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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2000
Commission File Number 0-27429
---------------------
EXPEDIA, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1996083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13810 SE EASTGATE WAY, STE. 400, BELLEVUE, WA 98005
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (425) 564-7200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of December
31, 2000 was 48,376,000.
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EXPEDIA, INC.
FORM 10-Q
For the Quarter Ended December 31, 2000
INDEX
Page
----
PART I. Financial Information................................................ 3
Item 1. Unaudited Consolidated Financial Statements..................... 3
a) Unaudited Consolidated Statements of Operations
and Comprehensive Loss for the Three Months
and Six Months ended December 31, 1999 and 2000............ 3
b) Unaudited Consolidated Balance Sheets as of June 30,
2000 and December 31, 2000................................. 4
c) Unaudited Consolidated Statement of Changes in
Stockholders' Equity for the Period from July 1, 2000
to December 31, 2000....................................... 5
d) Unaudited Consolidated Statements of Cash Flows
for the Six Months Ended December 31, 1999 and 2000........ 6
e) Notes to Unaudited Consolidated Financial Statements....... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17
PART II. Other Information.................................................... 18
Item 1. Legal Proceedings............................................... 18
Item 2. Changes in Securities and Use of Proceeds....................... 18
Item 6. Exhibits........................................................ 18
SIGNATURES..................................................................... 19
2
PART I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts) (unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
1999 2000 1999 2000
---------------------- ----------------------
Agency revenues $ 11,927 $ 24,092 $ 21,573 $ 45,738
Merchant revenues 480 47,292 679 94,012
Advertising and other revenues 5,414 8,294 10,837 16,417
---------------------- ----------------------
Revenues 17,821 79,678 33,089 156,167
---------------------- ----------------------
Cost of agency revenues (excluding recognition of stock-based
compensation of $229 and $78 for the three months ended December
31, 1999 and 2000 and $229 and $267 for the six months ended
December 31, 1999 and 2000) 6,210 11,475 10,772 23,353
Cost of merchant revenues (excluding recognition of stock-based
compensation of $458 and $164 for the three months ended December
31, 1999 and 2000 and $458 and $461 for the six months ended
December 31, 1999 and 2000) 460 39,593 627 77,727
Cost of advertising and other revenues (excluding recognition of
stock-based compensation of $76 and $22 for the three months
ended December 31, 1999 and 2000 and $76 and $95 for the six
months ended December 31, 1999 and 2000) 644 906 1,279 1,589
---------------------- ----------------------
Cost of revenues 7,314 51,974 12,678 102,669
---------------------- ----------------------
Gross profit 10,507 27,704 20,411 53,498
---------------------- ----------------------
Operating expenses:
Product development (excluding recognition of stock-based
compensation of $11,842 and $4,779 for the three months ended
December 31, 1999 and 2000 and $11,842 and $13,866 for the six
months ended December 31, 1999 and 2000) 4,452 5,862 9,845 11,132
Sales and marketing (excluding recognition of stock-based
compensation of $1,426 and $494 for the three months ended
December 31, 1999 and 2000 and $1,426 and $1,644 for the six
months ended December 31, 1999 and 2000) 10,584 20,878 17,316 38,777
General and administrative (excluding recognition of stock-
based compensation of $3,221 and $1,613 for the three months
ended December 31, 1999 and 2000 and $3,221 and $4,434 for the
six months ended December 31, 1999 and 2000) 1,946 5,311 4,675 10,653
Amortization of goodwill and intangibles - 15,532 - 31,064
Recognition of stock-based compensation 17,252 7,150 17,252 20,767
---------------------- ----------------------
Total operating expenses 34,234 54,733 49,088 112,393
---------------------- ----------------------
Loss from operations (23,727) (27,029) (28,677) (58,895)
Net interest income and other 543 1,728 543 2,810
---------------------- ----------------------
Loss before provision for income taxes (23,184) (25,301) (28,134) (56,085)
Provision for income taxes - - - -
---------------------- ----------------------
Net loss $(23,184) $(25,301) $(28,134) $(56,085)
====================== ======================
Net loss $(23,184) $(25,301) $(28,134) $(56,085)
Other comprehensive income:
Currency translation adjustment - 55 - 65
---------------------- ----------------------
Comprehensive loss $(23,184) $(25,246) $(28,134) $(56,020)
====================== ======================
Pro forma basic and diluted net loss per common share $ - $ - $ (0.81) $ -
====================== ======================
Basic and diluted net loss per common share $ (0.64) $ (0.53) $ - $ (1.21)
====================== ======================
Weighted average shares used to compute pro forma basic and
diluted net loss per common share - - 34,709 -
====================== ======================
Weighted average shares used to compute basic and diluted net loss
per common share 36,418 47,453 - 46,350
====================== ======================
See accompanying notes.
3
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited)
June 30, December 31,
2000 2000
--------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 60,670 $ 118,250
Accounts receivable, net 13,997 10,417
Prepaid expenses and other current assets 6,452 9,734
--------------------------
Total current assets 81,119 138,401
Property and equipment, net 6,446 10,950
Investments and restricted deposits 7,064 4,169
Intangible assets, net 88,739 67,251
Goodwill, net 89,682 81,790
--------------------------
Total assets $ 273,050 $ 302,561
==========================
LIABILITIES
Current liabilities:
Accounts payable $ 20,553 $ 21,524
Accrued expenses 16,582 22,037
Due to Microsoft 2,392 3,273
Current portion of notes payable 300 231
Current portion of unearned revenue 21,170 19,918
--------------------------
Total current liabilities 60,997 66,983
Notes payable, net of current portion 1,607 1,533
Unearned revenue, net of current portion 2,950 -
--------------------------
Total liabilities 65,554 68,516
--------------------------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 120,000 shares authorized, 44,489 and 48,376 issued and
outstanding at June 30, 2000 and December 31, 2000, respectively 445 484
Preferred stock, $.01 par value, 10,000 shares authorized, none issued and outstanding
at June 30, 2000 and December 31, 2000, respectively - -
Additional paid-in capital 369,446 430,562
Unearned stock-based compensation (49,261) (27,717)
Retained deficit (113,365) (169,450)
Accumulated other comprehensive income:
Cumulative currency translation adjustment 231 166
--------------------------
Total stockholders' equity 207,496 234,045
--------------------------
Total liabilities and stockholders' equity $ 273,050 $ 302,561
==========================
See accompanying notes.
4
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands) (unaudited)
Additional Unearned Currency
Common Stock Paid-in Stock-based Retained Translation
Shares Amount Capital Compensation Deficit Adjustment Total
-----------------------------------------------------------------------------------------
Balance, July 1, 2000 44,489 $445 $369,446 $ (49,261) $(113,365) $231 $207,496
Proceeds from exercise of options 233 2 1,004 - - - 1,006
Proceeds from issuance of common stock,
net of issuance costs 3,654 37 60,889 - - - 60,926
Recognition of stock-based compensation - - - 20,767 - - 20,767
Forfeiture of stock-based compensation - - (777) 777 - - -
Net loss - - - - (56,085) - (56,085)
Other comprehensive income:
Cumulative currency translation
adjustment - - - - - (65) (65)
-----------------------------------------------------------------------------------------
Balance, December 31, 2000 48,376 $484 $430,562 $ (27,717) $(169,450) $166 $234,045
=========================================================================================
See accompanying notes.
5
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
Six Months Ended
December 31,
---------------------------------
1999 2000
---------------------------------
Operating activities:
Net loss $(28,134) $(56,085)
Adjustments to reconcile net loss to net cash (used)/provided by operating activities:
Depreciation 586 2,030
Recognition of stock-based compensation 17,252 20,767
Amortization of goodwill and intangibles - 31,064
Provision for doubtful accounts - 960
Cash provided (used)/provided by changes in operating assets and liabilities:
Accounts receivable (increase) decrease (4,722) 2,620
Due to Microsoft (increase) decrease (2,554) 881
Prepaid expenses and other current assets increase (63) (3,282)
Accounts payable and accrued expenses increase 7,809 6,426
Unearned revenue decrease (477) (4,602)
---------------------------------
Net cash (used)/provided by operating activities (10,303) 779
---------------------------------
Investing activities:
Additions to property and equipment (2,553) (6,534)
Acquisitions of Travelscape and VacationSpot, net of acquisition costs - (1,684)
Return of restricted deposits - 3,295
---------------------------------
Net cash used by investing activities (2,553) (4,923)
---------------------------------
Financing activities:
Repayment of notes payable - (143)
Net proceeds from issuance of stock 76,646 60,926
Net proceeds from exercise of stock options 6 1,006
Net contribution from Microsoft 10,331 -
---------------------------------
Net cash provided by financing activities 86,983 61,789
---------------------------------
Effect of foreign exchange rate changes on cash and cash equivalents - (65)
---------------------------------
Net increase in cash and cash equivalents 74,127 57,580
Cash and cash equivalents at beginning of period - 60,670
---------------------------------
Cash and cash equivalents at end of period $ 74,127 $118,250
=================================
Supplemental disclosures to cash flow statements:
Cash paid for interest $ - $ 108
=================================
Forfeiture of stock-based compensation $ - $ 777
=================================
Cost-based investments received $ - $ 400
=================================
See accompanying notes.
6
EXPEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Business Description
In October 1996, Microsoft Corporation ("Microsoft") launched its online
travel services product called Expedia. Since that launch, Expedia, Inc. (the
"Company") has become a leading provider of branded online travel services for
leisure and business travelers. The Company operates three websites, located at
Expedia.com, Travelscape.com and VacationSpot.com. The Expedia.com website has
localized versions in the United Kingdom, Germany and Canada. The Company offers
one-stop travel, shopping and reservation services, providing real-time access
to schedule, pricing and availability information for airlines, hotels and car
rental companies.
The Company was incorporated in the state of Washington on August 23, 1999.
The authorized share capital of the Company was 120,000,000 shares of common
stock and 10,000,000 shares of preferred stock. On October 1, 1999, Microsoft
separated the assets and contributed them in exchange for 33,000,000 shares of
Expedia common stock or 100% of the outstanding common stock at that date.
Concurrent with this, the Company entered into a number of agreements with
Microsoft to facilitate the operation of the Company and its assets after the
separation.
In March 2000, the Company acquired both Travelscape.com, Inc.
("Travelscape"), a Delaware corporation based in Las Vegas, Nevada, and
VacationSpot.com, Inc. ("VacationSpot"), a Delaware corporation based in
Seattle, Washington. Travelscape is a leading branded internet hotel wholesaler
and packager with discounted rate contracts worldwide, and the operator of the
Travelscape.com and LVRS.com websites. VacationSpot is a leading reservation
network for vacation homes, rental condominiums, inns and bed & breakfasts
around the world. The VacationSpot.com and Rent-a-Holiday.com websites, acquired
as part of the acquisition, offer unique properties in vacation destinations and
countries worldwide.
The Company derives revenues from travel related sales transactions and
sales of advertisements on its websites. Historically, the Company has licensed
components of its technology and editorial content to selected airlines and
American Express as a platform for their websites.
2. Basis of Presentation
The accompanying consolidated balance sheets and related interim
consolidated statements of operations, cash flows, and changes in stockholders'
equity, are unaudited and in the opinion of management, include all adjustments
(consisting only of normal recurring items) necessary for their fair
presentation in conformity with accounting principles generally accepted in the
United States of America. Preparing financial statements requires the Company to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results may differ from those
estimates. Interim results are not necessarily indicative of results for a full
year. Users of the consolidated financial statements should read the information
included in this Form 10-Q in conjunction with Management's Discussion and
Analysis and consolidated financial statements and notes thereto included in our
Annual Report filed on Form 10-K with the Securities and Exchange Commission on
September 28, 2000.
The consolidated financial statements include the accounts of Expedia, Inc.
and its wholly-owned subsidiaries. Both Travelscape and VacationSpot were
acquired on March 17, 2000 and have been accounted for under the purchase method
of accounting. Significant inter-company transactions and balances have been
eliminated.
3. Capitalized Software Costs
The Company has capitalized $1.3 million and $2.5 million of software
development costs for the three and six months ended December 31, 2000,
respectively, in accordance with the Company's July 1, 2000 implementation of
Emerging Issues Task Force (EITF) Issue No. 00-02, Accounting for Website
Development Costs. These costs are being amortized over a one year useful life,
beginning upon the release of the website enhancements that these costs
pertained to. The Company has recorded amortization expense of $0.2 million for
the three and six-month periods ended December 31, 2000.
7
4. Recent Accounting Pronouncements
The EITF reached consensus on Issue No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, which establishes indicators to determine the
statement of operations' presentation of revenue. The Company is currently
evaluating the impact of this consensus, which must be applied by the end of the
fiscal year ending June 30, 2001. If, due to the consensus, the Company were to
report revenue on a net basis, this would have no effect on the Company's
operations, cash flow, gross profit or net loss. However, this would have a
material impact on revenues and cost of revenues.
In December 1999, the United States Securities and Exchange Commission
(SEC) released Staff Accounting Bulletin No. 101 (SAB No. 101), Revenue
Recognition in Financial Statements, which must be applied in the fourth quarter
of fiscal 2001. SAB No. 101 provides guidance on revenue recognition and the SEC
staff's views on the application of accounting principles to selected revenue
recognition issues. The Company does not expect that the adoption of SAB No. 101
will have a material impact on the consolidated financial statements.
The Company has adopted the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, beginning July 1, 2000. The
Company has not held derivative financial instruments at any time, therefore,
this pronouncement did not have any impact on the consolidated financial
statements.
5. Income Taxes
Effective October 1, 1999, the Company entered into a tax allocation
agreement with Microsoft. On March 18, 2000, Microsoft's investment in the
Company fell below 80% ownership. As such, from March 18, 2000 onward, the
Company must file a separate tax return. Based on the tax allocation agreement,
the Company may be reimbursed by Microsoft for tax losses incurred during the
period from October 1, 1999 to March 17, 2000 which are utilized on the
Microsoft consolidated U.S. federal tax return. Any losses not utilized by
Microsoft will be carried forward by the Company and can be used on the
Company's separate return to offset any future taxable income. As of December
31, 2000, the Company has received no such reimbursement from Microsoft. Any
reimbursement from Microsoft will be recorded as a capital contribution.
At December 31, 2000, the Company had generated a cumulative net operating
loss carry forward since incorporation of $36 million for federal income tax
purposes. Of this amount, $19 million of cumulative net operating loss carry
forward relates to the period prior to March 18, 2000. The net operating loss
carryforwards expire during the period from 2020 to 2021.
Because of the Company's limited operating history, losses incurred to date
and the difficulty in accurately forecasting future results, the Company has
established a valuation allowance equivalent to the expected tax benefit from
its net operating loss carry forward. As a result, the Company has not recorded
a benefit for federal and state income taxes or related deferred tax assets.
Management evaluates, on a quarterly basis, the recoverability of the deferred
tax assets and the level of the valuation allowance.
6. Net Loss Per Share
Net loss per share and pro forma net loss per share have been computed in
accordance with Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share. Pro forma net loss per share has also been computed in
accordance with SAB No. 98 to reflect the pro forma effect of the Company's
capitalization. Under the provisions of SFAS No. 128 and SAB No. 98, basic pro
forma net loss per share is computed by dividing the net loss for the period by
the weighted average number of common shares outstanding, using the pro forma
effect of the conversion of the net contribution from owner as if the shares
issued to capitalize the Company were outstanding over the entire period for
which the pro forma net loss per share has been computed. Net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common shares outstanding. Common stock equivalent shares related to stock
options, warrants and shares subject to repurchase are excluded from the
calculation as their effect is antidilutive. Accordingly, basic and diluted loss
per share are equivalent.
8
7. Related Party Transactions
Prior to October 1, 1999, the financial statements of the Company reflect
certain allocated corporate support costs from Microsoft. Such allocations and
charges are based on a percentage of total corporate costs for the services
provided, based on factors such as headcount, revenue, gross asset value or the
specific level of activity directly related to such costs.
Management believes that the allocation methods used are reasonable and
reflective of the Company's proportionate share of such expenses and are not
materially different from those that would have been incurred on a stand-alone
basis.
Costs prior to October 1, 1999 representing allocations from Microsoft (in
thousands):
Six Months Ended
December 31,
------------------
1999
------------------
Cost of revenues $ (924)
Product development (557)
Sales and marketing (1,497)
General and administrative (2,086)
------------------
Net expense $(5,064)
==================
Costs and revenue representing charges from the services agreement and
other agreements with Microsoft (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ----------------------
1999 2000 1999 2000
----------------------- ----------------------
Revenues $ 44 $ 44 $ 44 $ 88
Cost of revenues (1,011) (656) (1,011) (1,182)
Product development (1,016) (405) (1,016) (788)
Sales and marketing (245) (1,130) (245) (2,351)
General and administrative (457) (483) (457) (921)
------------------------ -----------------------
Net expense $ (2,685) $(2,630) $(2,685) $(5,154)
======================== =======================
On August 25, 2000, the Company issued 3,011,293 shares of common stock and
warrants to purchase an additional 602,259 shares of our common stock to TCV IV,
L.P. ("TCV") and TCV IV Strategic Partners, L.P. in exchange for approximately
$50 million in cash. As a result of the investment, one of the partners of TCV
became a director of Expedia. On that same date, the Company issued 602,258
shares of common stock and warrants to purchase an additional 120,452 shares of
our common stock to Microsoft in exchange for approximately $10 million in cash.
8. Commitments and Contingencies
The Company has multi-year agreements with certain travel service providers
that make available the services accessed through the Company's website. Under
these agreements, the Company pays monthly service fees to the service providers
based on the volume of activity. The Company expenses these amounts as the
services are provided.
The Company entered into a services agreement with Microsoft whereby
Microsoft provides the Company with administrative and operational services. The
services agreement has been extended from its original December 31, 2000
expiration to April 1, 2001. The Company and Microsoft are currently developing
an amended and restated services agreement to extend past April 1, 2001. Fees
are being paid to Microsoft for the services under this agreement on either an
estimated or actual cost reimbursement, including taxes.
The Company entered into a five-year carriage and cross promotion agreement
with Microsoft under which the Company receives premium placement on Microsoft's
domestic and international MSN.com website, the Hotmail email service and the
WebTV platform. Microsoft has received a flat annual fee of $2.0 million during
the first year of the agreement, which started on December 1, 1999, and will
receive $2.2 million during the second year. Microsoft also receives incentive
fees to the extent that the number of completed airline transactions from users
of the MSN.com website exceeds the Company's forecasts. The fees and terms of
sale of banner advertisements will depend on agreement between the parties for
the remaining three years under this agreement.
At December 31, 2000 we had $3.9 million of outstanding letters of credit.
Of this amount, $1.6 million is collateralized with restricted certificates of
deposit. The remaining amount is guaranteed by Microsoft. If Microsoft's
investment in Expedia were to fall below 50%, then we would have to
collateralize the outstanding letters of credit with cash deposits equaling 105%
of the letters of credit's face value in exchange for the release of the
Microsoft guarantee. Microsoft's percentage ownership of the shares outstanding
at December 31, 2000 was approximately 69%.
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. Management believes that the resolution of
all such matters will not have a material impact to our financial position,
results of operations or cash flows.
9. Acquisitions
The Company acquired Travelscape on March 17, 2000 in consideration for
approximately 3.0 million shares, stock options and warrants of the Company in
exchange for all outstanding shares, stock options and warrants of Travelscape.
The total value of the shares, stock options and warrants exchanged was
approximately $96 million. VacationSpot was also acquired on March 17, 2000 in
consideration for approximately 2.6 million shares and stock options of the
Company in exchange for all the outstanding shares and stock options of
VacationSpot. The total value of the shares and stock options exchanged in this
transaction was approximately $82 million. Commencing March 18, 2000, the
Company has included the results of operations of Travelscape and VacationSpot
in its consolidated results of operations.
9
The Company has accounted for these transactions under the purchase method
of accounting in accordance with the APB Opinion No. 16. Under the purchase
method of accounting, the purchase price was allocated to the assets acquired
and liabilities assumed based on their estimated fair values. All material
estimates and contingencies have now been identified and no material changes to
the consolidated financial statements have been identified. The fair values were
determined by an independent appraiser. Certain goodwill and intangibles have
been identified and capitalized as part of these transactions.
The following table summarizes the purchase accounting for the acquisitions
(in thousands):
Travelscape VacationSpot Total
----------- ------------ --------
Current and long term assets $ 20,959 $10,320 $ 31,279
Intangibles and goodwill 123,432 73,959 197,391
Liabilities assumed (45,943) (502) (46,445)
-------- ------- --------
Net assets acquired 98,448 83,777 182,225
Less: acquisition costs (2,882) (2,115) (4,997)
-------- ------- --------
Purchase price $ 95,566 $81,662 $177,228
======== ======= ========
Intangible assets are amortized on a straight-line basis over the estimated
useful life of the assets, ranging from two to four years. Goodwill is amortized
on a straight-line basis over five years.
The following table presents the results of operations of the Company on a
pro forma basis. These results are based on the individual historic results of
the Company, Travelscape and VacationSpot and reflect adjustments to give effect
to the acquisitions as if they occurred at the beginning of the period
presented. The only significant adjustment is the amortization of goodwill and
intangibles. The pro forma results are as follows (in thousands except per share
information):
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- ------------------
1999 1999
-------------------- ------------------
(Pro Forma)
Revenues $ 44,061 $ 79,612
==================== ==================
Loss from operations $(43,566) $(75,472)
==================== ==================
Net loss $(43,040) $(76,494)
==================== ==================
Pro forma basic and diluted net loss per common share $ (1.07) $ (1.99)
==================== ==================
Weighted average shares used to compute pro forma basic and
diluted net loss per common share 40,079 38,352
==================== ==================
10. Segment Information
The Company has five reportable segments: Transportation, Destinations
(formerly called "Lodging"), Advertising, International and Corporate. The
Transportation segment serves primarily as an agent for U.S.-originated airline
tickets and car rentals and a licensor of Expedia technology to various travel
companies. The Destinations segment generates most of its revenues from U.S.-
originated hotel bookings, airline tickets sold on the Travelscape.com website
and vacation property listing revenue from the VacationSpot.com website. The
Advertising segment sells advertisements on the domestic websites. The
International segment generates agency revenues from airline tickets, car
rentals and hotel bookings on the United Kingdom, Germany, Belgium and Canada
websites. The Corporate segment consists of the amortization of goodwill and
intangibles and recognition of stock-based compensation.
Segment information is presented in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
standard is based on a management approach, which requires segmentation based
upon the Company's internal organization and disclosure of revenue and operating
loss based upon internal accounting methods. The accounting policies of the
segments are substantially the same as those described in the summary of
significant accounting policies described in Note 2 of the Company's Form 10-K.
Management evaluates each segment's performance based upon income or loss
from operations. This involves significant allocations of various expenses to
the non-Corporate segments. These allocations are primarily based on transaction
volumes and other metrics.
The segment information is as follows (in thousands):
Transportation Destinations Advertising International Corporate Total
-----------------------------------------------------------------------------------------------
For the three months ended
December 31, 2000:
Revenues $25,312 $49,688 $2,913 $ 1,765 $ - $ 79,678
===============================================================================================
Depreciation and amortization $ 213 $ 690 $ 47 $ 91 $ 15,966 $ 17,007
===============================================================================================
Income (loss) from operations $ 6,294 $(4,386) $ 23 $ (6,278) $(22,682) $(27,029)
===============================================================================================
For the six months ended
December 31, 2000:
Revenues $49,028 $97,814 $5,939 $ 3,386 $ - $156,167
===============================================================================================
Depreciation and amortization $ 338 $ 961 $ 57 $ 125 $ 31,613 $ 33,094
===============================================================================================
Income (loss) from operations $11,039 $(6,072) $ (772) $(11,258) $(51,832) $(58,895)
===============================================================================================
These segments were developed by management for the first time for the
quarter ended September 30, 2000. As such, prior to that quarter, the Company's
financial reporting systems reflected one segment. As a result, no comparative
segment information is provided as it is impracticable to do so.
Assets of the segments are not relevant for management of the businesses
nor for disclosure. However, depreciation and amortization expense, excluding
amortization of goodwill and intangibles which has been exclusively allocated to
the Corporate
10
segment, have been allocated to the five segments for these segment disclosures
based on a usage metric. There are no reconciling items between the segment
information indicated above to the consolidated statements of operations, nor
are there any intersegment revenues.
The Company has allocated revenues from external customers to geographic
areas by selling location. The Transportation, Destinations and Advertising
segments derive revenues from the Company's U.S. websites and the International
segment derives revenues from the Company's international websites.
The Company is anticipating future changes to its allocation methods for
certain revenues and expenses for the quarter ended March 31, 2001.
11. Subsequent Event
On January 9, 2001, the Company settled two patent infringement lawsuits
with Priceline.com Incorporated ("Priceline.com"). Under the settlement, the
Company entered into a royalty arrangement with Priceline.com. The Company does
not anticipate this arrangement to have a material impact on its financial
position or results of operations.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in this section has been derived from our
unaudited consolidated financial statements and should be read together with our
unaudited consolidated financial statements and related notes included elsewhere
in this 10-Q. The discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
expressed or implied in these forward-looking statements as a result of various
factors, including those set forth under the section entitled "Risk Factors" in
our Registration Statement on Form S-1 (SEC File No. 333-40934) filed on July
21, 2000.
Overview
Prior to October 1, 1999, we conducted business as an operating unit of
Microsoft. Our statements of operations and balance sheets were derived from the
historic books and records of Microsoft and included cost allocations from
Microsoft. We believe that the allocated amounts are reasonable and reflective
of the Company's proportionate share of such expenses and are not materially
different from those that would have been incurred on a stand-alone basis. On
October 1, 1999, the effective date of the contribution agreement, Microsoft
contributed assets in exchange for common stock of Expedia, Inc. From that date
forward, our books and records have been maintained separately from Microsoft's.
Our agency revenues are derived from airline ticket transactions and hotel
and car rental reservations. Airline ticket transactions make up the substantial
majority of these revenues. This revenue represents both commissions and fees
related to the sale of airline tickets. Airline ticket commissions are
determined by individual airlines and billed and collected through the Airline
Reporting Corporation, an industry-administered clearinghouse. As is customary
in the travel industry, travel suppliers are not obligated to pay any specified
commission rate for bookings made through our websites. We recognize transaction
revenues on air transactions when the reservation is made and secured by a
credit card. We recognize transaction revenues on hotel, cruise and car rental
reservations either on receipt of commissions or on notification of entitlement
by a third party.
During the quarter ended December 31, 2000, we began to earn Express Fee
revenues where we charge customers for processing and delivering a paper ticket
via express mail if they choose not to have an electronic ticket. These revenues
are recorded as agency revenues.
Our merchant revenue is derived from transactions where we are the merchant
of record and determine the ticket price or room rate. Agreements with hotels
for blocks of rooms that we sell generate the majority of our total merchant
revenues. Hotel Price Matcher and Flight Price Matcher generate the remainder of
the merchant revenue. For all merchant transactions the revenue and related cost
of sales are recorded at gross amounts. If the reservation is non-cancellable,
revenue is recorded when the reservation is made. Otherwise, revenue is deferred
until the actual flight or stay occurs.
Management has made the decision to terminate the Hotel Price Matcher
program in February 2001. During the three and six month periods ended December
31, 2000, revenue from this product was $56,000 and $244,000, respectively.
In December 2000, we introduced the Expedia Packages business. This product
enables customers to customize their trip by selecting their itinerary, airline
and hotel of choice all for one packaged price. The Expedia Packages consist of
a combination of agency and merchant revenues.
Additionally, we derive revenues from the sales of advertisements on our
websites and listing revenues from our VacationSpot website. We recognize
advertising revenues either on display of each individual advertisement or
ratably over the advertising period, depending on the terms of the advertising
contract. Fees from the licensing of software to our airline and corporate
customers such as Continental Airlines, Northwest Airlines and American Express
are another source of revenue. The fixed portion of these license fees are
recognized ratably over the lives of the contracts. Transaction-based fees are
recognized when the transactions occur.
We launched our websites in Canada in fiscal 1997, in the United Kingdom in
fiscal 1999 and in Germany in fiscal 2000. Rent-a-Holiday.com, based in Belgium,
was acquired as part of the VacationSpot acquisition. As a result of increased
activity from these websites and future websites in other markets we may enter,
we expect international revenues to continue to increase.
The costs of agency and merchant revenues consist of fees paid to our
fulfillment vendors for the costs associated with issuing airline tickets and
related customer services, reserves and related payments to the airlines for
tickets purchased with fraudulent credit cards, fees paid to Worldspan for use
of their computer reservation and information services system and allocated and
direct costs for the operation of our data center and call center. In addition,
for our merchant of record transactions only, cost of revenues also includes the
cost of the hotel room or airline ticket as charged by the provider along with
the credit card merchant fees. The cost of advertising and other revenues
consists mainly of costs related to the physical placement of banner and other
advertisements on the websites.
Our direct product development expenses and direct general and
administrative expenses consist primarily of compensation for personnel. Our
product development personnel generally work on maintaining, enhancing and
upgrading our
12
websites and the infrastructure which supports our websites. Our direct sales
and marketing expenses consist of advertising, distribution and public relations
expenses as well as personnel-related costs.
Segment reporting involves significant allocations of various expenses to
our non-Corporate segments. These allocations are primarily based on transaction
volumes and other metrics. The amortization of goodwill and intangibles and
recognition of stock-based compensation are retained in the Corporate segment.
Prior to October 1, 1999, we were allocated operating costs incurred by
Microsoft for real estate, legal, treasury, human resources, information
technology and other general services. We believe that these allocations were
not materially different from the costs that we would have incurred as a stand-
alone entity.
In conjunction with the contribution agreement with Microsoft, we entered
into a services agreement with Microsoft on October 1, 1999. Accordingly, we are
no longer being allocated costs from Microsoft. Under the services agreement,
fees are paid to Microsoft for the services under this agreement on either an
estimated or actual cost reimbursement, including taxes. The agreement has been
extended from its December 31, 2000 expiration to April 1, 2001. The Company and
Microsoft are currently developing an amended and restated services agreement to
extend past April 1, 2001.
We have incurred and expect to continue to incur substantial losses over
the next several quarters. Additionally, our revenues are impacted by the
seasonality of the travel industry, particularly leisure travel. These factors
could adversely affect our future financial condition and operating results.
Our fiscal years end on June 30 of each year. References to a fiscal year,
such as fiscal 2001, are to the twelve months ended June 30 of that year.
Results of Operations
The following table sets forth our results of operations as a percentage of
revenues for the three and six months ended December 31, 2000 compared to the
same period in 1999. Included in this table is a breakdown of revenue from our
three primary sources: agency, merchant, and advertising and other.
(As a Percentage of Revenues)
Three Months Six Months
Ended Ended
December 31, December 31,
----------------- -----------------
1999 2000 1999 2000
----------------- -----------------
Agency revenues 67% 30% 65% 29%
Merchant revenues 3% 59% 2% 60%
Advertising and other revenues 30% 11% 33% 11%
----------------- -----------------
Revenues 100% 100% 100% 100%
----------------- -----------------
Cost of agency revenues (excluding recognition of stock-based
compensation of 1% and 0% for the three months ended December
31, 1999 and 2000 and 1% and 0% for the six months ended
December 31, 1999 and 2000) 35% 14% 32% 15%
Cost of merchant revenues (excluding recognition of stock-based
compensation of 3% and 0% for the three months ended December
31, 1999 and 2000 and 1% and 0% for the six months ended
December 31, 1999 and 2000) 2% 50% 2% 50%
Cost of advertising and other revenues (excluding recognition
of stock-based compensation of 0% and 0% for the three months
ended December 31, 1999 and 2000 and 0% and 0% for the six
months ended December 31, 1999 and 2000) 4% 1% 4% 1%
----------------- -----------------
Cost of revenues 41% 65% 38% 66%
----------------- -----------------
Gross profit 59% 35% 62% 34%
----------------- -----------------
Operating expenses:
Product development (excluding recognition of stock-based
compensation of 66% and 6% for the three months ended
December 31, 1999 and 2000 and 36% and 9% for the six months
ended December 31, 1999 and 2000) 25% 7% 30% 7%
Sales and marketing (excluding recognition of stock-based
compensation of 8% and 1% for the three months ended
December 31, 1999 and 2000 and 4% and 1% for the six months
ended December 31, 1999 and 2000) 59% 26% 52% 25%
General and administrative (excluding recognition of
stock-based compensation of 18% and 2% for the three months
ended December 31, 1999 and 2000 and 10% and 3% for the six
months ended December 31, 1999 and 2000) 11% 7% 14% 7%
Amortization of goodwill and intangibles 0% 20% 0% 20%
Recognition of stock-based compensation 97% 9% 52% 13%
----------------- -----------------
Total operating expenses 192% 69% 148% 72%
----------------- -----------------
Loss from operations (133%) (34%) (86%) (38%)
Net interest income and other 3% 2% 2% 2%
----------------- -----------------
Loss before provision for income taxes (130%) (32%) (84%) (36%)
Provision for income taxes - - - -
----------------- -----------------
Net loss (130%) (32%) (84%) (36%)
================= =================
Revenues
Three Months Ended Six Months Ended
December 31, December 31,
1999 2000 % Change 1999 2000 % Change
------------------------------ -----------------------------
Agency revenues $11,927 $24,092 102% $21,573 $ 45,738 112%
Merchant revenues 480 47,292 9753% 679 94,012 13746%
Advertising and other revenues 5,414 8,294 53% 10,837 16,417 52%
------------------ ------------------
Revenues $17,821 $79,678 347% $33,089 $156,167 372%
================== ==================
Revenues. Agency revenues reflect strong increases as internet commerce,
and especially travel sales, continues to gain acceptance and grow
substantially. In addition to a greater number of visitors to our websites, we
have also been successful in converting a greater percentage of those visitors
to make purchases. During the quarter ended December 31, 2000, we began to earn
Express Fee revenues where we charge customers for processing and delivering a
paper ticket via express mail if they choose not to have an electronic ticket.
These revenues are recorded as agency revenues.
With the acquisition of Travelscape in March 2000 and the introduction of
our Expedia Special Rate business in June 2000, we have significantly increased
our revenues since we record the full amount of the ticket or hotel room sold to
our customers as merchant revenue as opposed to only the amount received from
commissions and fees on transactions where we are not merchant of record. Also,
in December 2000, we introduced the Expedia Packages business. This product
enables customers to customize their trip by selecting their itinerary, airline
and hotel of choice all for one packaged price. The Expedia Packages consist of
a combination of agency and merchant revenues.
The remainder of the increase in revenues is due to increases in
advertising and licensing-related revenue. The growth rate in this area is less
because a portion of these revenues is fixed over time. Over the next quarters,
we anticipate the licensing revenue to significantly decline due to the expected
termination of one or more of the three licenses.
Cost of Revenues and Gross Profit (excluding recognition of stock-based
compensation of $763,000 and $264,000 for the three months ended December 31,
1999 and 2000 and $763,000 and $823,000 for the six months ended December 31,
1999 and 2000)
Three Months Ended Six Months Ended
December 31, December 31,
1999 2000 % Change 1999 2000 % Change
------------------------------ -----------------------------
Cost of agency revenues $ 6,210 $11,475 85% $10,772 $ 23,353 117%
Cost of merchant revenues 460 39,593 8507% 627 77,727 12297%
Cost of advertising and other revenues 644 906 41% 1,279 1,589 24%
------------------ ------------------
Cost of revenues $ 7,314 $51,974 611% $12,678 $102,669 710%
================== ==================
% of revenues 41% 65% 38% 66%
================== ==================
Gross profit $10,507 $27,704 $20,411 $ 53,498
================== ==================
% of revenues 59% 35% 62% 34%
================== ==================
13
Cost of Revenues and Gross Profit. The strong increase in agency revenues
correlates to increased transactions processed by Expedia. As a result, the
associated cost of agency revenues related to processing these transactions
increased significantly during the quarter in comparison to the preceding year's
quarter. We also incurred higher agency costs related to fraudulent and lost
tickets, which amounted to approximately $1.7 million and $4.2 million for the
three and six months ended December 31, 2000. During the quarter ended December
31, 2000, we began to earn Express Fee revenues where we charge customers for
processing and delivering a paper ticket via express mail if they choose not to
have an electronic ticket. The costs associated with Express Fees are recorded
as a cost of agency revenues.
The cost of merchant revenues have increased significantly as a result of
the acquisition of Travelscape in March 2000, the introduction of our Expedia
Special Rate business in June 2000 and Expedia Packages business in December
2000. The Expedia Packages consist of a combination of agency and merchant cost
of revenues. As merchant of record, we pay for the costs of rooms, airline
tickets and any other various incidental costs such as merchant credit card
fees.
The costs of advertising and other revenues have remained relatively
consistent quarter over quarter as the costs associated with the earning of this
revenue is generally fixed in nature.
The decrease in the gross profit percentage during the three and six months
ended December 31, 2000 was primarily due to increases in the merchant business.
Because we act as the merchant of record in these transactions, the revenue and
related cost of revenues are presented at gross amounts, resulting in a lower
gross profit percentage on these transactions. Partially offsetting the declines
in the gross profit percentage mentioned above are increased transaction
volumes, which have created economies of scale, and the growth in advertising
and other revenue, which has a high profit margin.
Product Development (excluding recognition of stock-based compensation of
$11,842,000 and $4,779,000 for the three months ended December 31, 1999 and
2000 and $11,842,000 and $13,866,000 for the six months ended December 31,
1999 and 2000)
Three Months Ended Six Months Ended
December 31, December 31,
1999 2000 % Change 1999 2000 % Change
------------------------------- ------------------------------
Product development $4,452 $5,862 32% $9,845 $11,132 13%
=================== =================
% of revenues 25% 7% 30% 7%
=================== =================
Product Development. During the three and six months ended December 31,
2000, we capitalized $1.3 million and $2.5 million in product development costs
related to website development. Excluding the impact of this capitalization,
which was in accordance with new accounting pronouncements, expenses would have
increased 60% and 39% for the three and six months ended December 31, 2000 from
last year reflecting growth in the number of employees focused on product
development. The decreases in costs combined with significantly larger revenues
result in the large decrease in product development costs as a percentage of
revenues.
Sales and Marketing (excluding recognition of stock-based compensation of
$1,426,000 and $494,000 for the three months ended December 31, 1999 and 2000
and $1,426,000 and $1,644,000 for the six months ended December 31, 1999 and
2000)
Three Months Ended Six Months Ended
December 31, December 31,
1999 2000 % Change 1999 2000 % Change
------------------------------- ------------------------------
Sales and marketing $10,584 $20,878 97% $17,316 $38,777 124%
==================== ==================
% of revenues 59% 26% 52% 25%
==================== ==================
Sales and Marketing. The increases in expenses are primarily attributable
to increased promotional activities intended to bring additional customers to
our websites. Our promotional activities range from radio to paper media
advertising, and include domestic television ads. We anticipate increasing our
spending during the certain remaining portion in conjunction with seasonal
travel sales volumes in order to build greater brand awareness and increase the
number of internet users who access our websites. Although the costs increased,
the significantly larger revenues resulted in the large decrease in sales and
marketing costs as a percentage of revenues.
General and Administrative (excluding recognition of stock-based compensation of
$3,221,000 and $1,613,000 for the three months ended December 31, 1999 and
2000 and $3,221,000 and $4,434,000 for the six months ended December 31, 1999
and 2000)
Three Months Ended Six Months Ended
December 31, December 31,
1999 2000 % Change 1999 2000 % Change
------------------------------- ------------------------------
General and administrative $1,946 $5,311 173% $4,675 $10,653 128%
=================== =================
% of revenues 11% 7% 14% 7%
=================== =================
General and Administrative. These costs increased in absolute terms but
decreased as a percentage of revenues. We have hired employees to perform
certain functions that were not previously necessary when Expedia was an
operating unit of Microsoft. In addition, the acquisitions of Travelscape and
VacationSpot in March 2000 have increased our general and administrative costs
through increased headcount as well as other related expenses. Through our
periodic review of potentially uncollectible accounts, we have recorded an
additional reserve of approximately $0.1 million and $1 million for the three
and six months ended December 31, 2000, respectively. Legal fees of $1.4 million
and $1.7 million for the three and six months ended December 31, 2000 related to
the Priceline lawsuit and eventual settlement also contributed to the increase
in expenses.
14
Amortization of Goodwill and Intangibles
Three Months Ended Six Months Ended
December 31, December 31,
1999 2000 % Change 1999 2000 % Change
------------------------------ ------------------------------
Amortization of goodwill and intangibles $ - $15,532 100% $ - $31,064 100%
================== ==================
% of revenues 0% 20% 0% 20%
================== ==================
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles was related to our acquisitions of Travelscape and VacationSpot in
March 2000.
Recognition of Stock-based Compensation
Three Months Ended Six Months Ended
December 31, December 31,
1999 2000 % Change 1999 2000 % Change
------------------------------ ------------------------------
Recognition of stock-based compensation $17,252 $7,150 (59%) $17,252 $20,767 20%
================== ==================
% of revenues 97% 9% 52% 13%
================== ==================
Recognition of Stock-based Compensation. On the completion of the initial
public offering, all the unvested options to purchase Microsoft common stock
held by Expedia employees were converted to Expedia options. These stock option
issuances were deemed to be new grants and created non-cash compensation expense
for the difference between the option exercise price and the fair market value
of the common stock at the date of grant. The starting date for amortization
coincides with the initial public offering date of November 10, 1999. The
decrease in the recognition of stock-based compensation from quarter to quarter
relates to amortizing the expense over the vesting period of the individual
options in accordance with Financial Accounting Standards Board Interpretation
(FIN) No. 28. This results in higher amortization amounts during the beginning
of the amortization period.
Net Interest Income and Other
Three Months Ended Six Months Ended
December 31, December 31,
1999 2000 % Change 1999 2000 % Change
------------------------------ ------------------------------
Net interest income and other $ 543 $1,728 218% $ 543 $2,810 417%
================== ==================
% of revenues 3% 2% 2% 2%
================== ==================
Net interest income and other. All of our operations were funded by
Microsoft prior to their contribution of assets on October 1, 1999. Expedia,
Inc. now invests its own cash, the majority of which were net proceeds from our
initial public offering of stock on November 10, 1999 and our private placement
of stock and warrants on August 25, 2000.
Segment Results
The segment results indicated below are for the three and six months ended
December 31, 2000. Since these segments were developed by management for the
first time for the quarter ended September 30, 2000, no comparative information
for the three and six months ended December 31, 1999 has been provided.
The Transportation segment generated $6.3 million and $11.0 million of
income from operations for the three and six months ended December 31, 2000,
respectively. This was primarily due to strong revenues from airline
transactions, as internet commerce, and especially travel sales, continues to
gain acceptance and grow substantially. As a result, in addition to a greater
number of visitors to our websites, we have also been successful in converting a
greater percentage of those visitors to make purchases.
The Destinations (formerly called "Lodging") segment had a $4.4 million and
$6.1 million loss from operations for the three and six months ended December
31, 2000, respectively. With the acquisition of Travelscape in March 2000, we
act as merchant of record on a significant portion of Destinations transactions.
The introduction in June 2000 of the Expedia Special Rate business, which
consists of offering negotiated rate hotel rooms on Expedia.com, and the
introduction in December 2000 of the Expedia Packages business, have contributed
to the growth in merchant business. High allocated marketing expenses associated
with both the Expedia.com and Travelscape.com websites have contributed to the
operating loss in this segment.
The Advertising segment had $23,000 in income from operations and $0.8
million of loss from operations for the three and six months ended December 31,
2000, respectively. This segment has experienced revenue growth due to increased
traffic to our websites which has created more demand for banner placements and
content sponsorships on our websites. Because this segment has low operating
costs, it generates a strong profit margin on its revenues. The allocation of
marketing expenditures and the additional bad debts expense of $0.1 million and
$1 million for the three and six months ended December 31, 2000, recorded
15
to this segment were the primary reasons for the year to date loss.
The International segment had a $6.3 million and $11.3 million loss from
operations for the three and six months ended December 31, 2000, respectively.
Our International business is still in its development stage and we have
invested in expansion by increasing promotional activities such as paper media
and television ads in order to bring additional customers to the websites.
The Corporate segment incurred significant losses from operations of $22.7
million and $51.8 million for the three and six months ended December 31, 2000,
respectively, due to the amortization of goodwill and intangibles and the
recognition of stock-based compensation.
Liquidity and Capital Resources
Prior to October 1, 1999, as a division of Microsoft, we financed our
activities through Microsoft. As a result, during the three months ended
September 30, 1999, operating and allocated expenses were recorded as a
contribution from owner.
In November 1999, we raised $76.6 million from our initial public offering.
In August 2000, we completed a private placement of warrants and common stock
consisting of $50.0 million from TCV IV, L.P. and TCV IV Strategic Partners,
L.P. and $10.0 million from Microsoft. Proceeds from these sales of stock have
been the primary source of funding our operations.
During the six months ended December 31, 2000, net cash provided by
operating activities was approximately $800,000. The net loss for this period,
excluding the non-cash charges for goodwill amortization and recognition of
stock compensation, was $4.3 million. A decrease in accounts receivable and
increase in accounts payable, combined with non-cash charges, were the primary
differences between the loss and the cash provided by operating activities.
Net cash used in investing activities for the six months ended December 31,
1999 and 2000, was $2.6 million and $4.9 million, respectively. These investing
activities consisted primarily of capital expenditures, which totaled $6.5
million during the six months ended December 31, 2000. Of this amount, $2.5
million relates to the capitalization of website development costs and $1.3
million relates to new system related costs. The remaining capital expenditures
reflect normal expenditure levels consistent with our growth as a company. We
anticipate other significant capital expenditures during the next twelve months
for computers and other system-related costs associated with our expected
growth. Additional costs will also be capitalized related to further website
development efforts.
Stock option exercises were a source of approximately $1.0 million of cash.
We anticipate additional stock option exercises going forward.
In addition to receiving cash from companies advertising on our websites,
in two agreements we also received equity as additional compensation. The fair
market value assigned to the equity received during the six months ended
December 31, 2000 was $0.4 million.
In December 2000, we entered into a one year, $7 million letter of credit
facility. This facility enables us to terminate existing letters of credit that
are fully secured with restricted certificates of deposit, thereby freeing up
this cash. Collateral for the new facility is in the form of a guarantee from
Microsoft.
As of December 31, 2000, we had $118.3 million in cash and cash
equivalents. We do not currently anticipate needing any other additional cash
funding as we believe that our current cash on hand will sufficiently fund the
negative cash flows from operations.
Recent Accounting Pronouncements
The EITF reached consensus on Issue No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, which establishes indicators to determine the
statement of operations' presentation of revenue. We are currently evaluating
the impact of this consensus, which must be applied by the end of the fiscal
year ending June 30, 2001. If we were to report revenue on a net basis, this
would have no effect on our operations, cash flow, gross profit or net loss.
However, this would have a material impact on our revenues and cost of revenues.
In December 1999, the United States Securities and Exchange Commission
(SEC) released Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition
in Financial Statements, which must be applied in the fourth quarter of fiscal
2001. SAB No. 101 provides guidance on revenue recognition and the SEC staff's
views on the application of accounting principles to selected revenue
recognition issues. We do not expect that the adoption of SAB No. 101 will have
a material impact on the consolidated financial statements.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have adopted the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, beginning July 1, 2000. We have not held
derivative financial instruments at any time, therefore, this pronouncement did
not have any impact on the consolidated financial statements. The majority of
the debt we have has fixed interest rates. Accordingly, we have not been exposed
to near-term adverse changes in interest rates or other market prices. We may,
however, experience such adverse changes if we incur variable-rate debt or hold
derivative financial instruments in the future. Our international operations
expose us to some foreign currency risk. We do not expect any of these risks to
have a material effect on our financial results.
17
PART II. Other Information
Item 1. Legal Proceedings
See Note 8 to Unaudited Consolidated Financial Statements ("Commitments and
Contingencies").
Item 2. Changes in Securities and Use of Proceeds
a) Recent Sales of Unregistered Securities
(i) On August 25, 2000, we issued 3,011,293 shares of our common stock and
warrants to purchase an additional 602,259 shares of our common stock to TCV IV,
L.P. and TCV IV Strategic Partners, L.P. in exchange for approximately $50
million in cash. On that same date, we issued 602,258 shares of our common stock
and warrants to purchase an additional 120,452 shares of our common stock to
Microsoft Corporation in exchange for approximately $10 million in cash. The
exercise price for the warrants issued in these transactions is $16.604167 per
share, subject to adjustment for dilutive events.
(ii) On March 17, 2000, we acquired Travelscape.com, Inc. by issuing
approximately 3.0 million shares, stock options and warrants in exchange for all
outstanding shares, stock options and warrants of Travelscape. The total value
of the stock exchanged was approximately $96 million. A registration statement
on Form S-3 was filed on December 1, 2000 to register those shares issued in
this transaction that have not been previously sold.
(iii) On March 17, 2000, we also acquired VacationSpot.com, Inc. by issuing
approximately 2.6 million shares and stock options in exchange for all of the
outstanding shares and stock options of VacationSpot. The total value of the
stock exchanged was approximately $82 million. A registration statement
on Form S-3 was filed on December 1, 2000 to register those shares issued in
this transaction that have not been previously sold.
The issuances described above were deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) thereof as a transaction
by an issuer not involving any public offering and/or reliance upon Regulation
D. The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with Expedia, to information about
Expedia.
Item 6. Exhibits
(A)
Exhibit 10.1 Amendment to the Expedia 1999 Stock Option Plan
Exhibit 27 Financial Data Schedule
18
SIGNATURES
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.
Date: February 14, 2001
By: /s/ Gregory S. Stanger
-------------------------------------
Gregory S. Stanger
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
19