in professional fees was primarily due to $5.9 million of legal fees incurred in connection with the pending merger with Live Nation and $2.3 million of professional services related to becoming a publicly traded company. Excluding the impact of Front Line, general and administrative expense increased $6.5 million, or 16%.
Depreciation
For the three months ended March 31, 2009 compared to the three months ended March 31, 2008:
|
Three Months Ended March 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | % Change | |||||||||
|
(Dollars in thousands) |
|||||||||||
Depreciation: |
||||||||||||
Ticketing |
$ | 11,507 | $ | 10,360 | 11% | |||||||
Artist Services |
135 | | NM | |||||||||
Corporate and unallocated |
758 | 695 | 9% | |||||||||
Total depreciation |
$ | 12,400 | $ | 11,055 | 12% | |||||||
As a percentage of total revenue |
3% | 3% | 15 bp |
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Depreciation in 2009 increased $1.3 million from 2008 primarily due to the incremental depreciation associated with the impact of acquisitions not in the prior year period.
Adjusted EBITDA
Adjusted EBITDA is a supplemental measure and is defined in "Ticketmaster Entertainment's Principles of Financial Reporting," below.
For the three months ended March 31, 2009 compared to the three months ended March 31, 2008:
|
Three Months Ended March 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | % Change | |||||||||
|
(Dollars in thousands) |
|||||||||||
Adjusted EBITDA: |
||||||||||||
Ticketing |
$ | 80,021 | $ | 88,005 | (9)% | |||||||
Artist services |
4,429 | | NM | |||||||||
Corporate and unallocated |
(25,421 | ) | (16,527 | ) | 54% | |||||||
Total Adjusted EBITDA |
$ | 59,029 | $ | 71,478 | (17)% | |||||||
Adjusted EBITDA in 2009 decreased $12.4 million from 2008, due to increases in cost of sales, selling and marketing expense and general and administrative expense, discussed above. The increase in these expenses was driven by acquisitions and increased marketing efforts, including ticket resale initiatives. Excluding the impact of Front Line not in the prior-year period, Adjusted EBITDA decreased $16.9 million, or 24%.
Operating income
For the three months ended March 31, 2009 compared to the three months ended March 31, 2008:
|
Three Months Ended March 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | % Change | |||||||||
|
(Dollars in thousands) |
|||||||||||
Operating income (loss): |
||||||||||||
Ticketing |
$ | 60,088 | $ | 66,494 | (10)% | |||||||
Artist services |
(6,760 | ) | | NM | ||||||||
Corporate and unallocated |
(28,028 | ) | (19,704 | ) | 42% | |||||||
Total operating income |
$ | 25,300 | $ | 46,790 | (46)% | |||||||
Operating income in 2009 decreased $21.5 million from 2008 operating income, primarily due to the decrease in Adjusted EBITDA described above and increases of $6.2 million in amortization of intangibles and $1.5 million in non-cash compensation expense. Excluding the impact of Front Line not in the prior year period, operating income decreased $14.7 million or 31%.
Corporate and unallocated expenses
Corporate and unallocated expenses primarily include compensation and other employee costs (including stock-based compensation), outside services and professional fees. Corporate and unallocated expenses in 2009 increased $8.3 million from 2008 driven primarily by higher legal fees associated with the pending merger with Live Nation and professional services related to becoming a publicly traded company.
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Other (expense) income, net
For the three months ended March 31, 2009 compared to the three months ended March 31, 2008:
|
Three Months Ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | % Change | ||||||||
|
(Dollars in thousands) |
||||||||||
Other (expense) income, net: |
|||||||||||
Interest income |
$ | 641 | $ | 3,290 | (81)% | ||||||
Interest expense |
(18,156 | ) | (735 | ) | NM | ||||||
Equity in income of unconsolidated affiliates |
1,343 | 666 | 102% | ||||||||
Other (expense) income |
(191 | ) | 944 | NM |
Interest income
Interest income in 2009 decreased $2.6 million from 2008, primarily due to the extinguishment of intercompany receivables from IAC upon the consummation of the spin-off and lower average interest rates.
Interest expense
Interest expense in 2009 increased $17.4 million from 2008, primarily due to interest expense and amortization of debt issuance costs of $17.7 million related to the issuance of the $300.0 million aggregate principal amount of Senior Notes with a fixed rate of 10.75% (the "Notes") and the indebtedness under our senior secured credit facilities.
Equity in income of unconsolidated affiliates
Equity in the income of unconsolidated affiliates in 2009 increased $0.7 million from 2008, primarily due to increased earnings at the Company's joint venture in Mexico.
Other (expense) income
Other (expense) income in 2009 decreased $1.1 million from 2008 due to losses on foreign currency exchange primarily related to the Company's operating activities in Canada and the United Kingdom due to the weakening of the U.S. dollar compared to the Canadian dollar and the British Pound.
Income tax provision
For the three months ended March 31, 2009 and 2008, Ticketmaster Entertainment recorded tax provisions of $4.2 million and $18.8 million, respectively, which represent effective tax rates of 47% and 37%, respectively. The 2009 tax rate is higher than the federal statutory rate of 35% due principally to losses in foreign jurisdictions for which no tax benefit can be recognized, adjustments to deferred taxes due to newly enacted state tax legislation, and increases in tax reserves, partially offset by foreign income taxed at lower rates including the effects of our international restructuring. Excluding the effects of the newly enacted state tax legislation, the Company's effective tax rate would have been 31%. The 2008 tax rate is higher than the federal statutory rate of 35% due principally to state taxes, partially offset by foreign income taxed at lower rates.
As of December 31, 2008 and March 31, 2009, the Company had unrecognized tax benefits of approximately $1.3 million and $2.3 million, respectively. During the three months ended March 31, 2009, the unrecognized tax benefits increased by approximately $1.0 million as a result of historical state tax positions and foreign income tax positions taken in the current year. The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense.
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Included in income tax expense for the three months ended March 31, 2009 is $0.2 million, net of related deferred taxes, for interest and penalties on unrecognized tax benefits. At March 31, 2009, the Company has accrued $0.6 million for the payment of interest and penalties.
By virtue of previously filed separate company tax returns, as well as consolidated tax returns with IAC, Ticketmaster Entertainment is routinely under audit by federal, state, local and foreign income tax authorities. 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 amounts recorded for unrecognized tax benefits and the amounts owed by Ticketmaster Entertainment are recorded in the period they become known. Ticketmaster Entertainment believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $1.4 million within twelve months of the current reporting date due to settlements and expirations of applicable statute of limitations. An estimate of other changes in unrecognized tax benefits cannot be made, but are not expected to be significant.
Segment Operating Results
The overall concept that Ticketmaster Entertainment employs in determining its operating segments is to present the financial information in a manner consistent with how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance. Operating segments are consolidated for reporting purposes if they have similar economic characteristics and meet the aggregation criteria of SFAS No. 131.
Prior to the acquisition of a controlling interest in Front Line, Ticketmaster Entertainment had one operating segment in accordance with its internal management structure and based upon how the chief operating decision maker viewed the business, its organizational structure and the type of service provided which primarily was online and offline ticketing services.
After the October 29, 2008 acquisition of Front Line, based upon changes in the internal management structure and how the chief operating decision maker viewed the business, the Company began reporting two segments: Ticketing and Artist Services.
The Ticketing segment is primarily an agency business that sells tickets for events on behalf of our clients and retains a convenience charge and order processing fee for our services. We sell tickets through a combination of websites, telephone services and ticket outlets.
The Artist Services segment primarily provides management services to music recording artists in exchange for a commission on the earnings of these artists. Artist Services also sells merchandise associated with musical artists at live musical performances, to retailers, and directly to consumers via a website.
For additional information about our segment results, refer to Note 3Segment Information in the Notes to Unaudited Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2009, Ticketmaster Entertainment had $624.0 million of cash and cash equivalents including $400.3 million in funds representing amounts equal to the face value of tickets sold on behalf of its clients ("client funds"). Ticketmaster Entertainment's $624.0 million of cash and cash equivalents included approximately $340.4 million, including $214.2 million of which were client funds, which were maintained principally in Canada, the United Kingdom, Ireland and Australia. The Company does not utilize client funds for its own financing or investing activities as the amounts are payable to clients.
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Net cash provided by operating activities was $173.1 million and $65.8 million for the three months ended March 31, 2009 and 2008, respectively. The increase of $107.3 million in net cash provided by operating activities reflected higher contributions from client funds of $129.0 million which was driven by the timing of settlements with clients, lower advance payments under ticketing contracts and sponsorship deals with resale partners, including significant advances made in the 2008 period which were not repeated in the 2009 period. These increases in net cash provided by operating activities was partially offset by a decline in operating results and the timing of settlements for accounts payable, accrued liabilities and accounts receivable.
Net cash used in investing activities in the three months ended March 31, 2009 of $9.5 million primarily resulted from cash paid for capital expenditures. Net cash used in investing activities in the three months ended March 31, 2008 of $540.1 million primarily resulted from cash transfers to IAC of $135.5 million, acquisitions, net of cash acquired, of $395.0 million and capital expenditures of $9.5 million. The cash transfers relate to IAC's centrally managed U.S. treasury function. Acquisitions, net of cash acquired, primarily related to the acquisitions of TicketsNow, Paciolan and GET ME IN!.
Net cash used in financing activities in the three months ended March 31, 2009 of $0.9 million was primarily due to principal payments on capital leases and distributions to minority interest holders. Net cash provided by financing activities in the three months ended March 31, 2008 was primarily due to capital contributions from IAC of $395.0 million to fund Ticketmaster Entertainment's acquisitions.
Ticketmaster Entertainment anticipates that it will need to make capital and other expenditures in connection with the development and expansion of its operations. Ticketmaster Entertainment's ability to fund its cash and capital needs will be affected by its ongoing ability to generate cash from operations and the overall capacity and terms of its financing arrangements as discussed above. Ticketmaster Entertainment believes that its cash on hand along with its anticipated operating cash flow in 2009 and its access to financing arrangements are sufficient to fund its operating needs, capital, investing and other commitments and contingencies for the foreseeable future.
Under the Company's Senior Secured Credit Facilities and the indenture governing the Company's Senior Notes, the Company is required to comply with certain financial covenants. The Senior Notes contain two incurrence-based financial covenants, requiring that the Company meet a minimum fixed charge coverage ratio, as defined therein, of 2.0 to 1.0 and a maximum secured leverage ratio, as defined therein, of 2.25 to 1.0 in order to incur additional indebtedness, other than permitted debt. The senior secured credit facility has two maintenance-based quarterly financial covenants, requiring a maximum total leverage ratio of 3.5 to 1.0 and a minimum interest coverage ratio of 3.0 to 1.0. The total leverage ratio for the Senior Secured Credit Facilities, calculated as total debt, as defined therein, divided by total earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined therein, for the trailing twelve-month period is the most sensitive to change, as debt levels increase and/or earnings decline. As of March 31, 2009, the Company was in compliance with all of these financial covenants, giving pro-forma effect, as required, to EBITDA for Front Line.
The Company believes it has adequate cash and cash equivalents and it will generate sufficient cash from operations to pay-down a portion of its debt, if required, in order to maintain compliance with all financial covenants through December 31, 2009. Ticketmaster Entertainment may, from time to time, engage in open market purchases of its Notes.
In the event that the proposed merger with Live Nation is consummated, we expect that our cost of capital related to our bank financing will increase as a result of obtaining the necessary amendments to our Senior Secured Credit Facilities required for the proposed merger.
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Critical Accounting Policies and Estimates
Refer to the discussion of our accounting policies in our audited consolidated financial statements and notes for the year ended December 31, 2008, which are included in our Annual Report on Form 10-K, as amended, filed with the SEC.
Ticketmaster Entertainment's management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). 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 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.
Recent Accounting Pronouncements
Refer to the discussion of our accounting policies in our audited consolidated financial statements and notes for the year ended December 31, 2008, which are included in our Annual Report on Form 10-K, as amended, filed with the SEC. In addition, refer to Note 2-Summary of Recent Accounting Standards of the Notes to Unaudited Consolidated Financial Statements.
TICKETMASTER ENTERTAINMENT'S PRINCIPLES OF FINANCIAL REPORTING
Ticketmaster Entertainment reports Adjusted Earnings before Interest, Income Taxes, Depreciation and Amortization ("Adjusted EBITDA") as a supplemental measure to GAAP. This measure is one of the primary metrics by which Ticketmaster Entertainment evaluates the performance of its segments and businesses, on which its internal budgets are based and by which management is compensated. Ticketmaster Entertainment believes that investors should have access to the same set of tools that it uses in analyzing its results. This supplemental 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 Entertainment provides and encourages investors to examine the reconciling adjustments between the GAAP measure and supplemental measure which are discussed below.
Definition of Ticketmaster Entertainment's Supplemental Measure
Adjusted EBITDA is defined as operating income excluding, if applicable: (1) depreciation expense (2) non-cash compensation expense (3) amortization and impairment of intangibles, (4) goodwill and other impairments, (5) pro forma adjustments for significant acquisitions, fair value adjustments to contingent consideration and executive compensation expense associated with significant transactions or the Merger with Live Nation and (6) one-time items. Ticketmaster Entertainment believes this measure is useful to investors because it represents the operating results from Ticketmaster Entertainment businesses excluding the effects of non-cash expenses. The Adjusted EBITDA metric was named Adjusted Operating Income in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2008. Adjusted EBITDA has certain limitations in that it does not take into account the impact to Ticketmaster Entertainment's statement of operations of certain expenses, including acquisition-related accounting. Ticketmaster Entertainment endeavors to compensate for the limitations of the supplemental 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 supplemental measure.
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Pro Forma Results
Ticketmaster Entertainment will only present Adjusted EBITDA on a pro forma basis if a particular transaction is significant within the meaning of Rule 11-01 of Regulation S-X or if it views a transaction as so significant in nature that disclosure of pro forma financial information would be material to investors. For the periods presented in this report, there are no transactions that Ticketmaster Entertainment has included on a pro forma basis.
One-Time Items
Adjusted EBITDA 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 Entertainment's Supplemental 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 Entertainment 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 Entertainment's discretion, on a net basis, with Ticketmaster Entertainment 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 Entertainment will have significant intangible amortization expense as it continues to acquire companies, Ticketmaster Entertainment 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 ADJUSTED EBITDA
For a reconciliation of Adjusted EBITDA to Net income attributable to Ticketmaster Entertainment, Inc. for the three months ended March 31, 2009 and 2008 see Note 3Segment Information of the Notes to Unaudited Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, refer to Part II, Item 7A Quantitative and Qualitative Disclosure about Market Risk which are included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2008. Our exposure to market risk has not changed materially since December 31, 2008.
Item 4(T). Controls and Procedures
The Company monitors and evaluates on an ongoing basis its disclosure controls in order to improve its overall effectiveness. In the course of this evaluation, the Company modifies and refines its internal processes as conditions warrant.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our management, including our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined by Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our chief executive officer and chief
36
financial officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information we are required to disclose in our filings with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 by the end of our fiscal year ending December 31, 2009. The notification of such compliance is due no later than the time we file our annual report for the fiscal year ending December 31, 2009. We believe we are devoting adequate resources and expertise, both internal and external, in order to meet this requirement. However, there is no guarantee that our efforts will result in management's ability to conclude, or our independent registered public accounting firm to attest, that our internal control over financial reporting is effective as of December 31, 2009.
As required by Rule 13a-15(d) under the Exchange Act, we, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, also evaluated whether any changes occurred to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such control. Based on that evaluation, there has been no such change during the period covered by this report.
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UPS Consumer Class Action Litigation
On October 21, 2003, a purported representative action was filed in California state court, challenging Ticketmaster Entertainment's charges to online customers for UPS ticket delivery. The complaint alleged in essence that it is unlawful for Ticketmaster Entertainment 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 Entertainment in connection with online ticket sales during the applicable statute of limitations period, and (ii) the amount Ticketmaster Entertainment paid to UPS for that service.
On August 31, 2005, the plaintiffs filed an amended class-action and representative-action complaint alleging (i) as before, that Ticketmaster Entertainment'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 Entertainment's website disclosures in respect of its ticket order-processing fees 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 Entertainment during the applicable statute of limitations period.
On August 14, 2006, the plaintiffs filed a motion for class certification, which Ticketmaster Entertainment opposed. On September 25, 2006, Ticketmaster Entertainment filed a motion for judgment on the pleadings, which the plaintiffs opposed. On November 21, 2006, Ticketmaster Entertainment 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 Entertainment'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 March 3, 2009, the California Supreme Court heard oral argument in the Tobacco II case. We expect a ruling in May or June of 2009. On April 1, 2009, the Court granted plaintiff's motion for leave to file a Second Amended Complaint that clarifies plaintiff's California Business and Professions Code claims and adds the allegation that Ticketmaster's order processing fees are unconscionable as a matter of law. The case is otherwise stayed pending the Tobacco II ruling. Ticketmaster Entertainment filed a demurrer to the Second Amended Complaint on May 8, 2009.
2001 Securities Class Action Litigation
On November 30, 2001, a purported securities class action was filed against Ticketmaster Entertainment 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 Entertainment common stock during the period from the date of its initial public offering through December 6, 2000, and alleged violations by Ticketmaster Entertainment of Section 10(b) of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933. Plaintiff alleged that Ticketmaster Entertainment 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
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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 Entertainment, but denied the motion as to the Section 11 claim against Ticketmaster Entertainment.
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 Entertainment 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 Entertainment.
Canadian Consumer Class Action Litigation Relating to TicketsNow
In February of 2009, five putative consumer class action complaints were filed in Canada against TNow Entertainment Group, Inc., Ticketmaster Entertainment, Ticketmaster Canada Ltd., and Premium Inventory, Inc. All of the cases allege essentially the same set of facts and causes of action: each plaintiff purports to represent a class consisting of all persons who purchased a ticket from Ticketmaster Entertainment, Ticketmaster Canada or TicketsNow from early February of 2007 to the present. Each proposed class purports to extend to United States as well as Canadian consumers. The complaints allege in essence that Ticketmaster Entertainment and Ticketmaster Canada conspired to divert a large number of tickets for resale through the TicketsNow website at prices higher than face value in violation of Ontario's Ticket Speculation Act, the Amusement Act of Manitoba, the Amusement Act of Alberta, and the Quebec Consumer Protection Act, respectively. The Ontario case contains the additional allegation that Ticketmaster Entertainment and TicketsNow's service fees run afoul of anti-scalping laws. Each lawsuit seeks compensatory and punitive damages on behalf of the class.
California Consumer Class Action Litigation Relating to TicketsNow
On February 6, 2009, a putative class action complaint asserting several causes of action under the federal antitrust laws as well as California and New York consumer protection laws was filed against Ticketmaster Entertainment and TicketsNow. The lawsuit alleges that Ticketmaster Entertainment and TicketsNow unlawfully attempted to monopolize and/or have monopolized the market for secondary tickets and deceived consumers by, among other things, selling large quantities of tickets to TicketsNow's ticket brokers, either prior to or at the time that tickets for an event go on sale, thereby forcing consumers to purchase tickets at significantly marked-up prices on TicketsNow instead of Ticketmaster.com. Plaintiff seeks actual damages or restitution in an amount to be determined at trial and attorneys fees and costs.
On February 20, 2009, a putative class action lawsuit was filed against Ticketmaster Entertainment, Inc. in the Central District of California. The plaintiff purports to represent a nationwide class of consumers consisting of "all persons who inadvertently purchased tickets from TicketsNow.com as a result of deceptive and unfair business practices engaged in by Ticketmaster Entertainment between January 1, 2005 to the present and who were damaged thereby." The plaintiff claims that Ticketmaster Entertainment violated California's Business and Professions code by redirecting consumers from Ticketmaster.com to Ticketsnow.com, thereby engaging in false advertising and an unfair business practice by deceiving consumers into inadvertently purchasing tickets from TicketsNow for amounts greater than face value. The plaintiff claims Ticketmaster Entertainment has been unjustly enriched by this conduct and seeks compensatory damages, a refund to every class member of the difference between face value and the amount paid to TicketsNow, an injunction
39
preventing Ticketmaster Entertainment from engaging in further unfair business practices with TicketsNow, and attorney fees and costs.
On March 23, 2009, a purported class action complaint asserting causes of action under California's Business and Professions Code and the California Consumer Legal Remedies Act was filed against Ticketmaster Entertainment and TicketsNow. The lawsuit alleges that Ticketmaster and TicketsNow committed unfair business practices by, among other things, "redirecting" consumers from Ticketmaster.com to TicketsNow.com. Plaintiff purports to represent a nationwide class consisting of "all persons who were redirected from Ticketmaster.com to TicketsNow.com and purchased tickets above face value from TicketsNow.com." Plaintiff seeks disgorgement and restitution on behalf of the class and attorneys fees and costs.
New Jersey Consumer Class Action Litigation Relating to TicketsNow
On May 5 and May 8, 2009, respectively, two purported class action complaints alleging causes of action for violation of the New Jersey Consumer Fraud Act, among others, were filed against Ticketmaster Entertainment, Inc. and TicketsNow.com, Inc. The complaints allege that Ticketmaster Entertainment has been unlawfully and knowingly rerouting customers from its website to defendant TicketsNow.com, a secondary resale ticket broker website which the complaints allege artificially inflates the price of event tickets. The complaints further allege that Ticketmaster Entertainment claims that face value tickets are sold out or unavailable within minutes of the tickets going on sale and redirects its customers to TicketsNow. Plaintiffs seek disgorgement and restitution on behalf of the class and attorneys fees and costs.
Securities Class Action Litigation Relating to Proposed Merger
Two putative securities class actions were filed in California Superior Court against Ticketmaster Entertainment and its Board of Directors on February 13, 2009 and February 20, 2009, respectively. The plaintiff in the first case alleges that the Live Nation transaction (the "Transaction") delivers insufficient value to Ticketmaster Entertainment stockholders that the Board of Directors of Ticketmaster Entertainment failed to adequately consider alternative transactions; and that Ticketmaster Entertainment insiders benefit disproportionately from the Transaction. Among other things, the complaint seeks an injunction against the consummation of the Transaction and compensatory damages for Ticketmaster Entertainment stockholders. The second putative class action was filed against Ticketmaster Entertainment and the members of its Board in the same Los Angeles court in which the first complaint was filed. The focus of this case is the alleged failure of Ticketmaster Entertainment to obtain the highest price and on alleged insufficiencies in the deal protections. Also included is a disclosure claim, which alleges that Ticketmaster Entertainment wrongfully failed to disclose certain antitrust-related schedules with the merger agreement, which plaintiff alleges makes it difficult for stockholders to assess certain provisions of the merger agreement.
Regulatory Review of Proposed Merger
The Company's proposed merger with Live Nation is subject to antitrust/competition regulatory review in the United States and four other countries. Ticketmaster Entertainment expects the merger to close before 2009 year end. In the United States, Ticketmaster Entertainment and Live Nation are engaged in discussions with the U.S. Department of Justice, Antitrust Division ("DOJ") regarding the proposed transaction. The parties are also in the process of responding to the DOJ's "second request" for information related to the companies' respective businesses and the proposed merger.
The other jurisdictions where the transaction is under regulatory review are Canada, the United Kingdom, Norway, and Turkey. The Canadian authorities recently issued a "second request" for additional information relating to the parties' respective businesses, and the parties are in the process
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of responding to the Canadian request. The U.K. authorities have issued several information requests to which the parties are in the process of responding. The Norwegian Competition Authority has advised that the parties are required to submit a full-form application for approval, which will require the parties to supplement the previously filed "short-form" application. Finally, the parties have recently submitted the required information to the Turkish competition authorities.
Cautionary Statements Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as "anticipates," "estimates," "expects," "projects," "intends," "plans" and "believes," among others, generally identify forward-looking statements. These forward-looking statements include, among others, statements relating to: Ticketmaster Entertainment's anticipated financial performance, business prospects and, anticipated trends and prospects in the various industries in which Ticketmaster Entertainment businesses operate, new products, services and related strategies and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
Actual results could differ materially from those contained in the forward- looking statements included in this report for a variety of reasons, including, among others, the risk factors set forth below. Other unknown or unpredictable factors that could also adversely affect Ticketmaster Entertainment's business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of our management as of the date of this report. Ticketmaster does not undertake to update these forward-looking statements.
Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K, as amended, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The risk factor set forth below updates the corresponding risk factors in Part I, "Item IA. Risk Factors" in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2008.
Live Entertainment Industry and General Economic Trends-Our success depends, in significant part, on entertainment, sporting and leisure events and factors adversely affecting such events could have a material adverse effect on business, financial condition and results of operations.
Through our Ticketing segment, we sell tickets to live entertainment, sporting and leisure events at arenas, stadiums, theaters and other facilities. Through our Artist Services segment, we provide artist management services to nearly 200 clients, and derive significant revenues from touring and live concerts by these clients. Accordingly, our 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
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event industries could adversely affect our business, financial condition and results of operations. Our Ticketing segment relies on third parties to create and perform live entertainment, sporting and leisure events and to price tickets to such events. Accordingly, our 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. Similarly, our Artist Services segment could be adversely affected if the artists it represents do not tour or perform as frequently as anticipated, or if such tours or performances are not as widely attended by fans as anticipated due to changing tastes, general economic conditions or otherwise.
In addition, general economic conditions, consumer trends, work stoppages, natural disasters and terrorism could have a material adverse effect on our 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. Recent market conditions have been extremely volatile and unemployment rates have risen in recent months. As a result of these macroeconomic factors, it is reasonably possible that a continued worsening of the Company's results or domestic and global economic conditions could change certain estimates and assumptions that are significant to the underlying amounts included in the Company's Consolidated Financial Statements and the Notes thereto. A protracted global recession could have a significant negative impact on our business, financial condition and results of operations. Similarly, public heath issues or a health epidemic could result in the cancellation of live entertainment events or in lower attendance and ticket sales fans choose to not attend events t hey would otherwise attend out of heath concerns. Recently, human cases of swine flu virus infection have been identified in the United States and internationally. If a public health issues such as the swine flu were to result in the cancellation of live entertainment events or diminished ticket sales, our business, financial condition and results of operations could be negatively impacted.
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Exhibit | Description | ||
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2.1 | Agreement and Plan of Merger, dated as of February 10, 2009, by and among Ticketmaster Entertainment Inc., Live Nation, Inc, and, from and after its accession to the Agreement, Merger Sub (incorporated by reference to Ticketmaster Entertainment's Form 8-K, filed February 13, 2009) | ||
31.1 |
CEO Certification Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
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31.2 |
CFO Certification Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
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32.1 |
CEO and CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TICKETMASTER ENTERTAINMENT, INC. (Registrant) |
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Date: November 4, 2009 | By: | /s/ BRIAN REGAN Brian Regan Executive Vice President and Chief Financial Officer |
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