United States District Court Southern District of New York
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
BEVERLY STEWART, Individually and On Behalf of All Others Similarly Situated, CIVIL ACTION NO.:
Plaintiff,
vs. CLASS ACTION COMPLAINT
IAC/INTERACTIVECORP, BARRY DILLER, DARA KHOSROWSHAHI, JULIUS GENACHOWSKI, RICHARD N. BARTON and VICTOR A. KAUFMAN, JURY TRIAL DEMAND Defendants.
Plaintiff, Beverly Stewart ("Plaintiff'), individually and on behalf of all other persons similarly situated, by her undersigned attorneys, for her complaint against defendants, alleges the following based upon personal knowledge as to herself and her own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through her attorneys, which included, among other things, a review of the defendants' public documents, conference calls and announcements made by defendants, United States Securities and Exchange
Commission ("SEC") filings, wire and press releases published by and regarding
IAC/INTERACTIVECORP, ("IAC" or the "Company") (a/k/a USA Networks and USA
Interactive) securities analysts' reports and advisories about the Company, and information readily obtainable on the Internet. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.
377186 NATURE OF THE ACTION
1. This is a federal class action on behalf of purchasers or acquirers of the securities of IAC between July 16, 2001 and August 3, 2004, inclusive (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act").
JURISDICTION AND VENUE
2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act, (15 U.S.C. §§ 78j(b) and 78t(a)), and Rule l0b-5 promulgated thereunder (17
C.F.R. § 240.10b-5).
3. This Court has jurisdiction over the subject matter of this action pursuant to § 27 of the Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1331.
4. Venue is proper in this Judicial District pursuant to § 27 of the Exchange Act, 15
U.S.C. § 78aa and 28 U.S.C. § 1391(b). Many of the acts and transactions alleged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this Judicial District. Additionally, the Company maintains its principal executive office in this Judicial District.
5. In connection with the acts, conduct and other wrongs alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including but not limited to, the United States mails, interstate telephone communications and the facilities of the national securities exchange.
PARTIES
6. Plaintiff, Beverly Stewart, as set forth in the accompanying certification, incorporated by reference herein, purchased IAC securities at artificially inflated prices during the Class Period and has been damaged thereby.
2 377186 7. Defendant IAC is a Delaware corporation with its principal executive office
located 152 West 57th Street, New York, New York 10019.
8. Defendant Barry Diller ("Diller") was, at all relevant times, the Company's Chief
Executive Offer, and Chairman.
9. Defendant Dara Khosrowshahi ("Khosrowshahi") was, since January 2002, the
Company's Chief Financial Officer and Executive Vice President. Prior to that, she was the
Company’s Executive Vice-President, Operations and Strategic Planning.
10. Defendant Julius Genachowski ("Genachowski") was, since January 2002, the
Company's Executive Vice President, General Counsel and Chief of Business Operations. Prior
to that, he was the Company’s Senior Vice-President and General Counsel.
11. Defendant Richard N. Barton ("Barton") was, at all relevant times, Founder,
President and Chief Executive Officer of Expedia and the Company's director of IAC.
12. Defendant Victor A. Kaufman ("Kaufman") was, at all relevant times, the
Company's Vice Chairman of the IAC Board of Directors.
13. Defendants Diller, Khosrowshahi, Genachowski, Barton, and Kaufman are
collectively referred to hereinafter as the "Individual Defendants." During the Class Period, each
of the Individual Defendants, as senior executive officers and/or directors of IAC were privy to
non-public information concerning its business, finances, products, markets and present and
future business prospects via access to internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and Board
of Directors meetings and committees thereof and via reports and other information provided to
them in connection therewith. Because of their possession of such information, the Individual
3 377186 Defendants knew or recklessly disregarded the fact that adverse facts specified herein had not
been disclosed to, and were being concealed from, the investing public.
14. Because of the Individual Defendants' positions with the Company, they had
access to the adverse undisclosed information about the Company's business, operations,
operational trends, financial statements, markets and present and future business prospects via
access to internal corporate documents (including the Company's operating plans, budgets and
forecasts and reports of actual operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at management and Board of Directors
meetings and committees thereof and via reports and other information provided to them in
connection therewith.
15. It is appropriate to treat the Individual Defendants as a group for pleading
purposes and to presume that the false, misleading and incomplete information conveyed in the
Company's public filings, press releases and other publications as alleged herein are the
collective actions of the narrowly defined group of defendants identified above. Each of the
above officers of IAC, by virtue of their high-level positions with the Company, directly participated in the management of the Company, was directly involved in the day-to-day operations of the Company at the highest levels and was privy to confidential proprietary information concerning the Company and its business, operations, growth, financial statements, and financial condition, as alleged herein. Said defendants were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein, were aware, or recklessly disregarded, that the false and misleading statements were being issued regarding the Company, and approved or ratified these statements, in violation of the federal securities laws.
4 377186 16. As officers and controlling persons of a publicly-held company whose securities
were, and are, registered with the SEC pursuant to the Exchange Act, and was traded on the
NASDAQ and governed by the provisions of the federal securities laws, the Individual
Defendants each had a duty to disseminate promptly, accurate and truthful information with
respect to the Company's financial condition and performance, growth, operations, financial
statements, business, markets, management, earnings and present and future business prospects,
and to correct any previously issued statements that had become materially misleading or untrue,
so that the market price of the Company's publicly-traded securities would be based upon
truthful and accurate information. The Individual Defendants' misrepresentations and omissions
during the Class Period violated these specific requirements and obligations.
17. The Individual Defendants participated in the drafting, preparation, and/or approval of the various public and shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature.
Because of their Board membership and/or executive and managerial positions with IAC, each of
the Individual Defendants had access to the adverse undisclosed information about IAC financial
condition and performance as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about IAC and its business issued or adopted by the Company materially false and misleading.
18. The Individual Defendants, because of their positions of control and authority as officers and/or directors of the Company, were able to and did control the content of the various
SEC filings, press releases and other public statements pertaining to the Company during the
Class Period. Each Individual Defendant was provided with copies of the documents alleged
5 377186 herein to be misleading prior to or shortly after their issuance and/or had the ability and/or
opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the
Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein.
19. Each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of IAC securities by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme: (i) deceived the investing public regarding IAC business, operations, management and the intrinsic value of IAC securities; and (ii) caused Plaintiff and other members of the Class to purchase IAC securities at artificially inflated prices.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
20. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or
otherwise acquired the securities of IAC between July 16, 2001 and August 3, 2004, inclusive
(the "Class Period") and who were damaged thereby. Excluded from the Class are defendants,
the officers and directors of the Company, at all relevant times, members of their immediate
families and their legal representatives, heirs, successors or assigns and any entity in which
defendants have or had a controlling interest.
21. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, IAC securities were actively traded on the
NASDAQ. While the exact number of Class members is unknown to Plaintiff at this time and
can only be ascertained through appropriate discovery, Plaintiff believes that there are hundreds
or thousands of members in the proposed Class. As of July 26, 2004, there were 696,046,333
shares outstanding. Record owners and other members of the Class may be identified from
6 377186 records maintained by IAC or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.
22. Plaintiff's claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of federal law that is complained of herein.
23. Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
24. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by defendants' acts as alleged herein;
(b) whether statements made by defendants to the investing public during the
Class Period misrepresented material facts about the business, operations and management of
IAC; and
(c) to what extent the members of the Class have sustained damages and the proper measure of damages.
25. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually
7 377186 redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
SUBSTANTIVE ALLEGATIONS
26. IAC is a multi-brand interactive commerce company. IAC consists of the following segments: IAC Travel, which includes Expedia, Hotels.corn, Hotwire, Interval
International, and TV Travel Shop; HSN, a home shopping service; Ticketmaster, which oversees ReserveAmerica; Match.com; LendingTree; Precision Response Corporation; IAC
Local and Media Services, which includes Citysearch, Evite, Entertainment Publications, Inc.
and TripAdvisor, Inc., and IAC Interactive Development, which includes ZeroDegrees. In June
2003, the company was renamed from USA Networks to InterActiveCorp.
Materially False And Misleading Statements Issued During The Class Period
27. The Class Period commences on July 16, 2001 when USA Networks (“USA”),
predecessor in interests to IAC, announced plans to become, “the leader in interactive travel” by
acquiring privately held National Leisure Group and a majority interest in publicly traded
Expedia. Existing Expedia shareholders were to receive USA Networks shares and warrants for
their Expedia shares. USA announced that with these acquisitions it would handle 16% of all online travel transactions and was predicting 40% year over year growth. These numbers were false and misleading because they did not account for the Company’s improper booking of
revenues and lacked a reasonable basis for the positive statements about the Company’s true
growth and progress.
28. A press release issued the same day over the Business Wire details the
transactions:
8 377186 USA Networks, Inc. Announces Agreement to Purchase Controlling Stake in Expedia, Becoming a Leader in Interactive Travel
LOS ANGELES--(BUSINESS WIRE)--July 16, 2001--
USA Also Agrees to Acquire National Leisure Group and Announces Launch of the USA Travel Channel
USA Networks, Inc. (NASDAQ: USAI) announced today an agreement to acquire a controlling interest in Expedia, Inc. (NASDAQ: EXPE), a leading online travel agency, through the purchase of up to 37.5 million shares, approximately 75% of the currently outstanding shares. Microsoft has agreed to transfer all of its 33.7 million shares and warrants in Expedia(R), subject to pro-ration. USA also announced today an agreement to acquire National Leisure Group, Inc., the foremost online cruise and vacation package agency. In addition, USA said it would launch the USA Travel Channel, a new cable television program service that will offer a full range of travel products. Upon completion of the proposed transactions, USA will generate approximately $4 billion in annual gross travel bookings, becoming the new leader in interactive travel.
These acquisitions, in addition to USA's interest in the Hotel Reservations Network (NASDAQ: ROOM), will form the USA Travel Group portfolio of companies, which collectively handled approximately 16% of the $14 billion worth of online travel transactions in 2000. For the calendar year 2001, the group is expected to generate approximately $4 billion in gross bookings. In calendar year 2002, gross bookings are expected to grow by approximately 40%. The companies had virtually no debt and a combined cash balance of approximately $340 million as of March 31, 2001.
Expedia and NLG will expand USA's estimated share of retail transactions conducted over the Internet and via television in the United States from 5%, to approximately 9% in 2001. Expedia and NLG anticipate leveraging USA's massive transactional infrastructure, which is expected to process 1 billion minutes of inbound customer calls, 83 million orders, and ship 40 million items over the next twelve months. The newly combined USA database of 33 million customers will include purchasers of everything from live music event tickets - to a wide array of home products - to cutting edge electronics - to complex travel packages, and are all products available from USA through either a television or computer screen.
9 377186 "For some time we have believed travel to be a key building block in offering goods and services in interactive formats. These announcements make that belief a reality: Expedia and its superb management, led by Richard Barton, will be at the heart of our activities. Together with the National Leisure Group and its leading array of travel packages, and the development of a broad- based commerce travel channel, I can't think of a better knitting together of the convergence of entertainment, information and direct selling," said Barry Diller, Chairman and CEO, USA.
***
Barry Diller will become Chairman of Expedia. Richard Barton will continue in his role as President and CEO of Expedia. "By joining USA Networks, we access an unrivaled array of media, direct selling and travel assets that will enable us to continue the strong growth momentum we currently carry," said Mr. Barton. "Expedia will be ideally positioned to extend its reach both online and on television."
***
As a part of the transaction, Expedia will create a new class of high-vote shares, which USA will receive from Expedia shareholders electing the USA consideration.
At closing of the transaction, USA will own 67% to 75% of the outstanding equity and over 90% of the voting interest in Expedia, depending on the number of Expedia shares exchanged for the USA securities, with the remaining Expedia equity held by the public and potentially Microsoft, depending on pro-ration. Microsoft will own approximately 3% to 5% of USA equity, depending on pro-ration.
***
National Leisure Group
USA has also agreed to acquire National Leisure Group, Inc. (NLG), a leading provider of technology and fulfillment services to world class affiliate partners engaged in the sale of vacation packages and cruises. NLG has long-term affiliate agreements under which it sells vacation packages and cruises though its multi- channel marketing activities (retail, direct marketing, television, and internet). NLG's affiliates range from leading travel web sites including Expedia.com to major offline retail partners. NLG's 2001 gross bookings growth of over 100% make it one of the fastest growing distributors in the leisure travel industry. Terms of
10 377186 the transaction were not disclosed. Aaron Gowell, President, will continue in that role.
"USA brings National Leisure Group a wealth of opportunity to accelerate our pace of growth, broaden into new areas and continue investing in the best technology platform in the industry for the sale of high margin cruise and vacation packages," said Mr. Gowell. "Contributing our industry leading technology and services to the USA Travel Group, we expect the combination to deliver extraordinary growth for USA shareholders and deliver an even more compelling product to our network of affiliates."
***
Hotel Reservations Network
In addition to becoming the instant leader in interactive travel, through USA's majority stake in the Hotel Reservations Network, the Travel Group will have access to one of the strongest stables of hotel rooms available for sale at discount prices. HRN is a leading provider of discount hotel rooms, offering accommodations at more than 3,000 properties worldwide, as well as access to vacation rental properties, including condominiums, vacation timeshare properties and other managed vacation properties.
***
"Through our portfolio of interactive commerce companies and the capabilities within, we are confident we have the most diverse, healthy and robust industry examples of convergence in the key categories of travel and access. At this point these are more than killer applications, they are accomplishments which improve the reality of real interactive businesses, in proven segments with tangible results," said Jon Miller, President and CEO, USA Information and Services. "These businesses thrive through their autonomy as well as their place in this world-leading group."
These numbers were false and misleading because they did not account for the Company’s improper booking of revenues and lacked a reasonable basis for the positive statements about the
Company’s true growth and progress.
29. On February 4, 2002, Expedia shareholders approved the USA Networks transaction. Defendants Diller, Genachowski, Kaufman and Khosrowshah immediately
11 377186 expanded the Expedia Board of Directors and placed themselves and their colleagues in positions of significant control.
30. The next day, the Company issued the following Press Release over the PR
Newswire:
Expedia, Inc. Shareholders Approve USA Networks, Inc. Transaction
Majority Ownership Transfers to USA
BELLEVUE, Wash., Feb. 5 /PRNewswire-FirstCall/ -- Expedia, Inc. (Nasdaq: EXPE) today reported that on February 4, 2002, its shareholders approved the merger transaction in which USA Networks, Inc. (Nasdaq: USAI) became the controlling shareholder of Expedia(R). The transaction was completed yesterday.
The transaction transfers the ownership of 33.7 million shares of Expedia from Microsoft Corporation to USA. In addition, another 1.0 million shares, including approximately 240,000 shares submitted via notice of guaranteed delivery, were exchanged by other Expedia shareholders for a package of USA securities, bringing USA's ownership in Expedia to 34.7 million shares, or about 65% of the 53.7 million basic shares outstanding, and representing 94.9% percent of the voting interest.
***
Immediately after the closing of the merger transaction, the Expedia board of directors expanded the Board from 7 to 13 members. With one of these members still to be named, the new Expedia Board consists of Barry Diller, chairman and chief executive officer of USA, as chairman; Richard Barton, president and chief executive officer of Expedia; Tom Breitling, former president of Travelscape, Inc.; Julius Genachowski, executive vice president and general counsel of USA; Jay Hoag, general partner of Technology Crossover Ventures; Victor Kaufman, vice chairman of USA; Dara Khosrowshahi, executive vice president and chief financial officer of USA; Gregory Maffei, CEO of 360networks and former chairman of Expedia's board of directors; Daniel Marriott, senior vice president, strategic planning, USA; Jon Miller, president and CEO, USA Information and Services, a division of USA; John Pleasants, president and CEO of
12 377186 Ticketmaster, Inc.; and Gregory Stanger, senior vice president and chief financial officer of Expedia.
It is anticipated that the Board will fill the remaining Board seat promptly.
31. On March 19, 2003, the Company filed a Form 8-K with the SEC announcing that it had entered into an agreement by which USA, already the majority owner of Expedia, would acquire the Expedia shares it did not own in a stock-for-stock transaction generally tax-free to
Expedia shareholders. The transaction was valued at $3.3 billion, based on the closing price of
USA common stock on March 18, 2003. The transaction allowed USA to further simplify its corporate structure. Under the agreement, Expedia shareholders would receive 1.93875 shares of
USA common stock for each share of Expedia stock that they owned, which represented approximately a 30% premium, based on the closing price of USA stock and Expedia stock on
March 18, 2003. In the transaction, USA would issue to Expedia public shareholders approximately 92.5 million basic shares and 124.9 million shares on a fully diluted, treasury method basis. Commenting on these news, defendant Diller stated:
"The timing in relation to world events is an accident - as often happens with transactions, they take the time they take to reach conclusion - however, we were of course mindful of events beyond our own - and our decision to acquire the balance of Expedia under these circumstances does dramatically underscore our great belief in the robust growth and long term value of online travel. Travel may be affected by this or that event, for a day or a month or whatever, but if there is life then there is travel - we bet on the latter.
We all have so much respect for Rich Barton, Erik Blachford and the superb group they have assembled that has executed so flawlessly building Expedia into a leadership position in online travel - we hope by this consolidation of ownership at USA that this great Expedia group will play an ever expanding role across all our 14 Divisions."
13 377186 This statement was false and misleading because defendants failed to disclose that its growth was
impacted by its improper booking of revenues.
32. On April 10, 2003, the Company filed a Form 8-K with the SEC announcing that
it had entered into an agreement by which USA, already the majority owner of Hotels.com,
would acquire the Hotels.com shares it did not own in a tax-free, stock-for-stock transaction.
The transaction was valued at approximately $1.1 billion based on the closing price of USA
common stock on April 9, 2003. The transaction represented the final step in USA's efforts,
begun in June 2002, to simplify its corporate structure by acquiring its public subsidiaries. As a
result of these transactions, all of USA's interests would be indivisible inside USA's public security. Travel was, however, its own sector and USA would continue to review strategy over time. The Hotels.com Board of Directors approved the agreement following the unanimous recommendation and approval of an independent Special Committee of the Hotels.com Board.
Under the agreement, Hotels.com shareholders would receive 2.4 shares of USA common stock for each share of Hotels.com stock that they own. This represented an approximately 20% premium based on the closing price of USA stock and Hotels.com stock on March 18th, 2003, the day prior to the announcement of USA's merger with Expedia. In the transaction, USA would issue to Hotels.com public shareholders approximately 43.0 million basic shares and 45.2 million shares on a fully diluted, treasury method basis.
33. On May 1, 2003, the Company filed a Form 425 with the SEC. Therein, the
Company provided a letter from defendant Diller to its shareholders laying out the Company’s
strategy for growth and consolidation. The letter failed to disclose that the Company was
improperly booking revenues, that the Company would have to expend additional resources to
market its products in the maturing Internet industry and that as a result Defendant Diller lacked
14 377186 a reasonable basis for his positive statements about the Company’s growth and progress. The letter stated:
To Our Shareholders
While it's my experience that it never seems so living through it, the last year was a whirlwind... the best way to review the year though isn't on a calendar basis, but instead using the start date of May 7th, since this was the date the contribution of our entertainment assets to Vivendi Universal Entertainment closed. On that date we went from a media, entertainment company with ecommerce interests to an interactive transaction company. From that moment, we were a company transformed-ending the material veto rights held by other parties, and eliminating the LLC structure under which we'd operated with such complexity and contradiction for almost all the years of our short life.
Through the recently announced buy-ins of the minority interests of Expedia and Hotels. com, and the previously completed acquisition of the outstanding minority interest in Ticketmaster, we have virtually completed the evolutionary process of simplifying our corporate structure. Recently, I resigned my position as CEO of Vivendi Universal Entertainment which clarified with great punctuation where my work would be concentrated. The cumulative effect of these actions has eliminated any lingering question about whether we're a holding company or an operating company. Clearly, we're now properly viewed as an operating company and judged against our theoretical peers-namely the Tier One companies in interactivity-eBay, Yahoo, and Amazon.
In this arena of Tier One interactive companies, from a financial standpoint, we compare quite favorably. We lead in Sales, EBITA, and Free Cash Flow-and we're second only to eBay in Gross Transaction Value. Market valuations in the internet sector certainly have a short and sharp roller coaster history ... our equity securities are certainly not currently, or thank god in historical terms, valued at the high multiples of the other leaders in the sector-but, to us, that's entirely besides the point. Our perspective is long term, and our focus is not on multiples but on creating real and lasting value for our shareholders. We're happy to have our performance speak for itself and have our stock follow, rather than the reverse.
These financial yardsticks are consistent with our goal to be the largest, most profitable interactive commerce company in the world-by pursuing a multi-brand strategy. Even though we
15 377186 have leadership today, we want to expand on that lead and create a company in which the power of our brands allows us to create an "unwalled" garden where our customers can benefit through discounts, membership, dynamic pricing and all methods to link and unite our great total audience of our combined users.
From a structural standpoint, there's only one lingering piece of the puzzle that needs final resolution ... our VUE securities. We've been clear on our intentions.. .this set of securities is worth the equivalent of cash to us and we intend, over the next 6-12 months, to either indirectly monetize this value (through the issuance of USA securities that mirror the economics of our VUE Preferred Stock) or exchange all our VUE securities into something else of substantially greater value. Our primary motivation is to turn a relatively "passive" asset on our books into the equivalent of cash, which we can then use either to acquire new businesses, invest in our current ones, or shrink our capitalization.
As we've said before, we are very committed to transparency and clarity when it comes to financial reporting. We've changed our format for presenting our quarterly numbers to further emphasize the relevant metrics and other important financial information relating to our operations. We will continue to give more and more information, trying in every way we can to do so in a clear and concise manner. The evolving accounting rules (such as those relating to giving equal prominence to GAAP measures along non-GAAP measures like EBITA and Adjusted EPS) sometimes make this challenging. But this type of challenge only reinforces for us our basic principles-namely, that investors are entitled to see all relevant information and to make their own judgment about which parts of our disclosed information are most important to them. Also, we're aware that our focus on providing detailed information and full explanation has spawned quite a number of footnotes in our earnings releases and other public filings-sometimes it may seem like there's more footnotes than text. This isn't something we're proud of, and over time we'd like to see our footnotes steadily shrink ... but, what we won't do is dot one less "i' in the pursuit of full and complete disclosure, providing whatever analysis and commentary we can in having our shareholders understand our company exactly as we do.
In our annual reporting and earnings releases, we'll give our views about the way in which we look at our results, the ways in which we operate internally and how to best look at our future prospects. But, be assured that whatever financial metrics you may find most
16 377186 compelling, we'll continue to try and be ahead of your thought process. This means that we'll present good news in a balanced way and we'll fairly disclose any anticipation of material bad news and bad trends very early to the extent that we can identify them. Openness is a mantra to us-and we're committed to talking to the investing community in a way that's totally consistent with the way in which we discuss our company among ourselves. We want investors who take a long-term view and are not swayed by short- term results--whichever way they may fall.
And, we want our employee incentives aligned with this philosophy. One of the most important decisions we made this year was deciding to begin our transition away from issuing stock options to granting restricted stock units. We believe that stock options encourage aggressive behavior and a get rich quick mentality that unfortunately dominated much of the "bubble" economy. While this has been an understandable shock to many of our employees as they transition out of the "option way of life," we believe it of paramount importance to perfectly align our employee equity incentives with the interests of our shareholders and we can't think of a better answer than restricted stock units. An equally important component of our equity plan is to extend the average vesting period of our grants-we believe USA equity is dear and we are only interested in people who want to be with us for the long term. While anyone can own our stock for a minute or a decade, we're only going to make decisions for the company with a long-term view.
Given our start in owning television stations, and my own history in entertainment, we certainly didn't get to where we are by design ... what we had was a real curiosity about interactivity and the great good luck to have it just prior to the development of the internet. We proceeded step by step, constantly re-evaluating our position, delving into the areas we found interesting, and jumping on opportunities with total focus, speed and aggression. After seven short years, we are firmly convinced that our distinct approach to this interactive world-that of multiple brands as opposed to one totalitarian brand-is a great way to create value.
While we are certain that the business arena we inhabit is at its earliest stage of development, and that there will be lots of twists and turns along the way, we are committed to making decisions with an absolute view of the value over the long term for our shareholders, and with a highly critical view of our own weaknesses and vulnerabilities. Our great challenge is to continue to execute in our multiple lines of businesses. We are mindful every day of the consistent operating discipline necessary to
17 377186 achieve the goals we have set ... however, with our stable of brands, each with such great growth ahead and their enormous potential to integrate and create new products and services, we believe we can sustain a competitive advantage far into the future.
All my experience in the entertainment business taught me very few people made the decisions that really counted, that were the determinants of success and failure... every single experience I have had in this new world of interactivity tells me exactly the opposite ... it is the expertise and the enterprise of a great many talented people working at every level of the organization that makes for success ... we are so very lucky to have so very many engaged in what I deeply believe can be one of this century's great enterprises. I am at the earliest stage (though I hope growing quickly) in learning how to manage an organization such as this ... part of that is knowing just how much I need to thank its members, together with our wise and engaged Board of Directors for their work this year past, and for their vigorous and challenging support in the work ahead.
Sincerely, /s/Barry Diller
Barry Diller Chairman and Chief Executive Officer
34. Additionally, on May 1, 2003, the Company reported results for its quarter ended
March 31, 2003. The Company, in its press release, in part stated:
* USA has simplified its corporate structure, with its completed buy-in of Ticketmaster and the announced buy-ins of Expedia and Hotels.com. These transactions further enhance USA's. ability to operate its subsidiaries to the fullest extent. This is the first quarter that USA is reporting pro forma the results of all three companies as 100%-owned subsidiaries of USA.
* Travel Services, Ticketing, and HSN International led USA's strong quarter. Travel Services gross bookings increased 75% in the face of war, and Ticketing gross value of transactions increased 27%. Results were offset somewhat by Personals, which invested aggressively in marketing during the quarter.
* USA expects to meet or exceed its FY 2003 Adjusted EPS budget of $0.75(d), though we do not expect to achieve growth rates similar to the first quarter in the second, third, and fourth quarters. Due to non-cash charges which include a charge of $245
18 377186 million to the book value of USA's common interest in VUE (see page 2 for more detail), we anticipate that FY 2003 GAAP Diluted EPS will be significantly lower than budget.
These statements were false and misleading because the Company again failed to disclose that it was improperly booking revenues.
35. On May 5, 2003, the Company filed a Form 8-K with the SEC. Therein, the
Company announced that they had entered into an agreement by which USA would acquire all of the outstanding capital stock of LendingTree in a stock-for-stock transaction. The transaction
would represent USA's entry into the large and attractive financial services and real estate
verticals, both of which are at an early stage of online migration. LendingTree was the leading
lending exchange with more than 200 participant lenders; the Company has facilitated nearly $48
billion in closed loans since inception and has recently entered the real estate sector with excellent early results. With this transaction, USA now had a presence in seven key areas of interactive commerce that represent approximately 75% of total interactive commerce.
36. On May 15, 2003, the Company filed its quarterly report with the SEC on Form
10-Q. The Company's Form 10-Q was signed by Diller and Khosrowshahi and reaffirmed the
Company's previously announced financial results but failed to disclose that the Company was
improperly booking revenues.
37. On June 23, 2004, IAC filed a Form 8-K with the SEC. Therein, the Company
announced the successful completion of its acquisition of the outstanding shares of Hotels.com
that it did not already own. The acquisition, which was accomplished by the merger of a wholly
owned subsidiary of IAC with Hotels.com, with Hotels.com surviving as a wholly owned
operating business of IAC, became effective before the open of the market. In connection with
the merger, Hotels.com options were converted into options to acquire IAC common stock.
Under the agreement, Hotels.com shareholders received 2.4 shares of IAC common stock for
19 377186 each share of Hotels.com stock that they own. In the transaction, IAC issued to Hotels.com public shareholders approximately 44.3 million basic shares and 47.2 million shares on a fully diluted, treasury method basis.
38. On August 5, 2003, IAC filed a Form 8-K with the SEC. Therein, the Company reported Q2 2003 revenue of $1.5 billion versus $1.1 billion, an increase of 38% over the prior year period, and operating income of $111.8 million versus $25.4 million in the prior year period. Second Quarter 2002 results include charges of $49.3 million related principally to the shut-down of HSN's Spanish language service, the impairment of PRC goodwill, and the closure of certain of PRC's call centers. Excluding these items, operating income growth would have been 50%. AC's businesses enabled $4.4 billion in gross transactions, up 36%. GAAP diluted
EPS from continuing operations was $0.09 versus $(0.22) in the prior year. The prior year period was impacted by certain charges including those described above, as well as equity losses in HSN unconsolidated operations, all totaling $125.4 million after-tax or $(0.30) per share.
GAAP diluted EPS was $0.16 versus $5.51 in the prior year period. The current year benefited from a $42 million, or $0.07 per share, tax benefit from the shut-down of ECS/Styleclick and
Avaltus (a PRC business), and the prior year period included a gain of $2.4 billion after-tax, or
$5.77 per share, as a result of the contribution of the Company's entertainment assets to Vivendi
Universal Entertainment ("VUE") (the "Vivendi transaction"). More specifically, the Company, in its press release, stated:
IAC's results were led by Travel Services and Electronic Retailing. Expedia and Hotels.com grew revenues 73% and 47%, respectively, driven mainly by continued strength in the merchant lodging and international businesses. Electronic Retailing grew revenue to $527 million, up 18%, as a result of improving domestic results, with HSN U.S. revenue growth of 8%, and strong international growth principally from the inclusion of
20 377186 Euvia in this year's consolidated results and favorable exchange rates.
For the six months ended June 30, 2003, net cash provided by operating activities was $939 million, compared with $439 million in the prior year period. Free Cash Flow was $823 million, compared with $306 million in the prior year period. 2003 results benefited from a positive change in working capital of $490 million, which was driven by a $238 million increase in Expedia deferred merchant bookings and Hotels.com deferred revenue. Based on these strong results, we are targeting $1.4 billion in net cash provided by operating activities for the full year 2003.
Adjusted EPS was $0.18 versus $(0.03) in the prior year period. The prior year period was impacted by certain charges (as described on page 4 and page 8) totaling $103 million after-tax or $(0.16) per adjusted share.
IAC expects to meet or exceed its FY 2003 Adjusted EPS budget of $0.75. Due to non-cash charges, including a Q1 charge of $245 million to the book value of IAC's common interest in VUE and amortization of non-cash compensation and intangibles related to the Ticketmaster and Hotels.com mergers and the pending Expedia merger, we anticipate that FY 2003 GAAP diluted EPS from continuing operations will be significantly lower than budget.
These statements were false and misleading because the Company again failed to disclose that it was improperly booking revenues.
39. On August 8, 2003, IAC filed a Form 8-K with the SEC. Therein, the Company announced the successful completion of its acquisition of the outstanding shares of Expedia that it did not already own through the merger of a wholly owned subsidiary of IAC with and into
Expedia. Expedia would continue operations as a wholly owned operating business of IAC. The acquisition became effective as of the close of market on August 8, 2003. In connection with the acquisition, each share of Expedia common stock was converted into 1.93875 shares of IAC common stock, each publicly traded Expedia warrant to purchase one share of Expedia common stock was converted into an IAC warrant to purchase 1.93875 shares of IAC common stock, and outstanding options to purchase Expedia common stock were converted into options to purchase
21 377186 IAC common stock. In the transaction, IAC issued to Expedia's public shareholders
approximately 100.8 million basic shares of IAC common stock and 133.3 million shares on a fully diluted, treasury method basis.
40. Additionally, on August 8, 2003, IAC announced the successful completion of its
acquisition of LendingTree, Inc. through the merger of a subsidiary of IAC with and into
LendingTree. LendingTree, the leading online lending and real estate exchange, would continue
operations as an operating business of IAC. As a result of the acquisition, LendingTree
shareholders would receive 0.6199 of a share of IAC common stock for each share of
LendingTree common stock they owned and options to purchase LendingTree common stock
were converted into options to purchase shares of IAC common stock. Holders of LendingTree preferred stock would receive shares of common stock of IAC on an as-converted basis in
exchange for their preferred shares. In this transaction, IAC would issue to LendingTree
shareholders approximately 18.8 basic shares and 21.1 shares on a fully diluted, treasury method
basis.
41. On August 10, 2003, The New York Times published an article entitled
“Financial Disclosure the Barry Diller Way.” The article drew attention to the Company’s
accounting methods and improper booking of revenues. The article, in relevant part, stated:
WHEN the titans of media and finance met last month in Sun Valley, Idaho, for the annual conference held by the investment banker Herbert Allen, the chatter was not limited to wheeling and dealing. Corporate governance was also a topic of discussion. Three company chairmen -- Warren E. Buffett of Berkshire Hathaway, Howard Stringer of Sony and Barry Diller of InterActiveCorp -- even participated in a panel on the subject for the lustrous crowd.
To some investors, Mr. Diller's inclusion on such a panel may seem incongruous. For while many companies have spent the past year making their financial reports simpler and more transparent, those from InterActive, an Internet commerce conglomerate whose
22 377186 businesses include the Home Shopping Network, Expedia Inc. and Hotels.com, are still maddeningly complex.
Investors perusing the company's quarterly earnings release from last Tuesday, for example, encountered a thicket of pro forma figures, used by InterActive to put the best spin on its results. Of course, the company also presented results according to generally accepted accounting principles, as regulators require. But pro forma figures -which calculate results excluding certain items -- dominated the release.
Perhaps more troubling, profits at InterActive's two big Internet travel sites, Expedia and Hotels.com, the company's growth engines, may be inflated. The problem is that the sites maybe paying less in hotel occupancy taxes than government authorities think is owed. And a disclosure in a recent regulatory filing, saying that the company could be forced to pay back taxes to state or local authorities and pay more taxes in the future, was minimal at best.
Moreover, nowhere in its documents does InterActive tell investors how much its earnings could be hurt if tax authorities require it to alter its practices.
In a telephone interview last Wednesday, Mr. Diller bristled at the notion that his company's financial statements were purposefully complex. "I would say strongly that we go to extraordinary lengths to be transparent and to write it in plain English," he said.
"Our goal is to simplify the capital structure of the company," he said. "We've made acquisitions, we have pro forma issues, issues of amortization, and our shareholders want to look at the company in ways other than GAAP, and we provide supplemental information that we hope is clear. By doing what we did this quarter, which was to essentially not obfuscate anything, was, I think, a fine step."
Dara Khosrowshahi, InterActive's chief financial officer, rejected the contention that the company's stance on the hotel occupancy tax was aggressive. "This tax issue is not a big deal in general," he said. "We have been advised on these issues by multiple experts in the area. They have advised us that we have a completely sound position as far as taxes go."
With InterActive, Mr. Diller intends to build the world's largest and most profitable e-commerce company. To that end, he has
23 377186 been dumping broadcasting and entertainment assets and replacing them with Internet commerce concerns.
* * *
Occupancy taxes vary across the country. New York City, the top destination for Hotels.com customers, charges state and city hotel occupancy taxes of 13.625 percent -- an 8.625 percent state tax and a 5 percent city tax -- and a state fee of $2 a room.
A check of New York City room prices on Hotels.com and Expedia indicates that taxes and fees charged by the sites can total 18 percent of the room rate. On Expedia, a room for two at the Milford Plaza in Midtown Manhattan later this month cost $109 a night, plus taxes and service fees of $19.04, or 17.5 percent. On Hotels.com, a room for two at that hotel on the same night cost $91.75, plus $16.75, or 18.3 percent, in taxes and service fees.
Neither Expedia nor Hotels.com discloses the amount paid to the operator of the Milford Plaza for the room. But assuming that its markup is 25 percent, which is standard in the industry, that would put Expedia's wholesale price for the room at about $87 and Hotels.com's at about $81.
Taxes due to New York State and New York City on those rates would be $13.85 at Expedia and $13.03 at Hotels.com. So by charging $19.04 in taxes and service fees, Expedia's profits could be $5.19 on the room, or 6 percent of its cost. By charging $16.75 in taxes and fees, Hotels.com's profits could be $3.72, or 5 percent of the room's cost.
If Expedia and Hotels.com paid taxes to the city and state based on what they charge customers, their profits would be much lower. The $19.04 that Expedia charges for taxes and fees would generate a profit of only $2.19, or 2.5 percent of the room's wholesale cost. The $16.75 in taxes and fees charged by Hotels.com would produce profits of $2.25, or 2.4 percent of the room's cost.
WHEN asked about the taxpaying practices of Internet hotel sites, Tom Bergin, spokesman for New York's taxation and finance department, maid: "Our audit and enforcement divisions are currently moving to address these and other sales tax issues."
Orlando, Fla., in Orange County, is another big destination for customers of Hotels.com and Expedia. Martha Haynie, comptroller of Orange County, which charges a resort tax of 5 percent on its hotel rooms, said: "It is our position that the tax is due on the gross room rate because it appears they are charging the customer tax on
24 377186 that room rate, and if they are collecting tax and not remitting it we are going to want that."
These receipts are attractive, Ms. Haynie said, because tax collections for the first five months of this year are down from last year. "I'm beginning to wonder how much impact this dot-corn business maybe having" on the decline, she said.
Dave Bruns, spokesman for Florida's revenue department, said it expected to advise companies later this month whether they must remit the 6.5 percent sales tax on the amount they charge customers for a room.
Texas law already states that a company that buys a block of rooms, marks them up, sells them over the Internet and has its own cancellation policy must collect and remit hotel taxes on the amount a customer pays.
Texas state occupancy taxes are 6 percent; Dallas levies an added city hotel tax of 9 percent. A recent search on Expedia and Hotels.com for a room at the Holiday Inn Aristocrat in Dallas for later this month indicated taxes and fees of 17 percent to 18 percent of the room rate.
Mr. Khosrowshahi dismissed the threat that tax authorities might present to the company's earnings. He said InterActive's practices were standard in the online travel industry.
But InterActive notes in its government filings that it may be vulnerable to additional or back taxes. "A successful assertion by one or more states or local taxing jurisdictions that we should collect sales or occupancy taxes on the sale of hotel rooms could result in substantial tax liabilities for past sales, decrease our ability to compete with other Internet travel companies not subjected to collecting sales and occupancy taxes and otherwise harm our business," a recent regulatory filing stated.
How much could InterActive's earnings be hurt if state authorities forced it to pay additional taxes?
Mr. Khosrowshahi said: "We don't think it is a significant liability at all. We are in discussions with a number of states' tax authorities, and the discussions have been productive and encouraging." He said the company had set aside a reserve of less than $10 million to cover potential tax bills.
But financial filings and news releases from Expedia and Hotels.com before they were absorbed into InterActive allow for a
25 377186 rough estimate of how the company's earnings could decline if tax authorities disagreed with Mr. Khosrowshahi's assessment. Based on that information, the shortfall could be substantial.
From the start of 2001 until the end of March 2003, Hotels.com and Expedia reported how many rooms they had sold each quarter as merchants rather than as agents. By analyzing the companies' cost of goods sold, one can estimate what the companies pay to hotel companies for rooms they buy and, therefore, what they remit in taxes.
42. On August 11, 2003, defendant Diller issued a response to The New York Times article. In the response, entitled "Letter from IAC/INTERACTIVECORP to The New York
Times," defendant Diller stated:
To the Editor:
It is unfortunate that newspapers - unlike public companies - appear not to be bound by the material misstatement and omission requirements of the federal securities laws. G retchen Morgenson's two articles regarding IAC/InterActiveCorp (Money & Business Section, August 10, 2003) contain numerous inaccuracies, as well as some apparent confusion regarding my statements to her in a conversation we had on August 6, 2003. In a world where markets react to headlines in newspapers, reporters need to be more vigilant to ensure they print accurate rather than misleading information. This letter will address only a few of the glaring inaccuracies in Ms. Morgenson's articles, as we do not believe that your newspaper is the appropriate forum for engaging in a point-by- point dialogue about our business. However, we do intend to correct the record on certain of the main issues raised…thus by way of example only:
We object to the entire premise of the articles to the extent they question the sufficiency of IAC/InterActiveCorp's public disclosures. IAC has been a leader on disclosure. We publicly release our budget. We were one of the first companies to stop providing quarterly "guidance." We are a prolific filer of information under Regulation FD to ensure that our shareholders have all up-to-date information that is important and relevant to them. Not many companies include their Principles of Financial Reporting so that investors can see with precision a detailed explanation for each of our actions. It is irresponsible to present a one-sided, ill-informed article that does not at a minimum note the company's consistent policy of open disclosure. We are also
26 377186 mystified by the characterization of our use of pro formas as "spin." As reflected in our various public documents, we use pro formas only to clarify and to add information -- and we have done so even when their use makes our results look less favorable.
The main article states that some government authorities are considering whether Hotels. corn and Expedia are required to collect and remit room occupancy taxes on the amount of the customers' payment that is retained by Hotels.com and Expedia. Unfortunately, the article then recklessly jumps to the conclusion that if such occupancy taxes were found to be owed on all of the companies' revenue, from all jurisdictions, the companies' liability could be substantial. But while a limited number of jurisdictions have raised this issue (and the companies are engaged in ongoing dialogue with those jurisdictions), there is simply no basis for the supposition that the companies will face liability in all jurisdictions. The applicable tax provisions vary among the jurisdictions, and many of the jurisdictions, including certain high- revenue states, limit the obligation to collect occupancy taxes to businesses that are hotel "operators" (or similar language), a category that we do not believe includes Expedia and Hotels.com. While statutes in some jurisdictions do not specifically limit occupancy tax collection responsibilities to hotel operators, the companies believe they have sound additional arguments as to why they are not required to collect and remit occupancy taxes in those jurisdictions (the companies do not presently collect or remit taxes on the portion of the customer payment that they retain). We are engaged in what we believe are productive discussions with the tax authorities in various jurisdictions to resolve this issue. The company has disclosed this issue in its prior public filings and has taken appropriate reserves (less than $10 million) in accordance with applicable accounting rules.
The second article suggests that I received a 1.5% interest in Vivendi Universal Entertainment (VUE) in exchange for agreeing to vote in favor of the VUE transaction. That is mistaken. I received my stake in VUE in exchange for various personal rights that I gave up, including entering into a non-compete agreement and a standstill agreement, and my agreement to serve as Chairman and CEO of VUE. It had nothing to do with any agreement to vote in favor of the transaction. To the contrary, my vote not only was not required under Delaware law, it was not even permitted, as Delaware law required the vote of 2/3 of the disinterested shareholders. That public vote was obtained, and overwhelmingly so - more than 90% of the disinterested shareholders voted in favor of the transaction.
27 377186 The article also states that Institutional Shareholder Services recommended that shareholders withhold their votes for three directors because of the company's supposed "failure to maintain an independent audit committee." Again, that statement is mistaken. In the ISS report referred to, ISS actually "commend[ed] the company for its high degree of board independence." And, in fact, IAC does maintain an independent audit committee, consisting of Donald Keough, the non-executive Chairman of Allen & Company and former President, COO and Director of Coca-Cola Corp., General Norman Schwarzkopf, and Alan Spoon, a managing general partner at Polaris Venture Partners. Contrary to Ms. Morgenson's suggestion, Mr. Keough meets every regulatory requirement for director independence and audit committee membership. ISS has never contended otherwise, as to Mr. Keough or the other members of the audit committee. ISS, despite its general praise of IAC's corporate governance, did recommend that shareholders withhold their votes because InterActiveCorp did not have a nominating committee, something it is not required to have under Nasdaq rules because it is a controlled company. Our public disclosures have, and will continue to, accurately describe material matters relating to the company. We would hope that your reporters would do the same.
43. On August 12, 2003, IAC filed its quarterly report with the SEC on Form 10-Q.
The Company's Form 10-Q was signed by Diller and Khosrowshahi and reaffirmed the
Company's previously announced financial results but failed to disclose that the Company was improperly booking revenues.
44. On November 5, 2003, IAC filed a Form 8-K with the SEC announcing its results for Q3 2003. Third Quarter 2003 results were led by IAC Travel, Electronic Retailing and
Ticketing. IAC Travel grew revenue 60%, operating income 52% and Operating Income Before
Amortization ("OIBA") 64%. Electronic Retailing's revenue growth was 17%, led by a strong performance at HSN US. Ticketing had a fine quarter, with operating income and OIBA up 8% and 25%, respectively. IAC repurchased 20 million shares of IAC common stock during the quarter for total consideration of $717 million and announced that its Board of Directors had authorized a new share repurchase program for up to 50 million shares. IAC had 57.7 million
28 377186 shares remaining in its authorizations, 7.7 million of which are from the program announced in
March 2003.
45. On November 14, 2004, IAC filed its quarterly report with the SEC on Form 10-
Q. The Company's Form 10-Q was signed by Diller and Khosrowshahi and reaffirmed the
Company's previously announced financial results but failed to disclose that the Company was improperly booking revenues.
46. On February 9, 2004, IAC filed a Form 8-K with the SEC reporting Q4 2003 results. Revenue grew 36% over the prior year to $1.8 billion and operating income grew 142% to $179 million. GAAP net income was $153 million versus $145 million in the prior year and
GAAP EPS was $0.20 versus $0.30 in the prior year. The decrease in GAAP EPS was principally due to higher amortization of intangibles and non-cash compensation and higher shares outstanding in Q4 of 2003. For the full year 2003, GAAP EPS was $0.23 versus $4.54 in the prior year, which included a gain of $5.58 per share related to the Vivendi transaction. IAC grew Operating Income Before Amortization ("OIBA") 131 % to $292 million. Adjusted Net
Income was $228 million versus $169 million in the prior year and Adjusted EPS was $0.29 versus $0.24 in the prior year. For the full year 2003, Adjusted EPS was $0.81 versus $0.33 in the prior year. IAC's operating businesses delivered strong results for the quarter. IAC Travel
("IACT") increased revenues by 41% to $677 million, operating income by 119% to $108 million and OIBA by 111 to $150 million, driven by growth in its merchant hotel, packages and international businesses. Electronic Retailing also had solid results domestically and internationally, with total revenues up 14%, operating income up 21 % and OIBA up 35%.
Ticketing grew revenues, operating income and O1BA by 11%, 41% and 47%, respectively.
29 377186 47. On March 15, 2004, IAC filed its annual report with the SEC on Form I0-K. The
Company's Form 10-K was signed by Diller and reaffirmed the Company's previously announced financial results but failed to disclose that the Company was improperly booking revenues.
48. On May 3, 2004, IAC filed a Form 8-K with the SEC reporting Q1 2004 results.
Revenue grew to $1.5 billion, up 23% over the prior year on a comparable net basis and up 6% as reported. Operating income decreased 57% as a result of non-cash compensation and amortization of intangibles recorded primarily as a result of the buy-ins of IAC's formerly public subsidiaries, as well as higher selling and marketing expenses. GAAP net income was $38 million versus a loss of $110 million in the prior year and GAAP diluted EPS was $0.05 versus
$(0.23) in the prior year. (Q1 2003 was impacted by a $245 million charge related to IAC's equity interest in VUE.) Operating Income Before Amortization grew by 14% to $198 million.
Adjusted Net Income grew 23% to $141 million and Adjusted EPS was $0.18 versus $0.16 in the prior year. IAC's operating businesses delivered strong results for the quarter. HSN U.S. recorded solid topline growth and margin expansion, with revenues, operating income and
Operating Income Before Amortization up 13%, 53% and 36%, respectively. Ticketing had a good quarter, with operating income and Operating Income Before Amortization up 19% and
13%, respectively. IAC Travel ("IACT") increased revenues on a comparable net basis by 41% to $494 million, operating income by 21% to $85 million and Operating Income Before
Amortization by 23% to $128 million, driven by growth in its merchant hotel, packages and international businesses.
49. On May 10, 2004, IAC filed its quarterly report with the SEC on Form 10-Q. The
Company's Form 10-Q was signed by Diller and Khosrowshahi and reaffirmed the Company's
30 377186 previously announced financial results but failed to disclose that the Company was improperly
booking revenues.
50. The statements listed above were materially false and misleading when made
because they failed to disclose or indicate the following: (1) that the Company knew or
recklessly disregarded the fact that its profits were being adversely impacted by the decreases in
available discounted inventory, such as discount hotel rooms and airline tickets; (2) that IAC had
to expend additional resources in order to market its products and brands in the maturing Internet
industry and that it was facing increased Internet competition; (3) that the favorable performance
of IAC's Expedia and the Hotels.com division were largely dependent on the improper booking
of revenue; and (4) that as a result of the foregoing, the defendants lacked a reasonable basis for
their positive statements about the Company's growth and progress.
The Truth Begins to Emerge
51. On August 3, 2004, after the market close, the Company reported Q2 2004
results. Revenue was $1.5 billion, operating income decreased 1% to $110 million, net income decreased 25% to $70 million, and GAAP. Diluted EPS decreased to $0.09 from $0.16. 2004
GAAP results were impacted by increased amortization of non-cash expenses and increased
shares outstanding related to the buy-ins of IAC's formerly public subsidiaries. The Company
disclosed that it was facing increased Internet competition which was impacting its performance.
More specifically, the Company stated:
IAC TRAVEL
IACT grew comparable net revenue by 34% to $555.5 million over the prior year, primarily driven by the worldwide merchant hotel business, increased consumer demand for packages, and the inclusion of recent acquisitions, most notably Hotwire. Packages revenue was $111 million during Q2, up 45% over the prior year. Merchant hotel revenue increased 32% over the prior year on a comparable net basis, despite the termination of the Travelocity
31 377186 affiliate relationship in September 2003, which represented 3% of IACT revenues on a comparable net basis in Q2 2003. Revenue per room night increased 5% over the prior year, due primarily to industry-wide increases in average daily room rates. Worldwide merchant hotel room nights, including room nights sold in packages, increased 25% year over year, driven by continued growth from our U.S. businesses, strong demand from our international websites, expanded supply in international markets, growth in our private label business and the inclusion of Hotwire in Q2 results. IACT's U.S. merchant hotel business continues to experience competition from other third party distributors, promotion by hotel chains of their own direct sites, and a more challenging supply environment resulting from recent increases in hotel occupancy rates. We believe these factors have resulted, and may continue to result, in slower growth rates in domestic merchant hotel bookings. International revenue increased 73% over the prior year, or 62% on a local currency basis, driven primarily by the UK and German websites as well as the inclusion of Anyway.com in 2004 results. IACT remains the leading online travel provider in Europe and continues to expand its footprint with the June launches of Expedia sites in France and Italy. In July, IACT announced that it will enter into the Asia Pacific region with its minority investment in eLong, Inc., a leading privately held online travel provider in China. Barney Harford, formerly senior vice president of air, car and private label for Expedia, Inc., has been appointed President, IAC Travel - Asia Pacific to lead IACT's latest international expansion efforts. Operating income and Operating Income Before Amortization grew 46% and 29% respectively, over the prior year. These results were primarily driven by the revenue increase as discussed above and higher margins at Interval, partially offset by higher worldwide selling and marketing expense including increased spending for several growth initiatives which include Expedia's international business, Expedia Corporate Travel ("ECT") and Classic Custom Vacations' new consumer direct website. The reversal of $6.4 million of expenses associated with the resolution of a contractual dispute also positively impacted results. IACT appointed Steven McArthur as its new President - Expedia, North America and Chris Bellairs as CFO, IAC Travel. McArthur takes on responsibilities previously held by Erik Blachford, who, since being appointed CEO of IACT in September 2003, has been serving in this joint capacity.
ELECTRONIC RETAILING
HSN U.S. increased revenue by 8% to $438.2 million from $404.4 million, operating income by 2% to $28.3 million from $27.7
32 377186 million and Operating Income Before Amortization by 4% to $41.6 million from $39,8 million. The revenue increase was driven primarily by an increase in average price per unit and lower overall return rates, partially offset by a slight decrease in the number of units sold. HSN also improved its household television distribution, increasing full time equivalent homes by 5.2% to 73.4 million. In addition, HSN.com grew revenue by 20% over the prior year. HSN gross profit margins declined 60 basis points to 38.0%, primarily as a result of increased fulfillment costs and a shift in product mix. Operating margins declined, mainly as a result of increased customer service costs including HSN's new distribution facility, the infomercial and catalog businesses, and higher cable distribution fees. HSN expects year-over-year revenue growth rates to improve in Q3 and Q4 as compared to Q2, with Q3 operating margins being similar to Q2 and improving in Q4. HSN International revenue decreased 12%, operating income decreased 27% and Operating Income Before Amortization decreased 26%. In local currency, revenue decreased 17%. As expected, this segment continues to experience increased competition at both Euvia and HSN Germany, and weakness in the Wellness category at HSN Germany.
TICKETING
Ticketmaster grew Operating Income Before Amortization by 29% over the prior year to $46.7 million, with operating income up 43% to $40.5 million. Revenue growth was driven by increased revenue per ticket from higher convenience and processing fees and favorable exchange rates from foreign markets. Operating margins expanded, even in a challenging environment for the concert industry, due to higher revenue, and increased operating and distribution efficiencies. Top event ticket on sales in the U.S. included Kenny Chesney, Prince, Van Halen and Ringling Bros. and Barnum & Bailey Circus. International revenue was up 15% over the prior year, or 7% on a local currency basis. The number of tickets sold declined from the prior year due to the overall weakness of concert ticket sales in 2004 compared to a strong concert season in 2003. Cancellations by popular acts such as Britney Spears, Christina Aguilera and Lollapalooza had a negative impact on ticket sales in 2004 and together with fewer stadium shows in 2004 and overall softness in the concert market, led to lower overall sales during the quarter. The company does not foresee significant improvement in the concert environment for the remainder of 2004. In addition, Ticketmaster could be negatively impacted by a potential NHL strike.
33 377186 52. In an earnings conference call with investors, Defendant Khosrowshahi stated,
“As many of you are probably aware, as of Q1 we changed the way that our Hotels.com subsidiary recognized revenue for merchant hotel bookings. So instead of recording the full price the customer pays for a room as revenue, we now record the net margin that we receive which we refer to as net revenues.”
53. Defendant Diller was quoted in the conference call as telling investors, “You look at our competition, Travelocity has definitely done better, Orbitz came out the other day and its okay. … We think that our share will probably drop a couple of points.”
54. News of this shocked the market. Shares of IAC fell $4.23 per share, or 15.65 percent, on August 4, 2004 to close at $22.80 per share.
UNDISCLOSED ADVERSE FACTS
55. The market for IAC securities was open, well-developed and efficient at all
relevant times. As a result of these materially false and misleading statements and failures to
disclose, IAC securities traded at artificially inflated prices during the Class Period. Plaintiff and
other members of the Class purchased or otherwise acquired IAC securities relying upon the
integrity of the market price of IAC securities and market information relating to IAC, and have
been damaged thereby.
56. During the Class Period, defendants materially misled the investing public,
thereby inflating the price of IAC securities, by publicly issuing false and misleading statements
and omitting to disclose material facts necessary to make defendants' statements, as set forth
herein, not false and misleading. Said statements and omissions were materially false and
misleading in that they failed to disclose material adverse information and misrepresented the
truth about the Company, its business and operations, as alleged herein.
34 377186 57. At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused or were a substantial contributing cause of the
damages sustained by Plaintiff and other members of the Class. As described herein, during the
Class Period, defendants made or caused to be made a series of materially false or misleading
statements about IAC business, prospects and operations. These material misstatements and
omissions had the cause and effect of creating in the market an unrealistically positive
assessment of IAC and its business, prospects and operations, thus causing the Company's
securities to be overvalued and artificially inflated at all relevant times. Defendants' materially
false and misleading statements during the Class Period resulted in Plaintiff and other members
of the Class purchasing the Company's securities at artificially inflated prices, thus causing the
damages complained of herein.
ADDITIONAL SCIENTER ALLEGATIONS
58. As alleged herein, defendants acted with scienter in that defendants knew that the
public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflecting the true facts regarding IAC, their control over, and/or receipt and/or modification of IAC allegedly materially misleading misstatements and/or their associations with the Company which made them privy to confidential proprietary information concerning IAC, participated in the fraudulent scheme alleged herein.
59. Defendants knew and/or recklessly disregarded the falsity and misleading nature of the information which they caused to be disseminated to the investing public. The ongoing
35 377186 fraudulent scheme described in this complaint could not have been perpetrated over a substantial
period of time, as has occurred, without the knowledge and complicity of the personnel at the
highest level of the Company, including the Individual Defendants.
60. During the Class Period and with the Company's stock trading at an inflated price,
defendant Diller sold 5,329,000 shares of proceeds of $177.6 million. Defendant Khosrowshahi sold 120,514 shares for proceeds of $4.1 million. Defendant Genachowski sold 237,500 for proceeds of $8.2 million, Defendant Barton sold 1,256,350 for proceeds of $40.6 million.
Defendant Kaufman sold 842,862 shares for proceeds of $28.3 million.
Applicability Of Presumption Of Reliance: Fraud-On-The-Market Doctrine
61. At all relevant times, the market for IAC securities was an efficient market for the
following reasons, among others:
(a) IAC stock met the requirements for listing, and was listed and actively
traded on the NASDAQ, a highly efficient and automated market;
(b) As a regulated issuer, IAC filed periodic public reports with the SEC and
the NASDAQ;
(c) IAC regularly communicated with public investors via established market
communication mechanisms, including through regular disseminations of press releases on the
national circuits of major newswire services and through other wide-ranging public disclosures,
such as communications with the financial press and other similar reporting services; and
(d) IAC was followed by several securities analysts employed by major
brokerage firms who wrote reports which were distributed to the sales force and certain
customers of their respective brokerage firms. Each of these reports was publicly available and
entered the public marketplace.
36 377186 62. As a result of the foregoing, the market for IAC securities promptly digested
current information regarding IAC from all publicly-available sources and reflected such
information in its stock price. Under these circumstances, all purchasers of IAC securities during the Class Period suffered similar injury through their purchase of IAC securities at artificially inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
63. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
Many of the specific statements pleaded herein were not identified as "forward-looking
statements" when made. To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements. Alternatively, to the
extent that the statutory safe harbor does apply to any forward-looking statements pleaded
herein, defendants are liable for those false forward-looking statements because at the time each
of those forward-looking statements was made, the particular speaker knew that the particular
forward-looking statement was false, and/or the forward-looking statement was authorized
and/or approved by an executive officer of IAC who knew that those statements were false when
made.
FIRST CLAIM
Violation Of Section 10(b) Of The Exchange Act Against And Rule 10b-5 Promulgated Thereunder Against All Defendants
64. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
37 377186 65. During the Class Period, defendants carried out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing
public, including Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and
other members of the Class to purchase IAC securities at artificially inflated prices. In
furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them,
took the actions set forth herein.
66. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices, and a course of business which
operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to
maintain artificially high market prices for IAC securities in violation of Section 10(b) of the
Exchange Act and Rule 10b-5. All defendants are sued either as primary participants in the
wrongful and illegal conduct charged herein or as controlling persons as alleged below.
67. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business,
operations and future prospects of IAC as specified herein.
68. These defendants employed devices, schemes, and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of IAC value and performance
and continued substantial growth, which included the making of, or the participation in the
making of, untrue statements of material facts and omitting to state material facts necessary in
order to make the statements made about IAC and its business operations and future prospects in
38 377186 the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of IAC securities during the Class Period.
69. Each of the Individual Defendants' primary liability, and controlling person liability, arises from the following facts: (i) the Individual Defendants were high-level executives and/or directors at the Company during the Class Period and members of the Company's management team or had control thereof, (ii) each of these defendants, by virtue of his responsibilities and activities as a senior officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company's internal budgets, plans, projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and familiarity with the other defendants and was advised of and had access to other members of the
Company's management team, internal reports and other data and information about the
Company's finances, operations, and sales at all relevant times; and (iv) each of these defendants was aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.
70. The defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing IAC operating condition and future business prospects from the investing public and supporting the artificially inflated price of its securities. As demonstrated by defendants' overstatements and misstatements of the Company's business, operations and earnings throughout the Class Period, defendants, if they did not have actual
39 377186 knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading.
71. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price of IAC securities was artificially inflated during the Class Period. In ignorance of the fact that market prices of IAC publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the securities trades, and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants but not disclosed in public statements by defendants during the Class Period, Plaintiff and the other members of the Class acquired IAC securities during the
Class Period at artificially high prices and were damaged thereby.
72. At the time of said misrepresentations and omissions, Plaintiff and other members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the other members of the Class and the marketplace known the truth regarding the problems that
IAC was experiencing, which were not disclosed by defendants, Plaintiff and other members of the Class would not have purchased or otherwise acquired their IAC securities, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid.
73. By virtue of the foregoing, defendants have violated Section 10(b) of the
Exchange Act, and Rule 10b-5 promulgated thereunder.
40 377186 74. As a direct and proximate result of defendants' wrongful conduct, Plaintiff and the other members of the Class suffered damages in connection with their respective purchases and sales of the Company's securities during the Class Period.
SECOND CLAIM
Violation Of Section 20(a) Of The Exchange Act Against the Individual Defendants
75. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.
76. The Individual Defendants acted as controlling persons of IAC within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the
Company's operations and/or intimate knowledge of the false financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which Plaintiff contends are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by Plaintiff to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.
77. In particular, each of these defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.
41 377186 78. As set forth above, IAC and the Individual Defendants each violated Section
10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct, Plaintiff and other members of the Class suffered damages in connection with their purchases of the
Company's securities during the Class Period.
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
(a) Determining that this action is a proper class action, designating Plaintiff as Lead Plaintiff and certifying Plaintiff as a class representative under Rule 23 of the Federal
Rules of Civil Procedure and Plaintiff's counsel as Lead Counsel;
(b) Awarding compensatory damages in favor of Plaintiff and the other Class members against all defendants, jointly and severally, for all damages sustained as a result of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
(c) Awarding Plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and
(d) Such other and further relief as the Court may deem just and proper.
42 377186 JURY DEMAND
Plaintiff hereby demands a trial by jury.
DATED: September 28, 2004
WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP
FRED TAYLOR ISQUITH [FI-6782] GREGORY M. NESPOLE [GN-6870] GUSTAVO BRUCKNER [GB-7701]
270 Madison Avenue New York, New York 10016 Telephone: 212-545-4600 Fax: 212-545-4653
LAW OFFICES OF BRUCE MURPHY Bruce Murphy, Esq. 265 Llwyds Lane Vero Beach, FL 32963 Telephone: (772) 231-4020
Attorneys for Plaintiff
43 377186