<PAGE>
As filed with the Securities and Exchange Commission on July 21, 2000
SEC File No. 333-40934
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE
AMENDMENT NO. 1
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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EXPEDIA, INC.
(Exact name of Registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
Washington 4700 91-1996083
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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13810 SE Eastgate Way, Suite 400
Bellevue, WA 98005
(425) 564-7200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
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Mark S. Britton
Vice President and General Counsel
Expedia, Inc.
13810 SE Eastgate Way, Suite 400
Bellevue, WA 98005
(425) 564-7200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies of all communications to:
Richard B. Dodd
Maja D. Chaffe
Preston Gates & Ellis LLP
701 Fifth Avenue, Suite 5000
Seattle, Washington 98104-7078
(206) 623-7580
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Maximum
Amount Maximum aggregate Amount of
Title of each class of to be offering price offering registration
securities to be registered registered per share(1) price(1) fee(1)
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<S> <C> <C> <C> <C>
Common Shares par value $0.01........ 900,000 shares $16.86 $15,174,000 $4,005.94
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</TABLE>
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(1) Estimated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, solely for purposes of calculating amount of registration fee
based upon the average of the high and low prices reported on July 3,
2000, as reported on The Nasdaq National Market. Previously paid with
original filing.
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
section 8(a), may determine.
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<PAGE>
900,000 Shares
[LOGO OF EXPEDIA, INC.]
Common Stock
----------------
The selling shareholders are selling 900,000 shares of our common stock. We
will not receive any of the proceeds from the sale of shares by the selling
shareholders. The selling shareholders may sell their common stock under this
prospectus between August 1, 2000 and August 13, 2000.
Our common stock is quoted on the Nasdaq National Market under the symbol
EXPE. On June 30, 2000, the last reported sale price of our common stock was
$14.8125 per share.
See "Risk Factors" beginning on page 8 to read about factors you should
consider before buying shares of the common stock.
----------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
Prospectus dated August 1, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Summary............................................................... 3
Risk Factors.......................................................... 8
Use of Proceeds....................................................... 18
Price Range of Common Stock........................................... 18
Dividend Policy....................................................... 18
Selected Financial Data............................................... 19
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 21
Business.............................................................. 30
Management............................................................ 44
Certain Relationships and Related Transactions........................ 52
Principal Shareholders................................................ 56
Selling Shareholders.................................................. 58
Description of Capital Stock.......................................... 60
Plan of Distribution.................................................. 61
Validity of the Common Stock.......................................... 62
Experts............................................................... 62
Where You Can Find More Information................................... 63
Index to Consolidated Financial Statements............................ F-1
</TABLE>
<PAGE>
SUMMARY
This summary may not contain all the information that may be important to
you. You should read this entire prospectus before making an investment
decision.
In this prospectus, the terms "Expedia" and "we" refer to Expedia, Inc. and
our subsidiaries and our predecessor, the travel business unit of Microsoft
Corporation, except where it is clear that such terms mean only Expedia, Inc.
Expedia, Inc.
We are a leading provider of branded online travel services for leisure and
small business travelers. We operate our own website, located at Expedia.com,
with localized versions in the United Kingdom, Germany and Canada and certain
other websites in the United States and Europe. We offer one-stop travel
shopping and reservation services, providing reliable, real-time access to
schedule, pricing and availability information for over 450 airlines, 65,000
lodging properties and all major car rental companies. The acquisitions of
Travelscape.com, Inc. and VacationSpot.com, Inc. in March 2000 position us as
the leader in Internet lodging with the broadest selection of properties and
approximately 700,000 room nights booked through our travel planning services
in the quarter ended March 31, 2000.
The Internet is dramatically changing the way that consumers and businesses
communicate, share information and buy and sell goods and services. The
Internet reduces inefficiencies in markets characterized by the presence of
large numbers of geographically dispersed buyers and sellers and purchase
decisions involving large amounts of information from multiple sources. We
believe that the worldwide travel industry, which exemplifies these
characteristics, is especially well-suited to benefit from increased Internet
and electronic commerce adoption. As a result, travel has already become the
largest online retail category with estimated online transactions of $7.8
billion in 1999, growing to $32 billion in 2004, according to Forrester
Research.
To address this market opportunity, we attract a large global base of
consumers and travel suppliers to our Internet-based travel marketplace and
enable them to research, buy and sell travel-related services online. Our
global travel marketplace offers consumers a convenient, comprehensive and
personalized source of travel information and services. At the same time, our
marketplace enables travel suppliers to reach a large, global audience of
consumers who are actively engaged in planning and purchasing travel services.
In our marketplace, suppliers can pursue a range of innovative, targeted
merchandising and advertising strategies designed to increase revenues, while
reducing overall transaction and customer service costs.
We have built an underlying technology infrastructure that enables both
buyers and sellers to transact through our websites in a reliable, scalable and
secure environment.
Since launching our online travel service in October 1996, we have
experienced significant growth in our traffic and the amount of travel
purchased through our travel planning services. In calendar year 1999,
$819 million in airline ticket purchases and hotel and car rental reservations
were made through the travel planning services of Expedia, Travelscape and
VacationSpot. In the fiscal quarter ended March 31, 2000, $401 million in
purchases and reservations were made through these same services.
We are located at 13810 SE Eastgate Way, Suite 400, Bellevue, WA 98005 and
our telephone number is (425) 564-7200.
3
<PAGE>
Strategy
Our objective is to enhance our position as a leading online global travel
marketplace. The key elements of our strategy are as follows:
Continue to Increase Brand Awareness
We are increasing and will continue to increase brand awareness among
consumers by pursuing an aggressive brand development strategy. Our present
brand-building campaign includes a substantial advertising presence in both
online media and traditional media, such as print, radio and television. We
continue to offer co-branded promotions with selected suppliers and pursue
targeted press coverage. We are also working with third parties to develop a
range of cross-media marketing initiatives including Expedia Radio and Expedia
Magazine.
Expand Merchant Business Activity
Strong supplier relationships are crucial to the success of our business.
The acquisition of Travelscape underlines an important shift in our business
model whereby we are moving increasingly towards a merchant business model, as
opposed to the traditional agency business model. In the merchant business
model, Expedia acquires inventory at discounted wholesale prices level from
preferred suppliers and then determines the retail price.This model allows us
to offer more competitive prices to our customers while also generating a
higher gross profit per transaction.
Enhance Technology Platform and Product Functionality
We plan to continue to enhance the underlying infrastructure and
functionality of our websites.
. Feature Differentiation. We will continuously update new software
features and editorial content to our websites. We have invested heavily
in the development of the Best Fare Search technology, a fare searching
technology and pricing engine that moves flight-pricing query activity
from the mainframes of computerized reservation systems to more flexible
and cost-effective servers based on the Windows platform. We will also
continue to develop features that meet the needs of specific market
segments, such as small business travelers. We are improving the
accessibility of our websites through various Internet access channels,
such as wireless hand-held devices, and are providing multimedia
applications.
. Scalability, Security and Reliability. We have invested heavily in core
infrastructure with the objective of eliminating downtime on our
websites, in order to ensure that we are able to continue to serve our
customers reliably as our operations scale. The operation of our own
websites and those of our licensees has given us extensive experience at
handling rapid increases in transaction volumes.
Expand Internationally
We operate localized websites in the United Kingdom, Germany and Canada. We
selected these countries due to their large travel markets and the rapid growth
of online commerce in these markets. In developing customized websites in our
international markets we will continue to draw on our experience in the United
States with technology, user interface and supplier relationships while
tailoring our international websites to specific characteristics of each local
marketplace.
Continue Diversification of our Sources of Revenue
We plan to expand our travel service offerings to include more complex
travel products and destination service offerings. Currently, the majority of
our transaction revenues are derived from airline ticket sales, hotel
4
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reservations and car rentals. We plan to extend our offerings in each of these
core segments and expand the range of offerings into other segments.
As a result of our focus on developing our merchant business, our business
is becoming better diversified than that of our principal online competitors.
Our merchant business is focused on lodging and package transactions.
Commissions and fees from the sale of airline tickets represented less than 30%
of our revenues and less than 40% of our gross profit in the fiscal quarter
ending March 31, 2000.
Risk Factors
An investment in our common stock involves a high degree of risk. We have
incurred substantial net losses and negative cash flows on both an annual and
interim basis, including a net loss of $75.9 million for the nine months ended
March 31, 2000 and, in the same period, cash flow used by operating activities
of $18.1 million. We expect our operating losses and negative cash flow to
continue of the foreseeable future. Before deciding whether to invest in shares
of our common stock, you should carefully consider the risks and uncertainties
described in "Risk Factors" beginning on page 8 of this prospectus.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Selling Shareholders........ 900,000 shares
Common stock to be outstanding after this offering.. 44,489,000 shares
Use of proceeds..................................... We will not receive any
of the proceeds of the
sales by the selling
shareholders (see Plan of
Distribution and Selling
Shareholders)
Nasdaq National Market symbol....................... EXPE
</TABLE>
6
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Summary Financial Data
<TABLE>
<CAPTION>
Pro Forma(1)
-------------------
Nine
Nine months ended Year months
Years ended June 30, March 31, ended ended
-------------------------------------------- ------------------ June 30, March 31,
1995 1996 1997 1998 1999 1999 2000 1999 2000
----- ------- -------- -------- -------- -------- -------- -------- ---------
(in thousands, except per share data)
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues............ $ -- $ -- $ 2,742 $ 13,827 $ 38,699 $ 25,127 $ 64,956 $ 71,342 $ 138,384
Cost of revenues........ -- -- 3,279 9,692 15,950 11,292 32,896 43,469 93,139
----- ------- -------- -------- -------- -------- -------- -------- ---------
Gross profit (loss)..... -- -- (537) 4,135 22,749 13,835 32,060 27,873 45,245
Operating Expenses:
Product development.... 818 6,263 16,211 18,506 21,180 15,314 14,610 23,412 17,819
Sales and marketing.... -- 17 8,820 10,823 14,888 7,695 38,672 30,642 64,104
General and
administrative........ 145 1,520 3,353 4,284 6,283 4,189 6,892 10,346 11,519
Amortization of
goodwill and
intangibles(2)........ -- -- -- -- -- -- 2,332 62,127 46,521
Recognition of
stock-based
compensation(3)....... -- -- -- -- -- -- 46,911 -- 48,053
----- ------- -------- -------- -------- -------- -------- -------- ---------
Total operating
expenses............ 963 7,800 28,384 33,613 42,351 27,198 109,417 126,527 188,016
----- ------- -------- -------- -------- -------- -------- -------- ---------
Loss from operations.... (963) (7,800) (28,921) (29,478) (19,602) (13,363) (77,357) (98,654) (142,771)
Interest income, net.... 1,457 (1,154) (267)
----- ------- -------- -------- -------- -------- -------- -------- ---------
Loss before provision
for income taxes....... (963) (7,800) (28,921) (29,478) (19,602) (13,363) (75,900) (99,808) (143,038)
Provision for income
taxes.................. -- -- -- -- -- -- -- -- --
----- ------- -------- -------- -------- -------- -------- -------- ---------
Net loss................ $(963) $(7,800) $(28,921) $(29,478) $(19,602) $(13,363) $(75,900) $(99,808) $(143,038)
===== ======= ======== ======== ======== ======== ======== ======== =========
Pro forma basic and
diluted net loss per
share(4)............... $ (.59) $ (2.09) $(2.72) $ (3.59)
======== ======== ======== =========
Weighted average shares
used to compute
pro forma basic and
diluted net loss per
common share........... 33,000 36,335 36,756 39,809
======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
As of
March 31, 2000
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(unaudited)
(in thousands)
<S> <C>
Balance Sheet Data:
Cash and cash equivalents........................................ $ 72,825
Working capital.................................................. 31,616
Total assets..................................................... 301,182
Retained deficit................................................. (70,950)
Long-term liabilities, net of current portion.................... 5,026
Total stockholders' equity....................................... 235,355
</TABLE>
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Notes
(1) The pro forma summary financial data reflect the consolidated results of
operations of Expedia, Inc., Travelscape.com, Inc. and VacationSpot.com,
Inc. for the year ended June 30, 1999 and for the nine months ended March
31, 2000 as if the acquisitions had occurred at the beginning of each of
the periods presented.
(2) The amortization of goodwill and intangibles relates to our acquisitions
of Travelscape.com, Inc. and VacationSpot.com, Inc. on March 17, 2000.
(3) The recognition of stock-based compensation relates to a non-cash stock
based compensation charge due to unvested Microsoft options being
converted to Expedia, Inc. options with exercise prices less than the fair
value of Expedia, Inc.'s common stock.
(4) Pro forma basic and diluted net loss per share prior to the initial public
offering was computed by dividing the net loss for the period by Expedia's
initial capitalization as a result of Microsoft's contribution.
7
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider the following factors carefully before deciding to purchase shares of
common stock. Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations.
Our operating results are volatile and difficult to predict. If we fail to meet
the expectations of securities analysts or investors, the market price of our
common stock may decline significantly.
Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. Because our operating results are volatile
and difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. It is
likely that in some future quarter our operating results will fall below the
expectations of securities analysts or investors. In this event, the trading
price of our common stock may decline significantly.
Factors that may cause us to fail to meet the expectations of securities
analysts or investors include the following:
. our inability to obtain new customers at reasonable cost, retain
existing customers or encourage repeat purchases
. decreases in the number of visitors to our websites or our inability to
convert visitors to our websites into customers
. our inability to adequately maintain, upgrade and develop our websites,
the systems that we use to process customers' orders and payments or our
computer network
. our inability to retain existing airlines, hotels, rental car companies
and other suppliers of travel services ("travel suppliers") or to obtain
new travel suppliers
. our inability to obtain travel products on satisfactory terms from our
travel suppliers
. the ability of our competitors to offer new or enhanced websites,
services or products or services or products with lower prices
. fluctuating gross margins due to a changing mix of revenues
. the termination of existing relationships with key service providers or
failure to develop new ones
. the amount and timing of operating costs relating to expansion of our
operations
. economic conditions specific to the Internet, online commerce and the
travel industry
Because we have a limited operating history, it is difficult to evaluate our
business and prospects.
Our business began operations in July 1994 and we launched our online travel
service in October 1996. As a result, we have only a limited operating history
from which you can evaluate our historical business. It is also difficult to
evaluate our prospective business because we face the risks frequently
encountered by early stage companies using new and unproven business models and
entering new and rapidly evolving markets, such as online commerce. These risks
include our potential failure to:
. attract additional travel suppliers and consumers to our service
. maintain and enhance our brand
. expand our service offerings
. operate, expand and develop our operations and systems efficiently
. maintain adequate control of our expenses
8
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. raise additional capital
. attract and retain qualified personnel
. respond to technological changes
. respond to competitive market conditions
We depend on our relationships with travel suppliers and computer reservation
systems; adverse changes in these relationships could affect our inventory of
travel offerings.
Our business model relies on relationships with travel suppliers, and it
would be negatively affected by adverse changes in these relationships. We
depend on travel suppliers to enable us to offer our customers comprehensive
access to travel services and products. Consistent with industry practices, we
currently have few agreements with our travel suppliers obligating them to sell
services or products through our websites. It is possible that travel suppliers
may choose not to make their inventory of services and products available
through online distribution. Travel suppliers could elect to sell exclusively
through other sales and distribution channels or to restrict our access to
their inventory, either of which could significantly decrease the amount or
breadth of our inventory of available travel offerings. Of particular note is
the proposed airline direct-distribution website, which is currently named
"Orbitz." Orbitz has announced its intention to launch in August 2000 and is
reportedly owned by American Airlines, Continental Airlines, Delta Air Lines,
Northwest Airlines and United Air Lines. Forester Research reports that Orbitz
will be the only website for consumers to find unpublished special fares on
these and at least 23 other airlines. If a substantial number of our airline
suppliers collectively agree or choose to restrict their special fares solely
to Orbitz, such action may have a material adverse affect on our business. We
also depend on travel suppliers for advertising revenues. Adverse changes in
any of these relationships, whether due to Orbitz or otherwise, could reduce
the amount of inventory which we are able to offer through our websites.
A decline in commission rates or the elimination of commissions could reduce
our revenues and margins.
A substantial majority of our online revenues depends on the commissions
paid by travel suppliers for bookings made through our online travel service.
Generally, we do not have written commission agreements with our suppliers. As
is standard practice in the travel industry, we rely on informal arrangements
for the payment of commissions. Travel suppliers are not obligated to pay any
specified commission rate for bookings made through our websites. We cannot
assure you that airlines, hotel chains or other travel suppliers will not
reduce current industry commission rates or eliminate commissions entirely,
either of which could reduce our revenues and margins.
For example, in 1995, most of the major airlines placed a cap on per-ticket
commissions payable to all travel agencies for domestic airline travel. In
September 1997, the major United States airlines reduced the commission rate
payable to traditional travel agencies from 10% to 5%. In 1997, the major
United States airlines reduced the commission rate payable for online
reservations from 8% to 5%. In addition, since 1998, many airlines have
implemented a commission cap of $10.00 for domestic online roundtrip ticket
sales. Because a high percentage of our business relates to airline ticket
sales, a further reduction in airline ticket commissions could reduce our
revenues.
Our business is exposed to risks associated with online commerce security and
credit card fraud.
Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To transmit confidential information such as customer credit
card numbers securely, we rely on encryption and authentication technology.
Unanticipated events or developments could result in a compromise or breach of
the systems we use to protect customer transaction data. Furthermore, our
servers may also be vulnerable to viruses transmitted via the Internet. While
we proactively check for intrusions into our infrastructure, a new and
undetected virus could cause a service disruption.
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To date, our results have been impacted due to reservations placed with
fraudulent credit card data. In the quarter ended March 31, 2000, we recorded a
one-time reserve of $4.1 million in order to cover fraudulent credit card
transactions booked on our websites. We recorded this reserve because, under
current credit card practices and the rules of the Airline Reporting
Corporation, we [may be] held liable for fraudulent credit card transactions on
our websites and other payment disputes with customers. Since discovering this
fraudulent activity, we have put additional anti-fraud measures in place above
and beyond our existing credit card verification procedures; however, a failure
to control fraudulent credit card transactions adequately could further
adversely affect our business.
Consumers, travel suppliers and advertisers may not accept our websites as
valuable commercial tools, which would harm the growth of our business.
For us to achieve significant growth, consumers, travel suppliers and
advertisers must accept our websites as valuable commercial tools. Consumers
who have historically purchased travel products using traditional commercial
channels, such as local travel agents and calling airlines directly, must
instead purchase these products through our websites. Consumers frequently use
our websites for route pricing and other travel information and then choose to
purchase airline tickets or make other reservations directly from travel
suppliers or other travel agencies. If this practice increases, it could limit
our growth.
Similarly, travel suppliers and advertisers will also need to accept or
expand their use of our websites. Travel suppliers will need to view our
websites as efficient and profitable channels of distribution for their travel
products. Advertisers will need to view our websites as effective ways to reach
their potential customers.
In order to achieve the acceptance of consumers, travel suppliers and
advertisers contemplated by our business plan, we will need to continue to make
substantial investments in our technology and brand. However, we cannot assure
you that these investments will be successful. Our failure to make progress in
these areas will harm the growth of our business.
We expect our losses and negative cash flows to continue.
We have incurred substantial net losses and negative cash flows on both an
annual and interim basis. For the fiscal year ended June 30, 1999, we had a net
loss of $19.6 million and cash flow used by operating activities of $17.4
million. For the nine month period ended March 31, 2000, we had a net loss of
$75.9 million and cash flow used by operating activities of $18.1 million.
As a result of the acquisitions of Travelscape and VacationSpot on March 17,
2000, we recognized goodwill and intangible assets of approximately $197
million which will be amortized over periods ranging from two to five years.
For the nine months ended March 31, 2000, we recognized $2.3 million of
amortization of goodwill and intangible assets. In addition, we incurred a non-
cash deferred charge of $112 million related to the issuance of stock options
to our employees to replace their unvested Microsoft options at the time of our
initial public offering in November 1999. This charge will be amortized over
the vesting period of the new options. For the nine months ended March 31,
2000, we recognized $46.9 million of stock based compensation.
We expect to continue to incur net losses and negative cash flows for the
foreseeable future and we cannot assure you that we will ever achieve
profitability or generate positive cash flow.
We expect to grow our operating expenses significantly. These increased
expenses will result primarily from our launch of a significant advertising
campaign in fiscal 2000, extension of the coverage of our advertising sales
force and expansion of our domestic and international operations. In addition,
we may experience an increase in expenses as we develop and purchase resources
in areas where we currently rely on Microsoft to provide services. As a result,
we will need to increase our revenues to become profitable. If our revenues do
not grow as expected, or if increases in our expenses are not in line with our
plans, there could be a material adverse effect on our business, operating
results and financial condition.
10
<PAGE>
Intense competition could reduce our market share and harm our financial
performance.
The markets for the products and services offered by us are intensely
competitive. We compete with other online travel reservation services,
traditional travel agencies, travel suppliers offering their services directly
and international travel service providers competing in critical national or
regional markets, such as the United Kingdom, Germany and Canada. We also
compete with many of the same parties and others in the licensing of technology
to airlines and corporate travel agencies.
We compete with a variety of companies with respect to each product or
service we offer. These competitors include:
. Internet travel agents such as Travelocity.com and American Express
Interactive, Inc.
. local, regional, national and international traditional travel agencies
. consolidators and wholesalers of airline tickets, hotels and other
travel products, including online consolidators such as Cheaptickets.com
and Priceline.com and online wholesalers such as Hotel Reservations
Network, Inc.
. airlines, hotels, rental car companies, cruise operators and other
travel service providers, whether working individually or collectively,
some of which are suppliers to our websites
. operators of travel industry reservation databases
In addition to the traditional travel agency channel, many travel suppliers
also offer their travel services as well as third-party travel services
directly through their own websites. These travel suppliers include many
suppliers with which we do business. In particular, five airline suppliers,
American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines
and United Air Lines, have announced their intention to launch a direct-
distribution website, currently named "Orbitz," by the end of August 2000.
Forester Research reports that Orbitz will be the only website for consumers to
find unpublished weekly special fares on at least 27 airlines. Suppliers also
sell their own services directly to consumers, predominantly by telephone. As
the market for online travel services grows, we believe that travel suppliers,
traditional travel agencies, travel industry information providers and other
companies will increase their efforts to develop services that compete with our
services by selling inventory from a wide variety of suppliers. We cannot
assure you that our online operations will compete successfully with any
current or future competitors.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we have and may enter into strategic or commercial
relationships with larger, more established and better-financed companies. Some
of our competitors may be able to secure services and products from travel
suppliers on more favorable terms, devote greater resources to marketing and
promotional campaigns and commit more resources to website and systems
development than we are able to devote. In addition, the introduction of new
technologies and the expansion of existing technologies may increase
competitive pressures. Increased competition may result in reduced operating
margins, as well as loss of market share and brand recognition. We cannot
assure you that we will be able to compete successfully against current and
future competitors. Competitive pressures faced by us could have a material
adverse effect on our business, operating results and financial condition.
If we fail to increase our brand recognition among consumers, we may not be
able to attract and expand our online traffic.
We believe that establishing, maintaining and enhancing the Expedia(R) brand
is a critical aspect of our efforts to attract and expand our online traffic.
The number of Internet sites that offer competing services increases the
importance of establishing and maintaining brand recognition. Many of these
Internet sites already have well-established brands in online services or the
travel industry generally. Promotion of the Expedia brand will depend largely
on our success in providing a high-quality online experience supported by a
high level of
11
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customer service. In addition, we intend to increase our spending substantially
on marketing and advertising with the intention of expanding our brand
recognition to attract and retain online users and to respond to competitive
pressures. However, we cannot assure you that these expenditures will be
effective to promote our brand or that our marketing efforts generally will
achieve our goals.
If we are unable to introduce and sell new products and services, our brand
could be damaged.
We need to broaden the range of travel products and services and increase
the availability of products and services that we offer in order to enhance our
service. We will incur substantial expenses and use significant resources
trying to expand the range of products and services that we offer. However, we
may not be able to attract sufficient travel suppliers and other participants
to provide desired products and services to our consumers. In addition,
consumers may find that delivery through our service is less attractive than
other alternatives. If we launch new products and services and they are not
favorably received by consumers, our reputation and the value of the Expedia
brand could be damaged.
Our relationships with consumers and travel suppliers are mutually dependent
since consumers will not use a service that does not offer a broad range of
travel services. Similarly, travel suppliers will not use a service unless
consumers actively make travel purchases through it. We cannot predict whether
we will be successful in expanding the range of products and services that we
offer. If we are unable to expand successfully, this could also damage our
brand.
Due to our anticipated growth, we may be unable to plan or manage our
operations and growth effectively.
Our growth to date has placed, and our anticipated future operations will
continue to place, a significant strain on our management, systems and
resources. We continue to increase the scope of our operations and the size of
our workforce. In addition to needing to train and manage our workforce, we
will need to continue to improve and develop our financial and managerial
controls and our reporting systems and procedures. A failure to plan, implement
and integrate these systems successfully could adversely affect our business.
Prior to our initial public offering, we used Microsoft's resources in
technology, systems, administration and other areas. Effective with our initial
public offering, we entered into a services agreement with Microsoft to provide
us with many of these services in the near term, but we will need to continue
to develop our own resources in these areas over time.
Declines or disruptions in the travel industry generally could reduce our
revenues.
We rely on the health and growth of the travel industry. Travel is highly
sensitive to business and personal discretionary spending levels, and thus
tends to decline during general economic downturns. In addition, other adverse
trends or events that tend to reduce travel are likely to reduce our revenues.
These may include:
. price escalation in the airline industry or other travel-related
industries
. increased occurrence of travel-related accidents
. airline or other travel-related strikes
. political instability
. regional hostilities and terrorism
. bad weather
Interruptions in service from third parties could impair the quality of our
service.
We rely on third-party computer systems and third-party service providers,
including the computerized central reservation systems of the airline, hotel
and car rental industries to make airline ticket, hotel room and
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<PAGE>
car rental reservations and credit card verifications and confirmations.
Currently, a majority of our transactions are processed through Worldspan, L.P.
and Pegasus Solutions, Inc. We rely on TRX, Inc. to provide telephone and email
customer support, as well as to print and deliver airline tickets as necessary.
Microsoft will also service substantially all of our information systems as
part of a services agreement. Any interruption in these third-party services or
a deterioration in their performance could impair the quality of our service.
If our arrangement with any of these third parties is terminated, we may not
find an alternate source of systems support on a timely basis or on
commercially reasonable terms. In particular, any migration from the Worldspan
system could require a substantial commitment of time and resources and hurt
our business.
Our success depends on maintaining the integrity of our systems and
infrastructure.
In order to be successful, we must provide reliable, real-time access to our
systems for our customers and suppliers. As our operations grow in both size
and scope, domestically and internationally, we will need to improve and
upgrade our systems and infrastructure to offer an increasing number of
customers and travel suppliers enhanced products, services, features and
functionality. The expansion of our systems and infrastructure will require us
to commit substantial financial, operational and technical resources before the
volume of business increases, with no assurance that the volume of business
will increase. Consumers and suppliers will not tolerate a service hampered by
slow delivery times, unreliable service levels or insufficient capacity, any of
which could have a material adverse effect on our business, operating results
and financial condition.
In this regard, our operations face the risk of systems failures. Our
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. Our business interruption insurance may not adequately
compensate us for losses that may occur. The occurrence of a natural disaster
or unanticipated problems at our facilities in Seattle, Washington and Las
Vegas, Nevada could cause interruptions or delays in our business, loss of data
or render us unable to process reservations. In addition, the failure of our
computer and communications systems to provide the data communications capacity
required by us, as a result of human error, natural disaster or other
operational disruptions, could result in interruptions in our service. The
occurrence of any or all of these events could adversely affect our reputation,
brand and business.
Rapid technological changes may render our technology obsolete or decrease the
competitiveness of our services.
To remain competitive in the online travel industry, we must continue to
enhance and improve the functionality and features of our websites. The
Internet and the online commerce industry are rapidly changing. In particular,
the online travel industry is characterized by increasingly complex systems and
infrastructures. If competitors introduce new services embodying new
technologies, or if new industry standards and practices emerge, our existing
websites and proprietary technology and systems may become obsolete. Our future
success will depend on our ability to do the following:
. enhance our existing services
. develop and license new services and technologies that address the
increasingly sophisticated and varied needs of our prospective customers
and suppliers
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis
Developing our websites and other proprietary technology entails significant
technical and business risks. We may use new technologies ineffectively or we
may fail to adapt our websites, transaction-processing systems and network
infrastructure to customer requirements or emerging industry standards. If we
face material delays in introducing new services, products and enhancements,
our customers and suppliers may forego the use of our services and use those of
our competitors.
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The success of our business will depend on continued growth of online commerce
and the Internet.
Because we do not intend to provide a material portion of our service
through any commercial medium other than the Internet, our future revenues and
profits depend upon the widespread acceptance and use of the Internet and
online services as a medium for commerce. Rapid growth in the use of the
Internet and online services is a recent phenomenon. This growth may not
continue. A sufficiently broad base of consumers may not accept, or continue to
use, the Internet as a medium of commerce. Demand for and market acceptance of
recently introduced products and services over the Internet involve a high
level of uncertainty.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a
reliable network backbone with the necessary speed, data capacity and security
and the timely development of complementary products for providing reliable
Internet access and services. Major online service providers and the Internet
itself have experienced outages and other delays as a result of software and
hardware failures and could face such outages and delays in the future. Outages
and delays are likely to affect the level of Internet usage and the processing
of transactions on our websites. In addition, the Internet could lose its
viability because of delays in the development or adoption of new standards to
handle increased levels of activity or of increased government regulation. The
adoption of new standards or government regulation may require us to incur
substantial compliance costs.
We are substantially controlled by Microsoft, which may impede our business
development and may prevent a takeover of Expedia, irrespective of whether it
is beneficial to our shareholders.
At March 31, 2000, Microsoft beneficially owned 33,000,000 shares of common
stock, which represents approximately 74.4% of the outstanding shares of common
stock. In August 2000, we anticipate closing a private placement of additional
shares and Microsoft will then own 33,722,710 shares of common stock, which
will represent approximately 69.9% of the outstanding shares of common stock.
As long as Microsoft controls a significant percentage of the common stock, it
will be able to control all matters requiring approval by our common
shareholders, including the election of directors and the ability to cause or
prevent a change of control of Expedia. In addition, there are no limitations
on the ability of Microsoft to purchase shares of common stock in the open
market.
As part of our separation from Microsoft in connection with our initial
public offering in November 1999, we entered into various agreements with
Microsoft relating to the provision of services to us by Microsoft, our
licensing of intellectual property from Microsoft and the sharing of taxes and
purchasing of services. In one of these agreements, Microsoft has agreed not to
compete with us for a period of three years, and we may face competition from
Microsoft after this period. These agreements were not negotiated on an arm's
length basis and potentially give Microsoft a further ability to influence our
operations.
Because we are a Microsoft-affiliated entity, some potential strategic
customers and vendors may not wish to enter, or may even be contractually
prohibited from entering, into strategic relationships with us. If too many
potential strategic partners were to decline strategic relationships with us,
it could have an adverse impact on our strategy and business development.
Microsoft's voting control and provisions of Washington law affecting
acquisitions and business combinations applicable to us may discourage
transactions involving an actual or potential change of control of Expedia,
including transactions in which our shareholders might receive a premium for
their shares over the then-prevailing market price. This voting control and
these provisions of Washington law may also have a negative effect on the
market price of the common stock.
Our international operations involve risks relating to travel patterns and
practices and Internet-based commerce.
We operate in the United Kingdom, Germany, Canada and Belgium and may expand
our operations to other countries. In order to achieve wide-spread acceptance
in each country we enter, we believe that we must
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<PAGE>
tailor our services to the unique customs and cultures of that country.
Learning the customs and cultures of various countries, particularly with
respect to travel patterns and practices, is a difficult task and our failure
to do so could slow our growth in those countries.
We also face risks specific to Internet-based commerce in foreign markets.
Our international risks include:
. delays in the development of the Internet as a broadcast, advertising
and commerce medium in international markets
. difficulties in managing operations due to distance, language and
cultural differences, including issues associated with establishing
management systems infrastructures in individual foreign markets
. unexpected changes in regulatory requirements
. tariffs and trade barriers and limitations on fund transfers
. difficulties in staffing and managing foreign operations
. potential adverse tax consequences
. exchange rate fluctuations
. increased risk of piracy and limits on our ability to enforce our
intellectual property rights
Any of these factors could harm our business. We do not currently hedge our
foreign currency exposures.
We may be found to have infringed on intellectual property rights of others
which could expose us to substantial damages and restrict our operations.
We could face claims that we have infringed the patents, copyrights or
other intellectual property rights of others. In addition, we may be required
to indemnify travel suppliers for claims made against them. Any claims against
us could require us to spend significant time and money in litigation, delay
the release of new products or services, pay damages, develop new intellectual
property or acquire licenses to intellectual property that is the subject of
the infringement claims. These licenses, if required, may not be available on
acceptable terms or at all. As a result, intellectual property claims against
us could have a material adverse effect on our business, operating results and
financial condition.
We are a defendant, along with Microsoft, in two lawsuits filed by
Priceline.com that allege that our Flight Price Matcher(TM) and our Hotel
Price Matcher(TM) services infringe on a patent held by them. See "Business--
Legal Proceedings."
Because our market is seasonal, our quarterly results will fluctuate.
Our limited operating history and rapid growth make it difficult for us to
assess the impact of seasonal factors on our business. Nevertheless, we expect
our business to experience seasonal fluctuations, reflecting seasonal trends
for the products and services offered by our websites. For example, demand for
travel bookings may increase in anticipation of summer vacations and holiday
periods, but online travel bookings may decline with reduced Internet usage
during the summer months. These factors could cause our revenues to fluctuate
from quarter to quarter. Our results may also be affected by seasonal
fluctuations in the inventory made available to our service by travel
suppliers.
Our success depends in large part on the continuing efforts of a few
individuals and our ability to continue to attract, retain and motivate highly
skilled employees.
We depend substantially on the continued services and performance of our
senior management, particularly Richard N. Barton, our Chief Executive Officer
and President. These individuals may not be able to fulfill their
responsibilities adequately and may not remain with us. The loss of the
services of any executive officers or other key employees could hurt our
business.
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<PAGE>
As of June 30, 2000, we employed a total of 574 full-time employees. In
order to achieve our anticipated growth, we will need to hire additional
qualified employees; however, competition for personnel throughout the Internet
industry is intense. If we do not succeed in attracting new employees and
retaining and motivating our current personnel, our business will be adversely
affected.
Our websites rely on intellectual property, and we cannot be sure that this
intellectual property is protected from copy or use by others, including
potential competitors.
We regard much of our content and technology as proprietary and try to
protect our proprietary technology by relying on trademarks, copyrights, trade
secret laws and confidentiality agreements with consultants. In connection with
our license agreements with third parties, we seek to control access to and
distribution of our technology, documentation and other proprietary
information. Even with all of these precautions, it is possible for someone
else to copy or otherwise obtain and use our proprietary technology without our
authorization or to develop similar technology independently. Effective
trademark, copyright and trade secret protection may not be available in every
country in which our services are made available through the Internet, and
policing unauthorized use of our proprietary information is difficult and
expensive. We cannot be sure that the steps we have taken will prevent
misappropriation of our proprietary information. This misappropriation could
have a material adverse effect on our business. In the future, we may need to
go to court to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. This litigation might result in substantial costs and diversion of
resources and management attention.
We currently license from third parties, including Microsoft, some of the
technologies incorporated into our websites. As we continue to introduce new
services that incorporate new technologies, we may be required to license
additional technology from Microsoft and others. We cannot be sure that these
third-party technology licenses will continue to be available on commercially
reasonable terms, if at all.
Regulatory and legal changes may impose taxes or other burdens on our business.
The laws and regulations applicable to the travel industry affect us and our
travel suppliers. We must comply with laws and regulations relating to the sale
of travel services, including those prohibiting unfair and deceptive practices
and those requiring us to register as a seller of travel, comply with
disclosure requirements and participate in state restitution funds. In
addition, many of our travel suppliers and computer reservation systems
providers are heavily regulated by the United States and other governments. Our
services are indirectly affected by regulatory and legal uncertainties
affecting the businesses of our travel suppliers and computer reservation
systems providers.
We must also comply with laws and regulations applicable to businesses
generally and online commerce. Currently, few laws and regulations directly
apply to the Internet and commercial online services. Moreover, there is
currently great uncertainty about whether or how existing laws governing issues
such as property ownership, sales and other taxes, libel and personal privacy
apply to the Internet and commercial online services. It is possible that laws
and regulations may be adopted to address these and other issues. Further, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws. New laws or different applications of
existing laws would likely impose additional burdens on companies conducting
business online and may decrease the growth of the Internet or commercial
online services. In turn, this could decrease the demand for our products and
services or increase our cost of operations.
Federal legislation imposing limitations on the ability of states to tax
Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, as this
legislation is known, exempts specific types of sales transactions conducted
over the Internet from multiple or discriminatory state and local taxation
through October 21, 2001. It is possible that this legislation will not be
renewed when it terminates in October 2001. Failure to renew this legislation
could allow state and local governments to impose taxes on Internet-based
sales, and these taxes could decrease the demand for our products and services
or increase our costs of operations.
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<PAGE>
Our stock price may experience extreme price and volume fluctuations, and
investors in our stock may not be able to resell their shares at or above the
price that they paid for them.
Due to fluctuations in the market price of our common stock, you may be
unable to resell your shares at or above the price that you paid for them. The
market price of our common stock has fluctuated in the past and is likely to be
highly volatile. In addition, the stock market in general and the market prices
of shares of Internet companies in particular, have been extremely volatile and
have experienced fluctuations that have often been unrelated or
disproportionate to the operating performance of such companies. The market
price of our common stock could continue to be highly volitile and is likely to
experience wide fluctuations in response to factors, many of which are largely
beyond our control, including the following:
. actual or anticipated variations in our quarterly operating results
. announcements of technological innovations or new services by us or our
competitors
. changes in financial estimates by securities analysts
. conditions or trends in the Internet or online commerce industries
. changes in the economic performance or market valuations of other
Internet, online commerce or travel companies
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments
. additions or departures of key personnel
. release of lock-up or other transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock
. potential litigation
The market prices of the securities of Internet-related and online commerce
companies have been especially volatile. Broad market and industry factors may
adversely affect the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of their stock, many companies have been the subject of securities
class action litigation. If we were sued in a securities class action, it could
result in substantial costs and a diversion of management's attention and
resources and would adversely affect our stock price.
This prospectus includes forward-looking statements relating to our industry
and our operations, which are inherently uncertain.
Some statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and elsewhere in this prospectus are
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our industry, plans, objectives, expectations,
intentions, assumptions and other statements contained in this prospectus that
are not historical facts. When used in this prospectus, the words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties
relating to our industry and our operations including those described in this
"Risk Factors" section, actual results may differ materially from those
expressed or implied by these forward-looking statements. This is particularly
true for a company with a limited operating history such as Expedia and for a
young and rapidly evolving industry such as the online travel industry.
Market data and forecasts relating to our operations which are used in this
prospectus have been obtained from independent industry sources. We have not
independently verified these data and results may be materially different from
these forecasts.
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<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds of the sale of common stock by the
selling shareholders.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol EXPE since November 10, 1999. The following table sets forth the high
and low closing sale prices for our common stock as reported on the Nasdaq
National Market for the periods indicated:
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Year ended June 30, 2000
Quarter ended December 31, 1999 (from November 10,
1999).................................................. $ 56.00 $35.00
Quarter ended March 31, 2000............................ 38.375 19.00
Quarter ended June 30, 2000............................. 21.75 14.00
</TABLE>
On July 5, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $18.625 per share. As of June 30, 2000, there were
approximately 315 holders of record of our common stock and 44,489,000 shares
of our common stock outstanding.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock or
other securities. We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business and do not
anticipate paying cash dividends in the foreseeable future.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read together with our
financial statements and notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The statement of operations data for the years ended June 30, 1997,
1998 and 1999 and the balance sheet data as of June 30, 1998 and 1999 are
derived from our audited financial statements included elsewhere in this
prospectus which have been audited by Deloitte & Touche LLP, independent
auditors, whose report thereon is also included elsewhere in this prospectus.
The statement of operations data for the years ended June 30, 1995 and 1996
and the balance sheet data as of June 30, 1995, 1996 and 1997 are derived from
unaudited financial statements not included herein. The statement of operations
data for the nine months ended March 31, 1999 and 2000 and the balance sheet
data as of March 31, 2000 are derived from our unaudited financial statements
included elsewhere in this prospectus. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results for these periods.
<TABLE>
<CAPTION>
Pro Forma
-------------------
Nine
Nine months ended Year months
Years ended June 30, March 31, ended ended
-------------------------------------------- ------------------ June 30, March 31,
1995 1996 1997 1998 1999 1999 2000 1999 2000
----- ------- -------- -------- -------- -------- -------- -------- ---------
(in thousands, except per share data) (unaudited)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues................. $ -- $ -- $ 2,742 $ 13,827 $ 38,699 $ 25,127 $ 64,956 $ 71,342 $ 138,384
Cost of revenues............. -- -- 3,279 9,692 15,950 11,292 32,896 43,469 93,139
----- ------- -------- -------- -------- -------- -------- -------- ---------
Gross profit (loss).......... -- -- (537) 4,135 22,749 13,835 32,060 27,873 45,245
Operating Expenses:
Product development........ 818 6,263 16,211 18,506 21,180 15,314 14,610 23,412 17,819
Sales and marketing........ -- 17 8,820 10,823 14,888 7,695 38,672 30,642 64,104
General and
administrative............ 145 1,520 3,353 4,284 6,283 4,189 6,892 10,346 11,519
Amortization of goodwill
and intangibles........... -- -- -- -- -- -- 2,332 62,127 46,521
Recognition of stock-based
compensation.............. -- -- -- -- -- -- 46,911 -- 48,053
----- ------- -------- -------- -------- -------- -------- -------- ---------
Total operating
expenses................. 963 7,800 28,384 33,613 42,351 27,198 109,417 126,527 188,016
----- ------- -------- -------- -------- -------- -------- -------- ---------
Loss from operations......... (963) (7,800) (28,921) (29,478) (19,602) (13,363) (77,357) (98,654) (142,771)
Interest income [expense],
net......................... 1,457 (1,154) (267)
----- ------- -------- -------- -------- -------- -------- -------- ---------
Loss before provision for
income taxes................ (963) (7,800) (28,921) (29,478) (19,602) (13,363) (75,900) (99,808) (143,038)
Provision for income taxes... -- -- -- -- -- -- -- -- --
----- ------- -------- -------- -------- -------- -------- -------- ---------
Net loss..................... $(963) $(7,800) $(28,921) $(29,478) $(19,602) $(13,363) $(75,900) $(99,808) $(143,038)
===== ======= ======== ======== ======== ======== ======== ======== =========
Pro forma basic and diluted
net loss per share.......... $ (.59) $ (2.09) $ (2.72) $ (3.59)
======== ======== ======== =========
Weighted average shares used
to compute pro forma basic
and diluted net loss per
common share................ 33,000 36,335 36,756 39,809
======== ======== ======== =========
</TABLE>
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<TABLE>
<CAPTION>
As of June 30,
-------------------------------------------- As of March
1995 1996 1997 1998 1999 31, 2000
----- ------- -------- -------- -------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ -- $ -- $ -- $ -- $ -- $ 72,825
Working capital......... -- -- 658 4,814 1,390 31,616
Total assets............ 28 601 1,645 8,333 5,756 301,182
Long-term liabilities,
net of current
portion................ -- -- -- 5,820 3,851 5,026
Accumulated deficit..... (963) (8,763) (37,684) (67,162) (86,764) --
Retained deficit........ -- -- -- -- -- (70,950)
Total stockholders'
equity (owner's net
deficit)............... 991 601 (721) (92) (1,675) 235,355
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this section has been derived from our
financial statements and should be read together with our financial statements
and related notes included elsewhere in this prospectus. 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 "Risk Factors" and elsewhere in this prospectus.
Overview
We are a leading provider of branded online travel services for leisure and
business travelers. We operate our own websites, including Expedia.com and
international versions of Expedia.com. as well as the Travelscape.com and
VacationSpot.com websites. We also license components of our technology to
provide the platform for travel websites with Continental Airlines, Northwest
Airlines and American Express Travel Related Services. We derive our revenues
from commissions, fees, and direct merchant sales related to transactions on
our websites. We also derive revenues from sales of advertisements on our
websites and licensing fees.
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. Although these allocations are not necessarily indicative of the
costs that would have been incurred by us on a stand-alone basis, we believe
that the allocated amounts are reasonable. 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 from the airlines as well as fees earned from our global
distribution system partner. 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 and car
rental reservations either on receipt of commissions or on notification of
entitlement by a third party.
Our merchant revenue is derived from transactions where we are the credit
card merchant of record and set the ticket price or room rate. Travelscape
generates a majority of our total merchant revenues. In September 1999, we
introduced Hotel Price Matcher and, in December 1999, we introduced Flight
Price Matcher. For all merchant transactions, in accordance with current
Generally Accepted Accounting Principles, the revenue and related cost of sales
are recorded at gross amounts, resulting in a lower gross profit percentage and
higher absolute gross profit per transaction compared to agency transactions.
If the reservation is non-cancelable, revenue is recorded when the reservation
is made. Otherwise, revenue is deferred until the actual flight or stay occurs.
Additionally, we derive revenues from the sales of advertisements on our
websites. 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 is recognized ratably over the lives of the contracts.
Transaction-based fees are recognized when the transaction occurs. Fees from
the listing of lodging properties on our VacationSpot.com and Rent-A-
Holiday.com websites are another source of revenue. These revenues are
recognized ratably over the term of the listing.
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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.
Cost of revenues consists 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, allocated and direct costs for the
operation of our data center, and costs related to insertion of banner and
other advertisements. For our merchant of record transactions, cost of revenues
also includes the entire cost of the hotel room or airline ticket as charged by
the provider along with the credit card merchant fees.
Our direct product development expenses consist primarily of compensation
for personnel. Our direct sales and marketing expenses consist of advertising,
distribution and public relations expenses as well as personnel-related costs.
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, Microsoft has continued to provide us with the types of services
described above. In return, we pay Microsoft fees based on the total cost of
many of the services. The services agreement is for an initial period ending
December 31, 2000 with one-year renewals if the parties agree on fees. The
agreement is cancelable by us upon 30 days written notice and by Microsoft upon
180 days written notice. We have begun developing our own resources in some of
these areas. For additional services that are no longer needed, adjustments to
the services agreement fees must be mutually agreed upon.
We have incurred and expect to continue to incur substantial losses and
negative cash flows on both an annual and interim basis. In particular, we
intend to increase our focus and spending on brand development, sales and
marketing, product development, website content and strategic relationships.
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 1999, are to the twelve months ended June 30 of that year.
22
<PAGE>
Results of Operations
The following table sets forth our results of operations as a percentage of
net revenues.
<TABLE>
<CAPTION>
As a Percentage of Net Revenues
----------------------------------------
Nine
months
ended
Years ended June 30, March 31,
-------------------------- -----------
1997 1998 1999 1999 2000
-------- ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
Agency revenue........................ 80 % 71 % 69 % 64 % 58 %
Merchant revenue...................... -- -- -- -- 14
Advertising and other revenue......... 20 29 31 36 28
-------- ------ ----- --- ----
Net revenues.......................... 100 100 100 100 100
Cost of revenues...................... 120 70 41 45 51
-------- ------ ----- --- ----
Gross profit (loss)................... (20) 30 59 55 49
Operating Expenses:
Product development................. 591 134 55 60 22
Sales and marketing................. 322 78 38 31 60
General and administrative.......... 122 31 16 17 11
Amortization of goodwill and
intangibles........................ -- -- -- -- 4
Recognition of stock-based
compensation....................... -- -- -- -- 71
-------- ------ ----- --- ----
Total operating expenses.......... 1,035 243 109 108 168
-------- ------ ----- --- ----
Loss from operations.................. (1,055) (213) (50) (53) (119)
Interest income, net.................. 2
-------- ------ ----- --- ----
Loss before provision for income
taxes................................ (1,055) (213) (50) (53) (117)
Provision for income taxes............ -- -- -- -- --
-------- ------ ----- --- ----
Net loss.............................. (1,055)% (213)% (50)% (53)% (117)%
======== ====== ===== === ====
</TABLE>
Nine months ended March 31, 1999 and 2000
Net Revenues
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------- %
1999 2000 Change
-------- -------- ------
($ in thousands)
<S> <C> <C> <C>
Agency Revenues................................... $ 15,861 $ 38,621 144%
Merchant Revenues................................. -- 8,816 100%
Advertising and Other Revenues.................... 9,266 17,519 89%
-------- -------- ---
Net Revenues...................................... $ 25,127 $ 64,956 159%
======== ======== ===
</TABLE>
Net Revenues. Agency revenues experienced strong increases. In January 2000
we began domestic and international television advertising campaigns and ran a
number of promotions that were successful in enhancing brand awareness and
increasing revenue. With the launch of our Price Matcher products in the
December 1999 quarter and the acquisition of Travelscape in March 2000, a
significant portion of our revenues now come from transactions where we are the
merchant of record. In future periods, this will significantly increase our
revenues since the full amount of the ticket or hotel room is recorded as
revenue as opposed to only the amount received from commissions and fees.
Increases in advertising and licensing-related revenue comprised the remainder
of the increase.
23
<PAGE>
Cost of Revenues and Gross Profit
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------ %
1999 2000 Change
-------- -------- ------
($ in thousands)
<S> <C> <C> <C>
Cost of Revenues................................ $ 11,292 $ 32,896 191%
% of Net Revenues............................... 45% 51%
Gross Profit.................................... $ 13,835 $ 32,060 132%
% of Net Revenues............................... 55% 49%
</TABLE>
Cost of Revenues and Gross Profit. The absolute dollar increases in the cost
of revenues and gross profit correspond to the growth in net revenues along
with our acquisitions of Travelscape and VacationSpot. The decreases in the
gross profit percentages during the periods ended March 31, 2000 were due to
two primary factors. First, we recorded a one-time charge of $4.1 million
related to fraudulent credit card transactions along with an increase in our
normal reserve levels for this expense. We are actively working to reduce our
exposure to this risk, which was a result of the usage of fraudulent credit
cards on our websites. The security and integrity of customer credit cards in
our database was not compromised. The second factor was due to increases in the
merchant of record business with our Price Matcher products and the Travelscape
acquisition. Because we act as the merchant of record in these transactions,
the revenue and related cost of sales are presented at gross amounts, resulting
in a lower gross profit percentage and higher absolute gross profit per
transaction compared to agency transactions. Helping to partially offset the
declines in the gross profit percentage mentioned above are increased
transaction volumes, which have created economies of scale, and the growth in
advertising revenue, which has a high profit margin.
Product Development
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------ %
1999 2000 Change
-------- -------- ------
($ in thousands)
<S> <C> <C> <C>
Product Development............................. $ 15,314 $ 14,610 (5)%
% of Net Revenues............................... 61% 22%
</TABLE>
Product Development. The decrease in development expenses is primarily due
to the charge from Microsoft under the services agreement starting on October
1, 1999 being somewhat lower than the amount previously allocated from
Microsoft prior to that date for development services. The lower costs combined
with significantly larger net revenues result in the large decrease in product
development costs as a percentage of net revenues.
Sales and Marketing
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------- %
1999 2000 Change
-------- --------- ------
($ in thousands)
<S> <C> <C> <C>
Sales and Marketing............................ $ 7,695 $ 38,672 403%
% of Net Revenues.............................. 31% 60%
</TABLE>
Sales and Marketing. The increases in expenses are primarily attributable to
increased promotional activities intended to bring additional customers to our
websites. In addition to radio and paper media advertising, during January
through March 2000 we began running television ads both domestically and
internationally. We anticipate continuing to spend a significant portion of net
revenues on advertising in coming periods in order to build greater brand
awareness and increase the number of Internet users who access our websites.
24
<PAGE>
General and Administrative
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------ %
1999 2000 Change
-------- -------- ------
($ in thousands)
<S> <C> <C> <C>
General and Administrative...................... $ 4,189 $ 6,892 65%
% of Net Revenues............................... 17% 11%
</TABLE>
General and Administrative. These costs increased in absolute terms but
decreased as a percentage of net revenues. The services agreement took effect
October 1, 1999 and replaced the cost allocation that had previously been
charged by Microsoft. Subsequent to October 1, 1999, permanent Microsoft
employees who were members of the Expedia business unit became employees of
Expedia. We have also hired employees to perform certain functions that were
not necessary prior to our being an independent public company.
Amortization of Goodwill and Intangibles
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------ %
1999 2000 Change
-------- --------- ------
($ in thousands)
<S> <C> <C> <C>
Amortization of Goodwill and Intangibles........ $ -- $ 2,332 100%
% of Net Revenues............................... 0% 4%
</TABLE>
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles was related to our acquisitions of Travelscape and VacationSpot.
Amortization was recorded from March 18, 2000 to March 31, 2000. Refer to Note
7 of our financial statements for additional information.
Recognition of Stock-based Compensation
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------- %
1999 2000 Change
-------- ---------- ------
($ in thousands)
<S> <C> <C> <C>
Recognition of Stock-based Compensation........ $ -- $ 46,911 100%
% of Net Revenues.............................. 0% 72%
</TABLE>
Recognition of Stock-based Compensation. Note 7 of our financial statements
discloses the source and reason for the charge. The starting date for
amortization coincides with the initial public offering date of November 10,
1999.
Interest Income
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------ %
1999 2000 Change
-------- --------- ------
($ in thousands)
<S> <C> <C> <C>
Interest Income, net............................ $ -- $ 1,457 100%
% of Net Revenues............................... 0% 2%
</TABLE>
Interest Income, net. All of our operations were funded by Microsoft prior
to their contribution of assets on October 1, 1999. Expedia now invests its own
cash, the majority of which were net proceeds from our initial public offering
on November 10, 1999.
25
<PAGE>
Fiscal 1997, 1998 and 1999
Net Revenues. Our net revenues increased 404% from $2.7 million in fiscal
1997 to $13.8 million in fiscal 1998 and increased a further 180% to $38.7
million in fiscal 1999. Approximately $7.6 million of the increase in net
revenues from fiscal 1997 to fiscal 1998 and $16.7 million of the increase in
net revenues from fiscal 1998 to fiscal 1999 were due to increases in
commissions and related revenues. These increases were primarily attributable
to increases in the number of airline-related transactions. Increases in
advertising revenues accounted for approximately $1.6 million of the increase
in net revenues from fiscal 1997 to fiscal 1998 and $4.8 million of the
increase in net revenues from fiscal 1998 to fiscal 1999.
Cost of Revenues. Cost of revenues increased 196% from $3.3 million in
fiscal 1997 to $9.7 million in fiscal 1998 and increased a further 65% to $16.0
million in fiscal 1999. As a percentage of net revenues, our cost of revenues
decreased from 120% in fiscal 1997 to 70% in fiscal 1998 and to 41% in fiscal
1999. These decreases are due to efficiencies associated with increased
transaction volume, the allocation of fixed costs, such as operation of our
data center, over a larger revenue base and growth in higher margin advertising
revenues.
Product Development. Product development costs increased 14% from $16.2
million in fiscal 1997 to $18.5 million in fiscal 1998 and increased a further
14% to $21.2 million in fiscal 1999. The increase in product development costs
from fiscal 1997 to fiscal 1998 resulted primarily from an increase in
personnel and consultant costs of $6.2 million offset by a decrease in product
development allocations from Microsoft of $4.1 million. The increase in product
development costs from fiscal 1998 to fiscal 1999 resulted primarily from an
increase in product development allocations from Microsoft of $2.5 million.
Product development costs as a percentage of net revenues decreased from 591%
in fiscal 1997 to 134% in fiscal 1998 and to 55% in fiscal 1999, primarily due
to increases in our revenue base in the applicable periods.
Sales and Marketing. Sales and marketing costs increased 23% from $8.8
million in fiscal 1997 to $10.8 million in fiscal 1998 and increased a further
38% to $14.9 million in fiscal 1999. The increase in sales and marketing costs
from fiscal 1997 to fiscal 1998 resulted primarily from an increase in
personnel and consultant costs of $1.4 million. The increase from fiscal 1998
to fiscal 1999 was attributable to a $4.8 million increase in the cost of
direct promotional activities intended to drive traffic to our Expedia.com
website, and to establish, enhance and maintain the Expedia brand, partially
offset by a decrease in marketing and advertising allocations from Microsoft of
$0.6 million. Sales and marketing costs as a percentage of net revenues
decreased from 322% in fiscal 1997 to 78% in fiscal 1998 and to 38% in fiscal
1999, primarily due to increases in our revenue base in the applicable periods.
General and Administrative. General and administrative costs increased 28%
from $3.4 million in fiscal 1997 to $4.3 million in fiscal 1998 and increased a
further 47% to $6.3 million in fiscal 1999. These increases primarily relate to
increases in general and administrative cost allocations from Microsoft as we
expanded our operations. As a percentage of net revenues, general and
administrative costs decreased from 122% in fiscal 1997 to 31% in fiscal 1998
and to 16% in fiscal 1999 as a result of increases in our revenue base.
26
<PAGE>
Quarterly Unaudited Results of Operations
The following table sets forth our unaudited quarterly results of
operations, in dollars and as a percentage of net revenues, for the periods
presented.
We have prepared this unaudited information on the same basis as the audited
financial statements. This information includes all adjustments, consisting
only of normal recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for the quarters
presented. The operating results in any quarter are not necessarily indicative
of the results that may be expected for any future period and you should not
rely on them as such.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31,
1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 6,057 $ 7,851 $11,219 $13,572 $15,268 $ 17,821 $ 31,867
Cost of revenues........ 3,177 4,132 3,983 4,658 5,364 7,314 20,218
------- ------- ------- ------- ------- -------- --------
Gross profit............ 2,880 3,719 7,236 8,914 9,904 10,507 11,649
Operating expenses:
Product development... 4,977 5,083 5,254 5,866 5,393 4,452 4,765
Sales and marketing... 2,060 2,516 3,119 7,193 6,732 10,584 21,356
General and
administrative....... 1,050 1,568 1,571 2,094 2,729 1,946 2,217
Amortization of
goodwill and
intangibles.......... -- -- -- -- -- -- 2,332
Recognition of stock-
based compensation... -- -- -- -- -- 17,252 29,659
------- ------- ------- ------- ------- -------- --------
Total operating
expenses............ 8,087 9,167 9,944 15,153 14,854 34,234 60,329
------- ------- ------- ------- ------- -------- --------
Loss from operations.... (5,207) (5,448) (2,708) (6,239) (4,950) (23,727) (48,680)
Interest income......... 543 914
------- ------- ------- ------- ------- -------- --------
Loss before provision
for income taxes....... (5,207) (5,448) (2,708) (6,239) (4,950) (23,184) (47,766)
Provision for income
taxes.................. -- -- -- -- -- -- --
------- ------- ------- ------- ------- -------- --------
Net loss................ $(5,207) $(5,448) $(2,708) $(6,239) $(4,950) $(23,184) $(47,766)
======= ======= ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31,
1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenues........ 52 52 35 34 35 41 63
--- --- --- --- --- ---- ----
Gross profit............ 48 48 65 66 65 59 37
Operating expenses:
Product development... 82 65 47 43 35 25 15
Sales and marketing... 34 32 28 53 44 59 67
General and
administrative....... 18 20 14 16 18 11 7
Amortization of
goodwill and
intangibles.......... -- -- -- -- -- -- 7
Recognition of stock-
based compensation... -- -- -- -- -- 97 93
--- --- --- --- --- ---- ----
Total operating
expenses............ 134 117 89 112 97 192 189
--- --- --- --- --- ---- ----
Loss from operations.... (86) (69) (24) (46) (32) (133) (152)
Interest income......... -- -- -- -- -- 3 3
--- --- --- --- --- ---- ----
Loss before provision
for income taxes....... (86) (69) (24) (46) (32) (130) (149)
Provision for income
taxes.................. -- -- -- -- -- -- --
--- --- --- --- --- ---- ----
Net loss................ (86)% (69)% (24)% (46)% (32)% (130)% (149)%
=== === === === === ==== ====
</TABLE>
27
<PAGE>
Liquidity and Capital Resources
Prior to October 1, 1999, we financed our activities through contributions
from Microsoft. During November 1999, we raised $76.6 million from our initial
public offering. In June 2000, we announced the pending private placement of
warrants and common stock totalling $60 million, $10 million of which will come
from Microsoft. This placement is anticipated to close in August 2000. Proceeds
from these public and private offerings have been and will continue to be used
to fund operations.
Net cash used in operations of $27.1 million in fiscal 1997, $29.5 million
in fiscal 1998 and $17.4 million in fiscal 1999 resulted primarily from net
losses of $28.9 million, $29.5 million and $19.6 million, respectively. During
the nine months ended March 31, 2000, net cash used by operating activities was
$18.1 million. Historically, operating and allocated expenses were recorded as
a contribution from owner. With our new capitalization, management of working
capital is now our responsibility. As a result, the levels of accounts
receivable, accounts payable, and accrued expenses are higher than those in the
historical financial statements. So, in addition to the cash portion of our net
losses, changes in operating assets and liabilities affect our operating cash.
During the nine months ended March 31, 2000, a large increase in accounts
payable and accrued expenses contributed towards a reduction in the amount of
cash used by operating activities. In our growing merchant hotel business,
there is a difference in the timing of cash receipts from a customer versus
payments to the hotel for a transaction. As a result, we anticipate further
fluctuations in cash as a result of changes in operating assets and
liabilities.
Net cash used in investing activities of $519,000 in fiscal 1997, $631,000
in fiscal 1998 and $650,000 in fiscal 1999 consisted primarily of capital
expenditures for personal computers and servers that support our online travel
operations.
Total capital expenditures during the nine months ended March 31, 2000 were
$4.3 million. Of this amount, $2.1 million relates to leasehold improvements
and related costs for renovation of office space in Bellevue, Washington. 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. We also plan to expand our
facilities both in Bellevue and in Las Vegas to accommodate our growing needs.
As part of the acquisitions of Travelscape and VacationSpot, we acquired
$18.3 million of cash owned by these two entities, net of accrued transaction
costs. We used $7.0 million of this cash to retire notes assumed from the
Travelscape acquisition.
During the nine month period ended March 31, 2000, we also advanced $4.1
million to our fulfillment vendor. This represents a restricted deposit, as the
funds will not be available until the expiration of the agreement in 2004.
Stock option exercises were a source of $1.0 million of cash. We cannot control
this potential inflow but do anticipate additional exercises going forward.
As of March 31, 2000, we had $72.8 million in cash and cash equivalents. In
July 2000, we anticipate completing the $60 million private placement of common
stock and warrants.
We have not held derivative financial instruments at any time. The debt we
have on our books has a fixed interest rate. 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 results of operations.
28
<PAGE>
Recent Accounting Pronouncements
The American Institute of Certified Public Accountants issued Statements of
Position, SOP 98-1, Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use, and SOP 98-5, Reporting on the Costs of Start-Up
Activities, which were effective for the beginning of our fiscal year 2000.
These SOPs have no material effect on our financial statements.
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 our fourth quarter of fiscal
2001. SAB 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 101 will have a
material effect on our financial statements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, in June 1998. As amended by SFAS No. 137, SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if it is, the type of hedge transaction. We do not expect SFAS No. 133 to
have a significant impact on our financial statements.
In October 1999, the SEC identified a list of issues that have arisen in
internet businesses which the SEC believes should be addressed by the Emerging
Issues Task Force (EITF) of the FASB or other standard setting bodies. One such
issue is EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent. This EITF Issue could impact whether certain merchant revenues
are presented gross or net in our income statement. No consensus has yet been
reached. While the EITF is in the process of addressing this and such issues
raised by the SEC, many of the identified issues have not yet been resolved.
Future resolution of all of the issues identified by the SEC may affect our
financial statements. We are not able to determine the impact on our financial
statements, if any, of such future rule making.
29
<PAGE>
BUSINESS
Business Overview
We are a leading provider of branded online travel services for leisure and
small business travelers. With the acquisitions of Travelscape and VacationSpot
in March 2000, we are positioned as the leader in Internet lodging with over
65,000 lodging properties available on the website and approximately 700,000
room nights booked through Expedia, Travelscape and VacationSpot in the quarter
ended March 31, 2000. Travelscape is a leading branded Internet hotel
wholesaler and packager with discounted rate contracts at over 1,500 hotels in
over 240 cities 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 and the
operator the VacationSpot.com and Rent-a-Holiday.com websites.
We operate our own website, located at Expedia.com, with localized versions
in the United Kingdom, Germany and Canada. We also operate the Travelscape.com,
LVRS.com, VacationSpot.com and Rent-a-Holiday.com websites, and a
Travelscape(R)/LVRS(TM) sales call-center in Las Vegas. We offer one-stop
travel shopping and reservation services, providing reliable, real-time access
to schedule, pricing and availability information for over 450 airlines, 65,000
lodging properties and all major car rental companies. Our websites' consumer-
oriented interfaces enable consumers to make informed choices about their
travel purchases by providing quick and easy access to travel information and
content, 24 hours a day, 7 days a week.
Our global travel marketplace enables travel service suppliers to extend
their marketing reach online. Through our websites, suppliers can reach a
large, global audience of consumers who are actively engaged in planning and
purchasing travel. Suppliers can pursue a range of innovative, targeted
merchandising and advertising strategies designed to increase revenues, while
at the same time reducing transaction and customer service costs. We also
license components of our technology and editorial content to selected airlines
and American Express as a platform for their websites.
Since launching our online travel service in October 1996, we have
experienced significant growth in our traffic and the amount of travel
purchased through our travel planning services. In calendar year 1999,
$819 million in airline ticket purchases and hotel and car rental reservations
were made through the travel planning services of Expedia, Travelscape and
VacationSpot. In the fiscal quarter ended March 31, 2000, $401 million in
purchases and reservations were made through these same services.
Industry Background
Growth of the Internet and Online Commerce
The Internet is dramatically changing the way in which consumers and
businesses communicate, share information and buy and sell goods and services.
The Internet's broadly distributed and easily accessible environment creates
the ideal foundation for new online marketplaces, which provide increased
search efficiency, comprehensive information and competitive pricing. In an
online environment, consumers have access to information and software tools
that enable them to evaluate and compare product and service offerings,
community forums within which to discuss relevant experiences and preferences
and tools to complete e-commerce transactions. In addition, suppliers can
extend their online marketing reach to a larger base of potential customers and
can efficiently target those customers who are most likely to buy their
products and services. The Internet brings efficiencies to markets
characterized by the presence of large numbers of geographically dispersed
buyers and sellers and purchase decisions involving large amounts of
information from multiple sources. We believe that the worldwide travel
industry, which exemplifies these characteristics, is especially well-suited to
benefit from increased Internet and e-commerce adoption.
30
<PAGE>
The Worldwide Travel Industry
The travel industry is very large in terms of both dollars spent and number
of participants. According to the United States Department of Transportation,
there will be over 700 million air passengers worldwide in 1999, rising to one
billion air passengers in 2010. The World Travel and Tourism Council estimates
that spending on travel and tourism worldwide will reach $3.7 trillion in 1999,
growing to $7.5 trillion in 2010. According to the World Travel and Tourism
Council, approximately 72% of the revenues in this market are attributable to
personal travel and tourism.
Consumers planning and purchasing a trip generally engage in a predictable
process that begins with consideration of destinations, dates and budgets and
progresses to a series of purchase decisions involving transportation,
accommodations and destination activities. This planning and purchasing process
is inefficient due in large part to the limitations of the infrastructure of
the traditional worldwide travel industry, which causes consumers to spend a
significant amount of time piecing together the information they need to plan
and purchase a trip. One critical reason for this inefficiency is the absence
of a single source of well-organized and in-depth travel information that
addresses all stages of the planning process and incorporates a reliable and
secure purchasing process. As a result, consumers, especially to the extent
they are price sensitive, frequently consult multiple sources, such as
guidebooks, magazines, travel agents, friends, co-workers and disparate travel
suppliers, to shop for each element of their trip.
Travel suppliers located around the world compete for business from travel
consumers. This supplier community includes hundreds of airlines, thousands of
hotels, dozens of car rental companies, numerous vacation packagers and cruise
lines and hundreds of thousands of destination services merchants such as
restaurants, attractions, and local transportation and tour providers. These
suppliers spend substantial amounts of money to reach and attract potential
purchasers. For example, according to the Air Transport Association, the
combined revenue of United States airlines in 1997 was $109 billion, and the
airlines spent an average of 13% of total revenues on promotions and sales
expenses. The fragmented nature of the global consumer travel market makes it
difficult and inefficient for suppliers to target those consumers with the
greatest propensity to purchase travel services. Traditional advertising
channels, such as print, television and radio, do not eliminate inefficiency
because only a limited portion of any traditional advertising audience is
planning a trip at the time the advertisement is run.
Consumers and suppliers have traditionally relied on travel agents as
intermediaries. However, traditional travel agents are often unable to reduce
the inefficiencies of the travel market. We believe that many traditional
travel agents cannot provide consumers with a reliable, personalized source for
comprehensive travel information. Although traditional travel agents generally
have access to comprehensive information on the availability and pricing of
airline seats through computer reservations systems such as Worldspan, Sabre
and Apollo, time and resource constraints frequently make it difficult for
travel agents to provide consumers with the full set of options available in a
given computerized reservation system. Furthermore, due to budgetary or time
constraints, traditional travel agents often have limited access to other
sources of travel information such as consumer ratings, editorial content or
information about destination services. Finally, productivity demands often
restrict the amount of time traditional travel agents can spend with any single
customer to learn about preferences and tailor recommendations. As a result,
many consumers hesitate to rely solely on traditional travel agents and consult
multiple sources to plan and purchase trips.
The traditional travel agency channel also does not provide suppliers with
an efficient distribution network. Computerized reservation systems are
effective in maintaining information about travel inventory, such as airline
seats or rental cars, that does not require extensive description. However,
these databases are not well-suited to maintaining detailed information about
travel inventory such as hotels, resorts, cruises and vacation packages that is
difficult to understand and sell in the absence of more descriptive editorial
or visual material. In addition, it is difficult and inefficient for suppliers
to use traditional travel agents as a distribution channel because the travel
agency market is fragmented and the cost of training and servicing travel
agents is high.
31
<PAGE>
Our Opportunity
The emergence of the Internet provides new opportunities for travelers and
suppliers to find one another. Travel has already become the largest online
retail category with United States leisure travelers making an estimated $7.8
billion in airline ticket purchases and hotel and car rental reservations
through travel websites in 1999, growing to $32 billion in 2004, according to
Forrester Research. Travel suppliers are beginning to sell their inventory
directly from their websites, and third-party providers of travel planning
services have emerged online. Some of these third parties attempt to replicate
the traditional travel agency experience on the Internet, some focus on
providing travel-related content and others offer a less comprehensive travel
service as a part of a larger e-commerce effort. Each of these solutions is
incomplete because it does not address fundamental consumer requirements for
comprehensive information and reliable service integrated with a secure and
efficient means to complete a purchase.
A significant opportunity exists for a new online global travel marketplace
that brings consumers and travel suppliers together, enables consumers to find
and act more easily upon a diverse selection of travel information and enables
suppliers to market and distribute their products and services more
efficiently. To be successful, this new travel marketplace must offer consumers
a blend of content, community, commerce and customer service, delivered in a
highly reliable and personalized manner. It must scale to accommodate growth in
users and it must be international in scope and localized by region, creating a
new and efficient channel for local and global travel suppliers to reach
consumers who are actively engaged in travel planning and purchasing.
Our Solution
We have created a leading online marketplace for researching, buying and
selling travel-related services. Our Internet-based travel marketplace offers
consumers a convenient, comprehensive and personalized source of travel
information and services and satisfies the needs of a broad range of travel
suppliers to market and sell their services cost-effectively to a large
audience that is actively engaged in planning and purchasing travel services.
We have built an underlying technology infrastructure that enables buyers and
sellers to transact in a reliable, scalable and secure environment.
Leading Travel Services Marketplace
Expedia.com, Travelscape.com, LVRS.com and VacationSpot.com, our travel
websites aimed at the United States consumer market, bring together a large
base of consumers and travel suppliers. According to Media Metrix, the Expedia
websites attracted over 6.4 million unique visitors in the United States in May
2000. We offer consumers access to dozens of vacation and cruise suppliers and
to an increasing number of local destination services providers. With the
acquisitions of Travelscape and VacationSpot in March 2000, we are positioned
as the leader in Internet lodging with over 65,000 lodging properties available
on the website and approximately 700,000 room nights booked through Expedia,
Travelscape and VacationSpot in the quarter ended March 31, 2000. In the fiscal
quarter ended March 31, 2000, approximately $401 million in airline ticket
purchases and hotel and car rental reservations were made through the travel
planning services of Expedia, Travelscape and VacationSpot.
Compelling Value for Consumers
We believe that consumers value Expedia services because we provide the
control, flexibility and access to information necessary for them to identify
competitive prices for a wide range of travel options. Our Best Fare Search
technology allows Expedia to price many times more itineraries than the current
industry standard. The current implementation of this underlying technology, in
the form of the "Build your own trip" feature on the Expedia.com website,
increases the choices available to customers while also allowing them to make
price and schedule tradeoffs on a flight-by-flight basis, rather than on an
itinerary-by-itinerary basis, which is the current industry standard. We allow
consumers to evaluate and purchase travel-related services at any time of day
or
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night and to enhance the travel planning experience with high-quality editorial
content. We offer consumers access to a range of published and negotiated rate
offerings. Our travel marketplace is also designed to be more convenient,
comprehensive and personalized and delivers a higher quality of service than
alternative travel planning and purchase methods. Our Expedia.com website and
our localized international websites offer a unique blend of content,
community, commerce and customer service, enabling consumers to easily
identify, evaluate and purchase travel services in a single location and a
secure, reliable transactional environment.
Compelling Value for Travel Suppliers
Recognizing the limitations of traditional travel solutions for suppliers,
we have worked with our suppliers to design our websites to address their
specific needs on both a local and multinational basis. Through our websites,
suppliers worldwide can reach a large audience of consumers who are actively
engaged in planning and purchasing travel. Suppliers can pursue a range of
innovative, targeted merchandising and advertising strategies designed to
increase revenues while at the same time reducing transaction and customer
service costs. Suppliers can also use remote inventory management tools located
on our ExpediaPartners.com website, to introduce new products, services and
promotions quickly and easily. In addition, we are creating an aggregated,
secure database of customer purchase and shopping patterns that will allow
suppliers to offer more tailored services through our marketplace while
preserving consumer privacy.
Global Reach and Presence
We designed our travel marketplace to be global. Localized versions of our
websites accommodate not only differences in language and culture, but also
differences in travel purchase behavior and supplier inventory preferences.
These localized websites, such as Expedia.co.uk in the United Kingdom and
Expedia.de in Germany, are designed to replicate the success of our Expedia.com
website in addressing the needs of both consumers and suppliers in the United
States market. For example, because negotiated fares are important to consumers
in the United Kingdom, we developed a custom airfare pricing engine that allows
us to offer unique integration of negotiated fares with published fares in a
single display.
Reliable, Secure and Scalable Technology Platform
We have designed our platform to provide a high level of reliability,
security and scalability. Our multi-layered platform design allows us to
deliver a high-performance website capable of managing high transaction volumes
and ensuring reliable access for our customers and suppliers. We also offer
advanced security features, maintain excess capacity to handle peak traffic
loads in the rapidly expanding online travel market and have built dedicated
distributed storage for critical data such as customer profile information. Our
technology leadership and the scalability of our platform have enabled us to
generate revenue by licensing core parts of our platform to Continental
Airlines, Northwest Airlines and American Express.
Strategy
Our objective is to enhance our position as a leading online global travel
marketplace. The key elements of our strategy are as follows:
Continue to Increase Brand Awareness
We are increasing and will continue to increase brand awareness among
consumers by pursuing an aggressive brand development strategy. Our present
brand-building campaign includes a substantial advertising
presence in both online media and traditional media, such as print, radio and
television. We continue to offer co-branded promotions with selected suppliers
and pursue targeted press coverage. We are also working with third parties to
develop a range of cross-media marketing initiatives including Expedia Radio
and Expedia Magazine.
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Expand Merchant Business Activity
Strong supplier relationships are crucial to the success of our business.
The acquisition of Travelscape underlines an important shift in our business
model whereby we are moving increasingly towards a merchant business model, as
opposed to the traditional agency business model. In the merchant business
model, Expedia acquires inventory at discounted wholesale prices level from
preferred suppliers and then determines the retail price.This model allows us
to offer more competitive prices to our customers while also generating a
higher gross profit per transaction. In contrast, the agency business model is
one in which the supplier fixes the retail price and the agent is paid on a
commission or flat fee basis. Merchant transactions for Expedia include the
sale of negotiated rate hotel rooms, air tickets and packages through the
Expedia.com and Travelscape.com websites and sales through the Flight Price
Matcher and Hotel Price Matcher services on the Expedia.com website.
Enhance Technology Platform and Product Functionality
We plan to continue to enhance the underlying infrastructure and
functionality of our websites.
. Feature Differentiation. We will continuously update new software
features and editorial content to our websites. We have invested heavily
in the development of the Best Fare Search technology, a fare searching
technology and pricing engine that moves flight-pricing query activity
from the mainframes of computerized reservation systems to more flexible
and cost-effective servers based on the Windows platform. We believe
increasing the level of personalization in our marketplace is critical
to providing a rich consumer experience and more efficient and targeted
merchandising and advertising opportunities for suppliers. We will also
continue to develop features that meet the needs of specific market
segments, such as small business travelers. We are improving the
accessibility of our websites through various Internet access channels,
such as wireless hand-held devices, and are providing multimedia
applications.
. Scalability, Security and Reliability. We have invested heavily in core
infrastructure with the objective of eliminating downtime on our
websites, in order to ensure that we are able to continue to serve our
customers reliably as our operations scale. The operation of our own
websites and those of our licensees has given us extensive experience at
handling rapid increases in transaction volumes.
Expand Internationally
We operate localized websites in the United Kingdom, Germany and Canada. We
selected these countries due to their large travel markets and the rapid growth
of online commerce in these markets. According to the World Travel and Tourism
Council, spending on travel and tourism is expected to be $209 billion in the
United Kingdom, $301 billion in Germany and $111 billion in Canada in 1999,
rising to $380 billion in the United Kingdom, $557 billion in Germany and $212
billion in Canada in 2010. In developing customized websites in our
international markets we will continue to draw on our experience in the United
States with technology, user interface and supplier relationships while
tailoring our international websites to specific characteristics of each local
marketplace.
Continue Diversification of our Sources of Revenue
We plan to expand our travel service offerings to include more complex
travel products and destination service offerings. Currently, the majority of
our transaction revenues are derived from airline ticket sales, hotel
reservations and car rentals. We plan to extend our offerings in each of these
core segments and expand the
range of offerings into other segments. Other new travel services categories
may include offering retailing travel-related goods such as luggage and
accessories, selling travel insurance and entering into strategic relationships
with third-party providers of ground transportation, tours and similar
services.
As a result of our focus on developing our merchant business, our business
is becoming better diversified than that of our principal online competitors.
Our merchant business is focused on lodging and package
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transactions. Commissions and fees from the sale of airline tickets represented
less than 30% of our revenues and less than 40% of our gross profit in the
fiscal quarter ending March 31, 2000.
Our Travel Planning Services
United States
Customers in the United States can use our travel planning services to
access the wide selection of our online travel services to shop for and book
airline tickets, car rentals and hotel reservations, and to search and book the
offerings of selected vacation packagers, cruise lines, specialty lodging
providers and travel-related retailers.
On our Expedia.com website, consumers engaging in travel planning, can
consult extensive editorial content covering over 350 popular destinations,
travel advice and recommendations from acknowledged industry experts, feature
articles on specific destinations and specialty travel sections geared to the
needs of specific groups such as families and business travelers. Consumers
looking for advice from fellow travelers can take advantage of extensive
community interaction, including bulletin boards and chat rooms. To accommodate
the needs of consumers who are searching for price and availability
information, we complement our core flight, hotel and car rental shopping and
purchase functionality with a number of powerful comparison shopping tools.
After building a specific itinerary, customers can complete the purchase of
airline tickets, hotel rooms or car rentals by entering credit card and address
information. Customers instantly receive email confirmation of the purchase and
are directed via links on our website to explore relevant destination
information and take advantage of our proprietary Expedia Maps. We also provide
a twenty-four hour toll-free customer service center that customers can call
for assistance.
On Travelscape.com and LVRS.com, customers can book discounted hotel rooms
and discounted air and hotel packages on over 1,500 hotels in over 240 cities
worldwide. On VacationSpot.com, customers can browse over 25,000 vacation
homes, rental condos, inns and bed & breakfast properties in more than 4,000
vacation destinations and more than 100 countries worldwide.
Using our websites, consumers and suppliers engage in a heavy volume of
transactions across multiple systems and networks. We rely on third-party
computer systems and third-party service providers, including the computerized
central reservation systems of the airline, hotel and car rental industries.
The nature and size of the reservation process require frequent expansion of
our operations, and upgrades of our systems and infrastructure in order to deal
with the increasing number of customers and travel suppliers. Upgrades are also
required to enable the enhanced features and functionality which we need to
compete in our industry. The complexity of these processes and the multiple
parties involved result inevitably in our customers and suppliers occasionally
encountering problems in accessing or distributing information through our
marketplace or in completing transactions.
The travel planning services offered by our US websites can be divided into
4 main areas: commerce, content, community and customer service.
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Commerce
The Expedia websites offer a broad range of features that provide consumers
with access to purchase information such as reliable price comparisons,
availability and itinerary details, an integrated purchase path and post-
purchase confirmation.
. Flight, Hotel and Car Wizards. Consumers can search for and compare
airline, rental car and hotel room pricing and availability information
and can also purchase tickets, make reservations and obtain additional
information on hotels in our hotel directory.
. Vacation and Cruise Wizards. These tools search a proprietary database
of vacation and cruise packages. The content of this database is
regularly updated by suppliers using the inventory management tools
offered on ExpediaPartners.com.
. Hotel Price Matcher. This shopping tool offers consumers the ability to
request specific prices for hotel rooms in popular cities, such as New
York, San Francisco and Las Vegas. We search our proprietary database of
negotiated hotel rates for available rooms that meet the boundary
conditions contained in the consumer's request.
. Flight Price Matcher. This shopping tool offers consumers the ability to
request specific prices for airline tickets. We search our proprietary
database of negotiated airfares for available seats that meet the
boundary conditions contained in a consumer's request.
. Fare Tracker. This service enables subscribers to specify three routes
and receive updates on special fares and offers via weekly email as well
as via a personalized summary on our website. As of March 31, 2000, we
had over 4.1 million Fare Tracker subscribers.
. My Trips and My Profile. This personalization feature enables consumers
to define a personal travel page which provides easy access to existing
travel itineraries and personal profiles. The My Trips and My Profile
feature encourages consumers to return to our Expedia.com website and
build an ongoing customer relationship with us.
. Mileage Miner. Working with a third-party partner, our Expedia.com
website helps consumers manage their frequent flyer programs online.
Content
Consumers can use the editorial content available on the Expedia websites at
the beginning of the travel planning and purchase process for researching
destinations and travel tips. Consumers can also use content after they have
purchased travel as a way to gain more insight before their trip begins. Some
examples of content include:
. Expedia.com Destination Guides. Essential information on 455 places, to
help you plan your perfect trip: When to go, what to bring, how to get
around, what not to miss. Plus: Maps, weather, news and multimedia
features.
. Expedia Maps. We maintain a proprietary database of street maps of the
United States and highway maps for the rest of the world that we offer
as stand-alone applications and that we integrate with other features
such as the Hotel Wizard.
. Specialty Travel Sections. We have launched two new editorial
sections within the Expedia.com website that target adventure
travel, golf, families and business travel. We intend to launch new
editorial sections that target other consumer groups in response to
perceived consumer and advertiser demand.
. Travel Features. We provide travel content that uses multimedia
technologies such as 360-degree photography and video clips. We also
offer editorial features on travel destinations and other special
interest travel topics.
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. Travel News. We provide regularly updated information on fare sales,
changing travel conditions and specific weather and security
advisories.
. Flight Information. Consumers can use this feature to check the
expected arrival times of flights in progress.
. Directory of Web Links. To extend our own travel research tools, we
offer consumers a selection of links to useful travel-related and
destination-related websites.
. Expedia Radio. We work with a licensee that produces a travel-
related radio show, Expedia Radio, that is broadcast to over 2.5
million listeners in over 100 markets in the United States. Visitors
to the Expedia.com website can play Expedia Radio audio content from
our website.
. Search. Our proprietary search engine allows consumers to generate a
quick list of information relating to a particular destination or
travel theme, such as Hawaii or scuba diving.
Community
One of the best resources for travel recommendations is other travelers,
and, to reflect this, we have developed features to encourage a sense of
community among the six million consumers who visit the Expedia websites in a
typical month. Some examples of our community services are as follows:
. Fare Compare. This benchmarking feature allows consumers to review
airfares that other consumers of our Expedia.com website have found
on particular routes.
. Chat Rooms. Visitors to our Expedia.com website can communicate
directly with one another in chat rooms maintained by Microsoft
through the MSN.com(R) website.
. Bulletin Boards. Travelers can post their questions and answers on
bulletin boards maintained by Microsoft through their MSN.com
website and moderated by travel experts on contract to the
Expedia.com website.
. From Experience. This section of our website contains feedback from
travelers organized according to destination.
Customer Service
We strive to provide superior service to our customers to enhance their
experience and to assist them with travel plans.
. Telephone and Email Support. For all of its travel offerings,
Expedia provides a rich agent-based support service. This service is
accessible by email as well as by toll-free, 24 hour a day, seven
day a week telephone support. For purposes of operational
flexibility, Expedia has opted to provide this support
infrastructure with a balanced combination of inhouse and outsourced
solutions. High volume customer support is split between our call
center in Las Vegas, where we have approximately 160 agents, and our
outsourced partner, TRX, who has approximately 200 agents. All
supplier support is handled inhouse.
Supplier Functionality
We offer an array of functionality to address the specific needs of our
travel suppliers.
. Promotional, Sponsorship and Advertising Inventory. We provide
sponsorship opportunities advertising banners and other placements
throughout the website. Suppliers participating in the Expedia
Travel Network have access to a wide variety of promotional
opportunities, including front-page placement, travel category
targeting, inclusion in our Special Deals database and access to our
Vacation and Cruise Wizard database.
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. Inventory Management Tools. We enable selected suppliers to upload
information related to vacation and cruise packages into a
proprietary database maintained at ExpediaPartners.com(TM). This
inventory is then available on our website.
. Email Promotions. We work with suppliers to tailor email-based
promotions for selected segments of our customer base.
International
We offer localized Expedia.com websites in the United Kingdom, Germany and
Canada as well as the Rent-a-Holiday website in Belgium.
Expedia.co.uk
In the United Kingdom, we operate a leading online travel service at
Expedia.co.uk. This marketplace offers a number of features customized to the
needs of consumers and suppliers in the United Kingdom, such as:
. Negotiated Fares. We offer fares negotiated with airlines by MTG
Limited UK (Thomas Cook) and integrate both negotiated and published
fares in a single display.
. Holiday Shop. This service allows customers in the United Kingdom to
browse vacation package offerings leaving from the United Kingdom.
. Localized Customer Service. Expedia.co.uk customer service is
provided by MTG Limited UK (Thomas Cook) in the United Kingdom and
is tailored to the needs of United Kingdom travelers.
. Localized Editorial Content. The editorial advice and feature
articles offered on the United Kingdom website are developed with a
British point of view. Though we use content developed for the
United States market where appropriate, our goal is to offer a local
product to the United Kingdom travel market.
. United Kingdom Strategic Relationships. We have developed strategic
relationships in the United Kingdom with British Airways, MTG
Limited UK (Thomas Cook) and the local service of AOL, among others.
These relationships enable us to expand our localization features
such as negotiated fares, provide local editorial content and extend
our regional distribution channels.
. Travel Insurance. We offer travelers the ability to purchase travel
insurance in the United Kingdom through our website.
Expedia.de
In Germany, we recently launched a new website at Expedia.de. In addition to
relevant language and currency changes, other features on our website include:
. Package Tours Database. Because package tours are a popular vacation
purchase in Germany, we provide customers with an interface to a
third-party database of packaged tour inventory.
. Negotiated Fares. We offer fares negotiated with airlines by
Deutsches Reiseburo and integrate negotiated and published fares in
a single display on our website.
. Localized Customer Service. Expedia.de customer service is provided
by Deutsches Reiseburo in Germany and is tailored to the needs of
German travelers.
. Localized Editorial Content. The editorial advice and feature
articles offered on our Expedia.de website are developed with a
German point of view. Therefore, most of our feature articles and
editorials are not translations of articles that run on our
Expedia.com website but instead are original German articles.
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. German Strategic Relationships. We have developed strategic
relationships in Germany with Lufthansa, Touristik Union
International and Deutsches Reiseburo, among others.
. Travel Insurance. We offer travelers the ability to purchase travel
insurance in Germany through our website.
Expedia.ca
In Canada, we operate the Expedia.ca website, which is similar to the
Expedia.com website, with localized currency and date formats. This website
offers a number of features to address the needs of the Canadian marketplace,
including localized customer service.
Rent-a-Holiday.com
In Europe, we operate the Rent-a-Holiday.com website, which was acquired in
the VacationSpot acquisition. Similar to the VacationSpot.com website, the
Rent-a-Holiday.com website offers unique properties at vacation destinations in
countries worldwide.
Licensing of Expedia Products
We license components of our technology and editorial content to selected
airlines and American Express as a platform for their websites. Licensing
selected components of our technology allows us to participate in online
bookings whether they are placed through airline websites and corporate travel
agencies or on our websites. We do not expect this to be a core business of
Expedia in the future.
Strategic Relationships
We pursue strategic relationships to increase our access to online
customers, to build brand recognition and to expand our online presence. To
date, we have established the following alliances, among others, for
distribution and product enhancement:
. Worldspan. Worldspan, our primary computer reservation service
provider, processes a substantial majority of airline ticket and car
rental reservations for our Expedia.com website, a portion of
airline ticket and car rental reservations for our websites in the
United Kingdom, Germany and Canada, and a portion of the hotel
reservations for our websites. We are working closely with Worldspan
in the development of our Best Fare Search technology as described
above.
. World Travel Partners/TRX. World Travel Partners' subsidiary, TRX,
assists us in the provision of a proportion of high volume telephone
and email customer support and mailing and other fulfillment
services. World Travel Partners was the third largest travel agency
in the United States in 1999, according to Travel Weekly, focusing
on corporate travel services.
. Pegasus. Pegasus is our primary provider of connectivity to hotel
reservation systems for both our Hotel Wizard reservations channel
and our Hotel Price Matcher service.
. MTG Limited UK (Thomas Cook). Thomas Cook, a leading travel agency
in the United Kingdom, is our primary customer service and
negotiated rates provider in the United Kingdom.
. Deutsches Reiseburo. Deutsches Reiseburo, a leading travel agency
and tour operator in Germany, is our primary customer service and
negotiated rates provider in the German market.
. Microsoft. Microsoft supplies us with premium placement on the
MSN.com website, the Hotmail(R) email service and the WebTV(R)
platform. Microsoft also supplies us with technology and systems
infrastructure under license agreements. MSN.com is the third most
visited site on the Internet, attracting over 39 million unique
visitors in May 2000 according to Media Metrix.
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Hotmail, with over 65 million active accounts in June 2000 is one of
the largest email systems in the world, and WebTV is one of the
largest providers of television-based Internet access.
Technology
We believe that the quality of our technology differentiates our websites
from those of our competitors. Our goal has been to build a reliable, scalable
and secure environment for consumers to plan and purchase travel. Since
inception, we have supported substantial growth in traffic, commerce and
advertising inventory with our present architecture.
Our core booking engine connects to each of the four major computer
reservations systems: Worldspan, Sabre, Apollo and Amadeus, giving our websites
and our licensees the ability to choose which computerized reservation system
to support.
Our Best Fare Search technology is a fare searching technology and pricing
engine that moves flights pricing query activity from the mainframes of
computerized reservation systems to servers based on the Windows platform. This
allows us to deliver enhanced consumer functionality in a more flexible and
cost-effective manner.
We have built a multi-layered system using powerful and expandable Internet
hardware and software. From inception, we have distributed functionality across
multiple layers of our platform. One layer handles the demands of serving
webpages. Another layer manages the demands of high-volume message traffic
between our servers and those of our suppliers and intermediaries. A third
layer manages storage of critical data such as customer profiles, marketing
database information and editorial content. Our hardware consists of multiple
Compaq Proliant servers. Our data center is connected to the Internet through
the equivalent of eight T3 connections. Microsoft Back Office technology,
including Windows NT(R), SQL Server(R) and Internet Information Server(R), is
the foundation for our operating service software. Multiple redundant servers
support each key layer of the architecture to help manage heavy user traffic.
Microsoft hosts substantially all of our systems, software and hardware.
Consumer Marketing
We believe that important drivers of our business are our ability to attract
visitors to our websites, our ability to convert those visitors into purchasing
customers and our ability to convert first-time purchasers into repeat
customers. We plan to continue to attract new visitors to our websites by
continuing our brand building efforts and promotional advertising, both online
and in traditional television, radio and print media, and by continuing to work
with influential press and industry analysts. Our strategy to convert visitors
into purchasers includes a combination of broad purchase-related promotions,
increased emphasis on merchandising of available offers and increased efforts
to work with our travel suppliers to offer superior selection and quality of
travel inventory. We plan to convert first-time purchasers to repeat customers
by focusing on enhanced customer satisfaction, new personalization features and
through ongoing investments in customer relationship management technologies.
Sales and Supplier Relations
Our sales efforts are directed toward building long-term relationships with
the travel supplier community and key advertising partners, including
advertising agencies. We are expanding our sales force to extend our national
sales coverage and to build a dedicated advertising sales force. Our
salespeople make frequent sales calls at advertiser and supplier offices and
attend trade shows, conferences and other industry events. Our sales efforts
are complemented by public relations and other channel marketing efforts,
including advertisement placements in industry trade publications.
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Competition
The online travel services market is new, rapidly evolving and intensely
competitive, and we expect competition to increase. We compete on the basis of
service, merchandising, reliability, amount and accessibility of information
and breadth of products and services offered. We make available to our
customers a wide range of products and prices offered by our travel suppliers.
In the United States, we compete primarily with online travel services and
with traditional travel agent distribution channels. In the online travel
services market, we compete with other entities that maintain commercial
websites providing online travel services, such as Travelocity.com, Hotel
Reservations Network, CheapTickets.com, TravelWeb (operated by Pegasus),
GetThere.com, Biztravel.com (operated by Rosenbluth Travel), TravelNow.com,
Worldres.com and Trip.com. We also compete with companies that offer travel as
part of a larger electronic commerce portfolio, such as Priceline.com and
Yahoo. Several traditional travel agencies, including larger travel agencies
such as Uniglobe Travel and Carlson Wagonlit Travel, have established, or may
establish in the future, commercial websites offering online travel services.
We also compete with many of these same parties and others in the licensing of
technology to airlines and corporate travel agencies.
Internationally we compete with a different set of participants in each
market, ranging from traditional travel agents, market-specific websites and
global competitors, including Travelocity, which have expanded beyond the
United States market. In the United Kingdom, local online competitors include
LastMinute.com and Ebookers.com. In Germany, local online competitors include
Travelchannel.de and iFAO.
As the market for online travel services grows, we believe that the range of
companies involved in the online travel services industry, including travel
suppliers, traditional travel agencies, travel industry information providers,
online portals and e-commerce providers, will increase their efforts to develop
services that compete with our websites. Many airlines and other travel
suppliers offer travel services directly through their own websites, including
services from other travel suppliers. We are unable to anticipate which
companies will offer competitive services in the future. As the market for
online travel service grows, we believe that companies involved in the travel
services industry will increase their efforts to develop services that compete
with our services.
In addition, five airline suppliers, American Airlines, Continental
Airlines, Delta Air Lines, Northwest Airlines and United Air Lines, have
announced their intention to launch a direct-distribution website, currently
named "Orbitz," by the end of August 2000. Forester Research reports that
Orbitz will be the only website for consumers to find unpublished weekly
special fares on at least 27 airlines.
We cannot assure you that our online operations will compete successfully
with any current or future competitors.
Proprietary Rights
Our intellectual property rights relate to trademarks and domain names
associated with the names "Expedia," "Travelscape," "Las Vegas Reservation
Services," "VacationSpot" and "Rent-a-Holiday" and copyrights and other rights
associated with our websites, our software and other aspects of our business
and technology. We rely on trademark and trade secret protection law, copyright
law and confidentiality and/or license agreements with our employees,
customers, partners and others to protect our proprietary rights. We pursue the
regulation of our key trademarks and service marks in the United States and
internationally.
We license the right to use some of Microsoft's retail products and other
technology pursuant to our license agreements with Microsoft. In addition, we
license, on a perpetual and royalty-free basis, patent rights from Microsoft
that relate to our business. See "Certain Relationships and Related
Transactions--Our Relationship with Microsoft; License Agreements."
We license components of our travel website technology and editorial content
to selected airlines and American Express. In addition, we license trademark
rights to the Expedia brand to a third party who operates
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Expedia Radio and to Microsoft for use with some of its software products. We
may license other intellectual property rights to third parties in the future.
Government Regulation
The laws and regulations applicable to the travel industry affect us and our
travel suppliers. We must comply with laws and regulations relating to the sale
of travel services, including those prohibiting unfair and deceptive practices
and requiring us to register as a seller of travel, to comply with disclosure
requirements and to participate in state restitution funds. In addition, many
of our travel suppliers and computer reservation systems providers are heavily
regulated by the United States and other governments. Our services are
indirectly affected by regulatory and legal uncertainties affecting the
businesses of our travel suppliers and computer reservation systems providers.
We must also comply with laws and regulations applicable to businesses
generally and online commerce specifically. Currently, few laws and regulations
apply directly to the Internet and commercial online services. Moreover, there
is currently great uncertainty whether or how existing laws governing issues
such as property ownership, sales and other taxes, libel and personal privacy
apply to the Internet and commercial online services. It is possible that laws
and regulations may be adopted to address these and other issues. Further, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws. New laws or different applications of
existing laws would likely impose additional burdens on companies conducting
business online and may decrease the growth of the Internet or commercial
online services. In turn, this could decrease the demand for our products and
services or increase our cost of doing business.
Federal legislation imposing limitations on the ability of states to impose
taxes on Internet-based sales was enacted in 1998. The Internet Tax Freedom
Act, as this legislation is known, exempts certain types of sales transactions
conducted over the Internet from multiple or discriminatory state and local
taxation through October 21, 2001. It is possible this legislation will not be
renewed when it terminates in October 2001. Failure to renew this legislation
could allow state and local governments to impose taxes on Internet-based
sales, and these taxes could decrease the demand for our products and services
or increase our cost of operations.
Employees
As of June 30, 2000, we employed a total of 574 full-time employees. In
addition, we contract for the services of 24 employees of temporary staffing
firms.
Our ability to attract and retain highly qualified employees will be
important to our success in maintaining online leadership. We have a policy of
using equity-based compensation programs to reward and motivate significant
contributors among our employees. Competition for qualified personnel in our
industry is intense. Our employees are not presently represented by a labor
union. We have not experienced any work stoppages and consider our relations
with our employees to be good.
Properties
We are headquartered in Bellevue, Washington in a leased space consisting of
approximately 77,000 square feet and housing our principal administrative,
sales and marketing, customer service and computer and communications systems
facilities. Our lease for this space expires in five years with an option to
renew for an additional five-year term. Travelscape is headquartered in Las
Vegas, Nevada in a purchased building consisting of approximately 9,100 square
feet and in a leased space consisting of approximately 3,500 square feet.
42
<PAGE>
Legal Proceedings
On October 13, 1999 and July 14, 2000, Priceline.com Incorporated filed two
separate patent infringement lawsuits against Microsoft and Expedia in the
United States District Court for the District of Connecticut. The lawsuits
allege that our Hotel Price Matcher and Flight Price Matcher services infringe
patents assigned to Priceline.com. The October 13, 1999 lawsuit also alleges
that Microsoft and Expedia engaged in unfair and deceptive acts or practices in
violation of the Connecticut Unfair Trade Practices Act.
We do not believe that the claims made by Priceline.com in either lawsuit
have merit. On April 5, 2000, Microsoft and Expedia filed an Answer to
Priceline.com's October 13, 1999 complaint, and asserted a counterclaim that
alleges inequitable conduct on Priceline.com's behalf in the prosecution of the
patent in question, and seeks a declaration that the patent is invalid,
unenforceable or not infringed. Discovery has recently commenced relating to
the October 13, 1999 lawsuit. Microsoft and Expedia have not replied to
Priceline's July 14, 1999 complaint, nor has discovery commenced in that
lawsuit. We are not presently able to estimate the likelihood of an adverse
result or the range of possible loss relating to either matter.
On October 7, 1999, Reed Elsevier Inc. filed a complaint in the United
States District Court for the District of New Jersey against Microsoft and
Expedia. The suit alleged that Microsoft and Expedia materially breached an
agreement between Microsoft and Reed Elsevier relating to the development by
Microsoft of a hotel directory for the internet and the sale of internet
advertising in that directory. On February 14, 2000, the parties entered into a
confidential settlement agreement and, in accordance therewith, the court
dismissed the complaint with prejudice on March 3, 2000.
On December 27, 1999, Expedia, Inc filed a federal court action for
trademark infringement in the Central District of California against Xpedior,
Inc., a newly formed subsidiary of Metamor Worldwide. Xpedior filed its Answer
to the complaint on January 14, 2000. The lawsuit alleges that Xpedior's use of
the XPEDIOR trademark constitutes unfair competition, trademark infringement,
and is likely to dilute the brand strength and awareness of the EXPEDIA mark.
No trial date has been set in this matter. We are not presently able to
estimate the likelihood of success or the range of possible outcomes and their
consequences.
In addition to the matters discussed above, we are subject to various legal
proceedings and claims that arise in the ordinary course of business. We
believe that the resolution of such matters will not have a material impact to
the financial position, results of operations or cash flows of the Company.
43
<PAGE>
MANAGEMENT
Executive Officers and Directors
The names, ages and positions of our executive officers and directors as of
June 15, 2000 are listed below along with their business experience during the
past five years. The business address of all of our executive officers is 13810
SE Eastgate Way, Suite 400, Bellevue, Washington 98005. Directors will be
elected to serve until they resign or are removed, or are otherwise
disqualified to serve, or until their successors are elected and qualified.
Executive officers of Expedia are appointed by the Board of Directors. No
family relationships exist among any of the directors or executive officers of
Expedia.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<C> <C> <S>
Richard N. Barton........ 33 President, Chief Executive Officer and
Director
Byron D. Bishop.......... 36 Vice President, Transportation and Core
Technology
Erik C. Blachford........ 33 Vice President, Marketing and Programming
Simon J. Breakwell....... 35 Vice President, International Business
Mark S. Britton.......... 33 Vice President, General Counsel and Secretary
Kathleen K. Dellplain.... 41 Vice President, Human Resources
Seth E. Eisner........... 41 Vice President, Operations and Supplier
Technologies
Gregory S. Stanger....... 36 Vice President and Chief Financial Officer
Greg Slyngstad........... 44 Vice President, Destinations
Gregory B. Maffei........ 40 Chairman of the Board
Brad Chase............... 39 Director
Gerald Grinstein......... 68 Director
Laurie McDonald Jonsson.. 51 Director
Richard D. Nanula........ 40 Director
</TABLE>
Richard N. Barton founded Expedia in 1994. He has served as a Director of
Expedia since September 1999. Prior to this, he worked for Microsoft from 1991
to 1994 in various product management roles involving Windows and MS-DOS. Prior
to joining Microsoft in 1991, he worked as a strategy consultant for Alliance
Consulting Group. Mr. Barton received a B.S. in industrial engineering from
Stanford University.
Byron D. Bishop joined Expedia in 1994 as a founding member, with the
principal focus of building and managing Expedia's product development team.
Mr. Bishop has been a Microsoft employee since 1986. During this time, he
created and managed three other development groups within Microsoft, including
the "Windows for Pen Computing" operating system and Microsoft's first handheld
operating system. Mr. Bishop received a B.S. in computer science and
mathematics from the University of Washington.
Erik C. Blachford joined Expedia in 1995. Previously, he served as General
Manager at Kroll Travel Watch, a travel information services division of Kroll
Associates Inc. from 1994 to 1995. Prior to this, he held various marketing and
new product development positions at Butterfield & Robinson Travel Inc. from
1989 to 1992. Mr. Blachford received a B.A. from Princeton University and an
M.B.A. from Columbia Business School.
Simon J. Breakwell joined Expedia in 1997. Previously, Mr. Breakwell held
various sales positions at British Airways from 1987 to 1993 and various senior
sales management positions from 1993 to 1997. During this period, Mr. Breakwell
managed sales strategy, distribution, sales technology and commercial
agreements with British Airways corporate customers in the United Kingdom. Mr.
Breakwell received an Honors Politics Degree from Portsmouth Polytechnic and an
M.B.A. from Lancaster University.
44
<PAGE>
Mark S. Britton joined Expedia in 1999. Prior to this, he was an attorney
with the Seattle office of Preston Gates & Ellis LLP from 1997 to 1999, being
elected to this firm's partnership in 1999. Mr. Britton served as Senior
Counsel to the Division of Corporation Finance of the SEC from 1994 to 1997.
Mr. Britton received a juris doctorate degree from the National Law Center,
George Washington University, and a B.B.A. from Gonzaga University.
Kathleen K. Dellplain joined Expedia in 1999. Previously, Ms. Dellplain
served as Vice President, Human Resources, for IDX Systems Corporation, a
healthcare information technology company, from 1997 to 1999. Prior to this,
Ms. Dellplain was the Senior Director, Human Resources, for PHAMIS, Inc., from
1990 until its merger with IDX Systems Corporation in 1997. She has over 15
years experience in various human resources management positions in health care
information systems, health care and manufacturing industries. Ms. Dellplain
received a B.B.A. from the University of Hawaii, Honolulu and an M.B.A. from
the University of Washington.
Seth E. Eisner joined Expedia in 1998. Before joining Expedia, Mr. Eisner
spent two and a half years within Microsoft's Information Technology Group,
serving as Director of Development, and later as Corporate Data Manager. Mr.
Eisner also managed all technical and business operations for Sidewalk,
Microsoft's Local City Guide from 1997 to 1998. Mr. Eisner joined Microsoft in
1994. Mr. Eisner's work history includes 18 years of experience with IT systems
and, in particular, construction and deployment of high performance, real-time
transactional systeMs. Mr. Eisner received a B.S. in mathematics from
Washington University, St Louis.
Gregory S. Stanger joined Expedia in 1999. Prior to joining Expedia, he
served as Senior Director, Corporate Development at Microsoft from 1998 to
1999. Prior to this, he held various positions in Microsoft's Corporate
Development department from 1993 to 1998, and elsewhere within Microsoft's
Finance Organization from 1991 to 1993. Prior to joining Microsoft, Mr. Stanger
worked as an investment banker with PaineWebber from 1987 to 1989. Mr. Stanger
received a B.A. from Williams College and an M.B.A. from the University of
California at Berkeley.
Greg Slyngstad re-joined Expedia in March 2000, having been General Manager
of Expedia's founding team when it was a wholly owned subsidiary of Microsoft
Corporation. During his 14 years with Microsoft, he also held numerous
management positions involving Microsoft Word, and served in Japan as
Microsoft's Director of Far East Product Strategy. After leaving Microsoft, Mr.
Slyngstad co-founded VacationSpot.com in October 1997 and served as that
company's Chief Operating Officer until it was acquired by Expedia in
March 2000.
Gregory B. Maffei has served as Chairman of the Board of Directors of
Expedia since 1999. Since January 2000, Mr. Maffei has served as the Chief
Executive Officer and a Director of 360 Networks Inc. From 1997 until January
2000, he was the Senior Vice President, Finance & Administration and Chief
Financial Officer of Microsoft Corporation. Previously, Mr. Maffei has held a
number of positions at Microsoft, including Vice President of Corporate
Development, Treasurer, and Director, Business Development & Investments. Prior
to joining Microsoft in 1993, he was with Citicorp Venture Capital, Pay N Pak
Stores and Dillon Read. Mr. Maffei received an A.B. degree from Dartmouth
College and an M.B.A. from Harvard Business School, where he was a Baker
Scholar. Mr. Maffei serves on the board of directors of Starbucks Corporation,
Avenue A Inc. and Optical Networks, Inc.
Brad Chase has served as a Director of Expedia since November 1999. Since
April 1999 he has been Senior Vice President of the Consumer and Commerce Group
of Microsoft Corporation. Prior to his current position, since July 1987 Mr.
Chase held a number of positions at Microsoft, most recently managing the
Windows Marketing and Developer Relations Group. Previously, he managed the
marketing and development teams for Microsoft Plus!, served as General Manager
for MS-DOS and served in a variety of other management roles at Microsoft in
the applications division. Mr. Chase received a B.S. from the University of
California at Berkeley and an M.B.A. from Northwestern's Kellogg Graduate
School of Management.
45
<PAGE>
Gerald Grinstein has served as a Director of Expedia since 1999. Mr.
Grinstein has been non-Executive Chairman of Agilent Technologies since 1999
and non-Executive Chairman of the Board of Delta Air Lines, Inc. since 1997. He
is also a principal of Madrona Investment Group, L.L.C., a Seattle-based
investment company. From 1985 to 1991, Mr. Grinstein held a number of positions
at Burlington Northern, Inc. and served as Chairman and Chief Executive Officer
from 1991 until his retirement in 1995. He is also a director of PACCAR Inc.,
Vans, Inc., The Pittston Company and Imperial Sugar Corporation. He previously
served as a director of Browning-Ferris Industries, Inc. and Sundstrand
Corporation.
Laurie McDonald Jonsson has served as a Director of Expedia since 1999.
Since 1987 she has served as Chairperson and CEO of Stellar Travel, a Seattle-
based travel agency specializing in family, business and cruise vacation
travel, and President and CEO of Stellar International, an international
investment company. She also co-founded both Sundance Cruises and Admiral
Cruises. Ms. McDonald Jonsson serves on the board of directors of the Commerce
Bank, the Harvard University, John F. Kennedy School of Government, Women's
Leadership Board, and is also chair of Governor Locke's Executive Women's
Council, which sponsored the first all-women's trade and study mission to
Central Europe. She received a B.A. from the University of Washington, an
M.S.W. from the University of Michigan and completed Stanford University's
Executive Business Program.
Richard D. Nanula has served as a Director of Expedia since 1999. Since
1999, he has served as President and Chief Executive Officer of Broadband
Sports, Inc., an Internet-based media company focused on delivering unique
sports content to sports fans. Prior to this, Mr. Nanula was the President and
Chief Operating Officer of Starwood Hotels & Resorts, Inc. from 1998 to 1999.
Previously, Mr. Nanula held a variety of positions at The Walt Disney Company
from 1986 to 1998, serving most recently as Senior Executive Vice President and
Chief Financial Officer from 1996 to 1998, as President of The Disney Stores
from 1994 to 1996 and as Executive Vice President and Chief Financial Officer
from 1991 to 1994. Mr. Nanula received a B.S. from the University of
California, Santa Barbara and an M.B.A. from Harvard Business School.
Jay Hoag, founding general partner of Technology Crossover Ventures, will
become a director of Expedia effective upon the closing of the Private
Placement.
Board Composition
Our Bylaws currently provide for a Board of Directors consisting of at least
3 and no more than 11 members. All directors hold office until the next annual
meeting of our stockholders and until their successors have been elected and
qualified. Our officers are appointed annually and serve at the discretion of
the Board of Directors.
Board of Directors Committees
Expedia has an Audit Committee and a Compensation Committee. Our Audit
Committee, consisting of Messrs. Grinstein and Maffei and Ms. McDonald Jonsson,
reviews the results and scope of the audits and other services provided by our
independent accountants.
Our Compensation Committee, consisting of Messrs. Chase, Maffei and Nanula,
reviews and approves the compensation and benefits for our executive officers,
administers our stock purchase and stock option plans and makes recommendations
to the Board of Directors regarding such matters.
Board Compensation
Except for reimbursement for reasonable travel expenses relating to
attendance at Board meetings and the grant of stock options, directors are not
compensated for their services as directors. Directors who are also our
employees are eligible to participate in our 1999 Stock Option Plan and will be
eligible to participate in our Purchase Plan. Directors who are not employees
are eligible to participate in our 1999 Stock Option Plan for Non-Employee
Directors. See "--Stock Plans."
46
<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth compensation awarded to, earned by, or paid
to our Chief Executive Officer and our four other most highly compensated
executive officers whose total cash compensation exceeded $100,000 for the
fiscal year ended June 30, 1999 (collectively, the "Named Executive Officers"),
which was prior to our initial public offering. Compensation information for
the fiscal year ended June 30, 2000 is not yet available. While this
compensation is indicative of the historical compensation paid by Microsoft to
the Named Executive Officers, it is not necessarily indicative of the
compensation which Expedia pays to such individuals since our initial public
offering.
<TABLE>
<CAPTION>
Securities
Underlying All Other
Fiscal Salary Bonus Options Compensation
Name and Principal Position(1) Year(2) ($)(3) ($) (#)(4) ($)
------------------------------ ------- ------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Richard N. Barton.............. 1999 119,072 50,000 -- --
President, Chief Executive
Officer and Director
Byron D. Bishop................ 1999 128,231 49,000 -- --
Vice President, Product
Development
Simon J. Breakwell............. 1999 105,157 6,500 10,000 8,194(5)
Vice President, Sales
Seth E. Eisner................. 1999 108,584 23,700 10,000 --
Vice President, Operations
Gregory S. Stanger............. 1999 101,427 35,591 40,000 --
Vice President and Chief
Financial Officer
</TABLE>
--------
(1) Prior to October 1, 1999, each of these officers was employed by Microsoft.
(2) The compensation information for this disclosure for the fiscal year ended
June 30, 2000 is not yet calculable.
(3) Includes amounts deferred at the election of the Named Executive Officers
pursuant to Microsoft's 401(k) plan.
(4) While this number includes all options that Microsoft granted to the Named
Executive Officers in fiscal 1999, only those options that were unvested at
the time of Expedia's separation from Microsoft were assumed by Expedia.
See "Certain Relationships and Related Transactions--Our Relationship with
Microsoft."
(5) Reflects a one-time reimbursement for moving expenses.
47
<PAGE>
Option Grants During Fiscal 1999
Vested and Unvested Microsoft Options
The following table provides information regarding stock options granted by
Microsoft prior to our initial public offering to the Named Executive Officers
during fiscal 1999. Microsoft did not grant any stock appreciation rights.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
# of Total Options Appreciation for
Options Granted to Exercise or Option Term(3)
Granted Employees in Base Price Expiration -----------------
Name (#)(1) Fiscal Year ($/share)(2) Date 5% ($) 10% ($)
---- ------- ------------------ ------------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard N. Barton....... -- -- % $ -- -- $ -- $ --
Byron D. Bishop......... -- -- -- -- -- --
Simon J. Breakwell...... 10,000 0.01 53.625 7/2/05 218,308 508,750
Seth E. Eisner.......... 10,000 0.01 53.625 7/2/05 218,308 508,750
Gregory S. Stanger...... 40,000 0.05 53.625 7/2/05 873,230 2,034,998
</TABLE>
--------
(1) While this number includes all options which Microsoft granted to the Named
Executive Officers in fiscal 1999, only those options that were unvested at
the time of Expedia's separation from Microsoft were assumed by Expedia.
See the table below, as well as the sections entitled "Certain
Relationships and Related Transactions--Our Relationship with Microsoft"
and "--Stock Plans; Stock Option Plan."
(2) The exercise price was the lowest price of Microsoft common stock during
July 1998.
(3) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the Microsoft common stock underlying the options over the
term of the options. These numbers do not take into account provisions for
termination of the option following termination of employment,
nontransferability or vesting over periods of up to 54 months.
Unvested Microsoft Options Replaced with Expedia Options
The following table provides information regarding stock options granted by
Microsoft to the Named Executive Officers during fiscal 1999 that were not
vested at the time of our initial public offering. Expedia issued replacement
options only for these unvested options. See "--Stock Plans; Stock Option Plan"
for a discussion of the formula relating to such replacement. This table
reflects the closing price of the Microsoft common stock on the date of our
initial public offering of $88.875 per share.
<TABLE>
<CAPTION>
Potential
Realizable
# of Total Options Value at
Granted to Exercise or the Public
Options Employees in Base Price Expiration Offering
Name Granted (#)(1) Fiscal Year ($/share)(2) Date Price(3)
---- -------------- ------------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Richard N. Barton....... -- -- % $ -- -- $ --
Byron D. Bishop......... -- -- -- -- --
Simon J. Breakwell...... 10,000 0.01 53.625 7/2/05 308,438
Seth E. Eisner.......... 10,000 0.01 53.625 7/2/05 308,438
Gregory S. Stanger...... 40,000 0.05 53.625 7/2/05 1,233,750
</TABLE>
--------
(1) Messrs. Breakwell's and Eisner's options were replaced by 55,547 Expedia
options and Mr. Stanger's options were replaced by 222,188 Expedia options.
48
<PAGE>
(2) The exercise price was the lowest price of Microsoft common stock during
July 1998. When these options were replaced with Expedia options, their
exercise price became $8.45.
(3) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the market price is equal to the
initial public offering price. These numbers do not take into account
provisions for termination of the option following termination of
employment, nontransferability or vesting over periods of up to 54 months.
Option Exercises During Fiscal 1999 and Fiscal Year-End Option Values
The following table sets forth information concerning options granted by
Microsoft to purchase Microsoft common stock exercised by the Named Executive
Officers during fiscal 1999. The table also sets forth the number and value of
unexercised in-the-money options at June 30, 1999. Microsoft has no outstanding
stock appreciation rights.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal in-the-Money Options at
Year-End (#) Fiscal Year-End ($)(1)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard N. Barton....... 15,682 $1,074,736 41,870 158,128 $3,348,757 $9,679,384
Byron D. Bishop......... 20,000 1,246,311 64,402 168,238 5,122,706 10,460,412
Simon J. Breakwell...... 250 17,000 4,550 22,000 302,291 1,162,875
Seth E. Eisner.......... 4,000 203,499 66,240 40,480 5,292,520 2,532,698
Gregory S. Stanger...... 27,000 2,204,125 87,900 77,300 7,067,186 4,105,283
</TABLE>
--------
(1) Value is calculated on the basis of the difference between the option
exercise price and the market price of Microsoft common stock of $90.19 at
June 30, 1999. While this number includes all options that Microsoft
granted to the Named Executive Officers in fiscal 1999, only those options
that were unvested at the time of our initial public offering were replaced
by Expedia. See "Certain Relationships and Related Transactions--Our
Relationship with Microsoft."
Stock Plans
Stock Option Plan
Our 1999 Stock Option Plan (the "Stock Option Plan") was adopted by the
Board of Directors and received stockholder approval in October 1999. In
addition to the approximately 13.7 million options that we issued in order to
replace the cancelled Microsoft options of our employees, we have reserved a
total of 4,000,000 shares of common stock for issuance under the Stock Option
Plan. As of June 30, 2000, we have issued 1,521,320 options under the Stock
Option Plan, including 617,439 options issued in connection with the
acquisitions of Travelscape and VacationSpot. The Stock Option Plan provides
for the grant to our employees, officers and employee directors of nonstatutory
stock options. Non-employee directors are not eligible for option grants under
the Stock Option Plan. Messrs. Chase and Maffei are considered to be employee
directors and will be eligible to participate in the Stock Option Plan.
The Stock Option Plan is administered by the Board of Directors or a
committee of the Board of Directors (the "Administrator"). The Administrator
determines the terms of options granted under the Stock Option Plan, including
the number of shares to be issued upon exercise of the option, exercise price,
term and exercisability. The exercise price of any stock option granted to an
optionee who owns stock representing more than 10% of the voting power of our
outstanding capital stock (a "10%+ Stockholder") must equal at least 110% of
the fair market value of the common stock on the date of grant. The exercise
price of all stock options other than to 10%+ Stockholders may be less than,
equal to or greater than the fair market value of our common stock on the date
of grant. Payment of the exercise price may be made in cash, check, delivery of
shares of our common
49
<PAGE>
stock, if the Optionee is an officer of Expedia, or other consideration
determined by the Administrator. The Administrator determines the term of
options. The term of any stock option granted under the Stock Option Plan may
not exceed 10 years; provided, however, that the term of an option qualifying
under Section 422 of the Code may not exceed five years for 10%+ Stockholders.
Options may not be transferred by the optionee other than by will or the laws
of descent or distribution or for estate planning purposes. Options granted are
exercisable at such times and under such conditions as determined by the Board
at the time of the grant or as permissible under the terms of the Stock Option
Plan.
In the event of a change in control as defined in the plan, the Stock Option
Plan requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation. In the event that a successor
corporation refuses to assume each option or substitute an equivalent option,
the Administrator shall provide for the optionee to have the right to exercise
the option as to all of the shares covered by the option, including shares as
to which the option would not otherwise be exercisable, in which case each
option will be exercisable for 15 days from the date of such determination. The
Board of Directors has the authority to amend or terminate the Stock Option
Plan as long as such action does not affect any outstanding option and provided
that stockholder approval shall be required for an amendment to increase the
number of shares reserved for the Stock Option Plan. If not terminated earlier,
the Stock Option Plan will terminate in ten years.
Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
the Board of Directors and received stockholder approval in October 1999. A
total of 300,000 shares of common stock has been reserved for issuance under
the Purchase Plan. As of June 30, 2000, we have not issued any shares of common
stock under the Purchase Plan. The Purchase Plan, which is intended to qualify
under Section 423 of the Code, generally will be implemented in a series of
twelve separate consecutive six-month offering periods commencing on January 1
and July 1 of each year. The first such offering period commenced on January 1,
2000. The Purchase Plan is administered by the Board of Directors or by a
committee appointed by the Board of Directors. Our employees, officers and
employee directors, or employees of any majority owned subsidiary designated by
the Board of Directors, are eligible to participate if they are employed by us
or any such subsidiary for at least 20 hours per week and more than 5 months
per year. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 10% of an employee's
compensation, at a price equal to the lower of (a) 85% of the fair market value
of our common stock at the beginning of the offering period or (b) 85% of the
fair market value of our common stock on the last business day of the offering.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with us.
The Purchase Plan provides that in the event of a merger of us with or into
another corporation or a sale of substantially all of our assets, the Board of
Directors may make such adjustments as it may deem appropriate in the number,
kind and price of shares available under the Purchase Plan and in the number of
shares employees are entitled to purchase. The Board of Directors has the power
to amend or terminate the Purchase Plan as long as such action does not
adversely affect any outstanding rights to purchase stock thereunder and
provided that stockholders approval shall be required for an amendment to
increase the number of shares subject to the Purchase Plan. If not terminated
earlier, the Purchase Plan will automatically terminate December 31, 2005.
Stock Option Plan for Non-Employee Directors
The 1999 Stock Option Plan for Non-Employee Directors (the "Directors'
Plan") was adopted by the Board of Directors and received stockholder approval
in October 1999. A total of 135,000 shares of common stock has been reserved
for issuance under the Directors' Plan. As of June 30, 2000, we have issued
45,000 options under the Directors' Plan. The Directors' Plan provides for
discretionary grants of nonstatutory stock options to our nonemployee
directors. The Directors' Plan will be administered by the Board of Directors
or by a committee appointed by the Board of Directors.
50
<PAGE>
The Directors' Plan provides that the Board of Directors may grant in its
discretion an option to any person who is a nonemployee director.
The Directors' Plan sets a maximum of 10,000 shares for which options may be
granted to any one nonemployee director in any year, or, in the case of a newly
elected director, a maximum of 15,000 shares in the year in which the director
is first elected. Without Board consent, no option granted under the Directors'
Plan is transferable by the optionee other than by will or the laws of descent
or distribution and each option is exercisable, during the lifetime of the
optionee, only by such optionee. The Directors' Plan provides that options
shall become exercisable as set by the Board of Directors in its discretion.
The exercise price of all stock options granted under the Directors' Plan shall
be set by the Board of Directors in its discretion. Options granted under the
Directors' Plan have a maximum term of 10 years unless they are terminated
early upon death of the holder or his departure from the Board.
In the event of a change in control, the Board of Directors may amend or
terminate the Directors' Plan; provided, however, that stockholder approval is
required for any amendment that will increase the total number of shares as to
which options may be granted under the Directors' Plan, modify the class of
persons eligible to receive options or otherwise as required by law. The Board
may not amend the Directors' Plan more than once every six months, other than
to comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act or the rules thereunder. If not terminated earlier, the
Directors' Plan will have a term of 10 years.
Employment Agreement
We have entered into an employment agreement with Richard N. Barton, which
provides that, if he is terminated by Expedia during his first two years of
employment for reasons set forth in the agreement, he will receive the salary
and stock option vesting which he would have otherwise received as an Expedia
employee.
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Relationship with Microsoft
In October 1996, Microsoft launched its online travel services through
Expedia. On October 1, 1999, Microsoft separated the Expedia assets and
contributed them to us in exchange for 33,000,000 shares of common stock or
100% of our outstanding common stock at that date. Currently, Microsoft owns
approximately 74.4% of our outstanding common stock. Upon the closing of the
recent private placement of additional shares to TCV IV, L.P., TCV IV Strategic
Partners, L.P. and Microsoft, which is anticipated to be in August 2000,
Microsoft will own approximately 69.9% of our outstanding common stock.
Microsoft cancelled all of the unvested options of Microsoft employees who
chose to join Expedia in connection with our initial public offering in
November 1999 and we replaced the canceled options with Expedia options, that
had equivalent vesting schedules and in-the-money values and comparable other
terms as the canceled Microsoft options.
Along with contributions of ownership of intellectual property described
below, Microsoft contributed to Expedia other assets such as computers and
securities of Expedia Canada Corp.
Microsoft assigned to us a number of contracts having to do with the Expedia
business. Many of these have intellectual property components. Generally, where
the contract only impacts the Expedia business and no other units of Microsoft,
it was assigned to Expedia. To our knowledge, Microsoft has obtained all
necessary consents to these assignments where applicable.
We also entered into a number of other agreements that were necessary to
separate the Expedia assets from Microsoft and to facilitate the operation of
the Expedia assets after such separation. Each of these agreements are
summarized below. Although these agreements were not negotiated on an arm's
length basis, we believe that the terms of these agreements, when taken as a
whole, are at least as favorable to Expedia as those which would have resulted
from arm's length negotiations with parties other than Microsoft. We intend to
negotiate any future agreements with Microsoft on the same basis.
Services Agreement
On October 1, 1999, we entered into a services agreement with Microsoft
whereby Microsoft will provide us with certain administrative and operational
services.
Under the services agreement, Microsoft has continued to provide us with the
types of services described above. In return, we pay Microsoft fees based on
the total cost of the services. The services agreement is for an initial period
ending December 31, 2000 with one-year renewals if the parties agree on fees.
The agreement is cancelable by us upon 30 days written notice and by Microsoft
upon 180 days written notice. We have begun developing our own resources in
some of these areas. For additional services that are no longer needed,
adjustments to the services agreement fees must be mutually agreed upon.
License Agreements
In a set of license agreements, Microsoft provides us with rights to
intellectual property to be used in our business.
Microsoft assigned to us the trademarks and domain names associated with the
name "Expedia." In addition, Microsoft assigned to us copyrights for software
relating to online travel services.
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We license the right to use some of Microsoft's retail products and other
technology pursuant to our license agreements with Microsoft. We also license
the server technology related to the Expedia Maps service. In addition, we have
a license to all of Microsoft's patents relating to the operation of our
websites. All of the licenses relating to Expedia specific software content and
data and patents are royalty-free and perpetual.
Microsoft holds licenses to various third-party software programs, content
and data that are useful in our business. Where the license to Microsoft
permits, Microsoft sublicensed these rights to us. We must reimburse Microsoft
for any fees due to the licensor for these sublicenses. As part of the licenses
granted by Microsoft to us for technology and data related to our Expedia Maps
service, we have agreed to provide Microsoft websites with mapping services to
the extent the services are requested by Microsoft.
Tax Allocation Agreement
Effective October 1, 1999, we entered into a tax allocation agreement with
Microsoft Corporation that generally adopts the "percentage of tax liability"
method of Regulations section 1.1552-1(a)(2) as its "basic method" and the
"percentage" method of Regulations section 1.1502-33(d)(3) as its complementary
method.
Under the "percentage of tax liability" method, a member's allocable share
of consolidated tax liability is equal to the tax liability of the group
multiplied by a fraction, the numerator of which is the separate return tax
liability of such member and the denominator of which is the sum of the
separate return tax liability of all the members.
This basic allocation method is modified by the complementary "percentage"
method. Under the percentage method, in the event a loss or credit is generated
by a member, such member is compensated at the time the loss or credit is
absorbed by the other members of the Microsoft group. In our case, however,
7.5% of the benefit we generate and is absorbed by the other members of the
Microsoft group will be retained by Microsoft as a "fee" because we are being
paid for tax attributes prior to the time we could have used them to reduce our
tax liability.
Under the terms of this agreement, each party computes its tax liability as
if it were a separate corporation. In making this computation, Microsoft is
entitled to deduct on its separate tax return a portion of the cost
attributable to the Microsoft stock options that we assume. The parties take
this deduction into account under the normal tax accounting rules, so the
deduction generally occurs on the exercise of the options. The portion of this
cost that Microsoft deducts is equal to the excess of the fair market value of
the shares to be acquired on exercise of the option on the date we employ the
optionee over the exercise price of the assumed option. We determine this
amount on the date that we employ each optionee.
We will be compensated by Microsoft for any Expedia tax losses incurred
during the period from October 1, 1999 to March 17, 2000 which are utilized on
the Microsoft consolidated return. On March 18, 2000, Microsoft's investment in
Expedia fell below 80% ownership. As such, from March 18, 2000 onward, Expedia
must file a separate return. Any losses not utilized by Microsoft will be
carried forward by Expedia and can be used on our separate return to offset any
future taxable income.
Carriage and Cross Promotion Agreement
We entered into a five-year carriage and cross promotion agreement with
Microsoft under which we receive premium placement on the MSN.com website. The
travel channel on the MSN.com website is a customized version of our
Expedia.com website that includes both our logo and MSN's logo. This website is
the exclusive travel transaction service offered on Microsoft's websites,
except in international markets where we do not have a presence. We develop,
maintain and host this website. We will also receive premium placement on the
Hotmail email service and the WebTV platform.
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The MSN(R) advertising sales team sells and keeps all revenues from the sale
of up to 52.0 million banner advertisements during the first year of this
agreement and up to 57.2 million banner advertisements during the second year
of the agreement. Revenues resulting from these sales are received and retained
by Microsoft, in addition to the annual fees which we pay to Microsoft under
this agreement. MSN sells all banner advertisements at a price responsive to
market conditions.
Under the agreement, the parties agreed to restrictions regarding the sale
of banner advertising on MSN.com and the co-branded travel channel on MSN.com.
We will pay Microsoft a flat annual fee of $2.0 million in fiscal 2000 and
$2.2 million in fiscal 2001. In addition, we will pay incentive fees to the
extent that the number of completed airline transactions from the MSN.com
website exceeds our 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.
Shareholder Agreement
We entered into a shareholder agreement with Microsoft relating to the
transfer and registration of the common stock owned by Microsoft.
Microsoft has agreed not to dispose of the common stock which it owns for 12
months following our initial public offering in November 1999. Microsoft may,
however, submit a written request to us to be relieved from this lock-up period
prior to its expiration. Only a majority of our outside directors may grant
this request.
Microsoft and Expedia have agreed that, for a period of one year from the
date of our initial public offering, no employee of either company will solicit
for the purpose of hiring any employee of the other company. Microsoft also
agreed that, for a period of three years following our initial public offering,
it will not engage in our business, including acquiring more than 5% of a
competing business. The shareholder agreement generally defines our business as
any online service for reserving or purchasing travel services, such as airline
tickets, hotel rooms, rental cars, cruises and resort vacation packages,
accessed with an interactive electronic device enabling the user to view
information and respond with additional information.
Microsoft has the right to require us to do our best to register under the
Securities Act all shares of common stock owned by Microsoft. These demand
registration rights include the condition that we would not be required to
effect more than one demand registration in any 12-month period. Microsoft also
has the right to participate, or "piggy-back," in equity offerings initiated by
us, subject to reduction of the size of the offering on the advice of the
managing underwriter. Microsoft will pay all expenses relating to the demand
registration requests under the shareholder agreement, and we will pay all
expenses relating to the performance of, or compliance with, "piggy-back"
registrations under the shareholder agreement. In either case, however,
Microsoft will be responsible for underwriters' discounts and selling
commissions with respect to the registrable shares being sold and the fees and
expenses of its counsel in connection with this registration.
Our Relationship with Microsoft and Technology Crossover Ventures that will
Result from the Private Placement of Shares with TCV IV, L.P., TCV IV Strategic
Partners, L.P. and Microsoft in August 2000.
Upon closing of the private placement of our common stock with TCV IV, L.P.,
TCV IV Strategic Partners, L.P. (the "TCV Entities") and Microsoft (the
"Private Placement"), which is anticipated to be in August 2000, we will have
entered into a registration rights agreement whereby we must do our best to
register under the Securities Act before February 1, 2001 all shares of common
stock received by the TCV Entities and Microsoft in the transaction, including
shares issued upon the exercise of warrants issued in the Private Placement. As
part of this registration rights agreement, we will also agree to pay all
expenses, excluding the fees of Microsoft's or Technology Crossover Ventures'
legal counsel, relating to the registration process under this registration
rights agreement.
Jay Hoag is a founding general partner of Technology Crossover Ventures and,
as part of the private placement, will become a director of Expedia effective
upon the closing of the private placement.
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Conflict of Interest Policies
We continue to conduct business with Microsoft, which may give rise to
conflicts of interest and our Articles of Incorporation contain policies
relating to the resolution of these conflicts of interest. These policies
regulate and guide our business relationships generally with the following
parties:
. Microsoft
. Microsoft's customers or suppliers
. other corporations, partnerships or other business entities in which
one or more of our directors have a financial interest (a "related
entity")
. the directors and officers of a related entity
. one or more of our officers and directors
If we enter into a contract or transaction with the above parties, the
contract or transaction is not void or voidable solely because:
. the party with which we entered into the contract or transaction was
one of the above parties
. any of our directors or officers who could be considered a related
party were present at or participated in the meeting or their votes
were counted at the meeting of our board of directors which
authorized the contract or transaction
Further, if we enter into a contract or transaction with any of the above
parties, our Articles of Incorporation generally provide that any related party
and any of our directors and officers who could be considered a related party
shall have fully satisfied their fiduciary duties to us and our stockholders
and have been deemed to have acted in good faith and not for an improper
personal benefit as long as any of the following conditions are met:
. the material facts about the contract or transaction are disclosed
or are known to the Board of Directors or the committee, and the
contract or transaction is authorized by the affirmative vote of a
majority of the directors who are considered disinterested
. the material facts about the transaction are disclosed or are known
to our stockholders entitled to vote on the transaction, and the
transaction is approved in good faith by vote of the shareholders of
a majority of the then outstanding common stock not owned by
Microsoft or a related entity
. the transaction is completed according to standards which are
approved by the affirmative vote of a majority of the disinterested
directors or by vote of the stockholders of a majority of our then
outstanding common stock not owned by Microsoft or a related entity
. the transaction is fair to us when it is authorized by our board of
directors or our stockholders
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
as of May 31, 2000 of our outstanding common stock as of and as adjusted to
reflect the sale of the shares of common stock in this offering for:
. each person or group that we know owns beneficially 5% or more of our
common stock;
. each of our directors;
. each of our four most highly compensated executive officers; and
. all directors and executive officers as a group.
The term "beneficial ownership" includes shares over which the indicated
beneficial owner exercises voting and/or investment power. The rules also deem
common stock subject to options or warrants currently exercisable, or
exercisable within 60 days, to be outstanding for purposes of computing the
percentage ownership of the person holding the options or warrants, but they do
not deem such stock to be outstanding for purposes of computing the percentage
of ownership of any other person. The applicable percentage of ownership for
each shareholder is based on 44,489,000 shares of common stock outstanding as
of June 30, 2000, together with applicable options for that shareholder. In
August 2000, we anticipate completing the private placement of 3,613,551 shares
of common stock and warrants to purchase 722,711 shares of common stock. The
pro forma as adjusted number of shares and percentage are presented as if the
private placement had occurred on June 30, 2000. Except as otherwise indicated,
we believe the beneficial owners of the common stock listed below, based on
information furnished by them, have sole voting and investment power over the
number of shares listed opposite their names.
<TABLE>
<CAPTION>
Shares Beneficially Owned
----------------------------------------
Pro Forma
as Adjusted
Actual Before for Closing of
Offering Private Placement
------------------- --------------------
Percent Percent
Before After
Name of Beneficial Owner Number Offering Number Offering
------------------------ ---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Microsoft Corporation(1)............. 33,000,000 74.18% 33,722,710 69.93%
Entities Affiliated with Technology
Crossover Ventures(2)............... 503,250 1.12 4,116,802 8.45
Richard N. Barton(3)................. 515,400 1.15 505,269 1.06
Byron D. Bishop(4)................... 538,261 1.20 538,261 1.11
Erik C. Blachford(5)................. 67,113 * 67,113 *
Simon J. Breakwell(6)................ 40,074 * 40,074 *
Mark S. Britton...................... 4,000 * 4,000 *
Kathleen K. Dellplain................ 1,500 * 1,500 *
Seth E. Eisner(7).................... 114,588 * 114,588 *
Gregory S. Stanger(8)................ 176,577 * 176,577 *
Gregory B. Maffei(9)................. 586,798 1.30 576,798 1.21
Brad Chase(10)....................... 164,705 * 164,705 *
Gerald Grinstein..................... 2,605 * 2,605 *
Laurie McDonald Jonsson.............. 6,000 * 6,000 *
Richard D. Nanula.................... 6,400 * 6,400 *
All directors and officers as a group
(13 persons)(11).................... 2,224,021 4.77 2,203,890 4.43
</TABLE>
--------
(1) Microsoft's address is One Microsoft Way, Redmond, WA 98052.
(2) Actual number consists of 3,654 shares held by TCV III (GP), 17,358 shares
held by TCV III, L.P., 461,346 shares held by TCV III (Q), L.P., and
20,892 shares held by TCV III Strategic Partners, L.P. (collectively, the
"TCV III Funds"). Pro forma number includes 2,903,042 shares to be
purchased upon the closing of the Private Placement by TCV IV, L.P. and
108,251 shares to be purchased by TCV IV Strategic Partners, L.P. (the
"TCV IV Funds"). The Pro forma numbers also include warrants to purchase
an aggregate of 602,259 shares of Common Stock to be issued to the TCV IV
Funds upon the closing of the Private Placement. Mr. Hoag, who will be
elected as a director of the Company upon the closing of the Private
Placement, is a Managing Member of Technology Crossover Management III,
L.L.C. and Technology Crossover Management IV L.L.C. which are the General
Partners of the TCV III Funds and TCV IV Funds, respectively. Mr. Hoag
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein. The address for each of these persons and
entities is c/o Technology Crossover Ventures, 575 High Street, Suite 400,
Palo Alto, California 94301.
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<PAGE>
(3) Includes 503,269 shares that Mr. Barton has the right to purchase under
options that are currently exercisable or will be exercisable within 60
days of the date of this prospectus.
(4) Includes 519,011 shares that Mr. Bishop has the right to purchase under
options that are currently exercisable or will be exercisable within 60
days of the date of this prospectus.
(5) Includes 62,213 shares that Mr. Blachford has the right to purchase under
options that are currently exercisable or will be exercisable within 60
days of the date of this prospectus.
(6) Includes 35,074 shares that Mr. Breakwell has the right to purchase under
options that are currently exercisable or will be exercisable within 60
days of the date of this prospectus.
(7) Includes 109,888 shares that Mr. Eisner has the right to purchase under
options that are currently exercisable or will be exercisable within 60
days of the date of this prospectus.
(8) Includes 174,577 shares that Mr. Stanger has the right to purchase under
options that are currently exercisable or will be exercisable within 60
days of the date of this prospectus.
(9) Includes 576,798 shares that Mr. Maffei has the right to purchase under
options that are currently exercisable or will be exercisable within 60
days of the date of this prospectus.
(10) Includes 158,705 shares that Mr. Chase has the right to purchase under
options that are currently exercisable or will be exercisable within 60
days of the date of this prospectus.
(11) The shares of Expedia common stock held by this group include an
aggregate of 2,140,890 shares that these persons have the right to
purchase under options that are currently exercisable or will be
exercisable within 60 days of the date of this prospectus.
* Less than one percent of the outstanding shares of common stock.
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<PAGE>
SELLING SHAREHOLDERS
The selling shareholders listed in the table are offering shares of common
stock as described in the "Plan of Distribution" below. The following table
sets forth the number of shares and the percentage of the outstanding shares
beneficially owned by each selling shareholder before and after this offering.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to the Offering Number of Owned After the Offering
------------------------------- Shares -----------------------------
Name Number Percent(1) Being Offered Number Percent(1)
---- --------------- --------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Tom A. Alberg........... 9,598 * 9,598 0 *
Chris Z. Andrews........ 1,048 * 1,048 0 *
Angel Investors LP(4)... 8,555 * 8,555 0 *
Angel Investors (Q)
LP(4).................. 6,929 * 6,929 0 *
Baxstresser Family
Trust(4)............... 4,568 * 4,568 0 *
Chris Bednarz(3)........ 233 * 233 0 *
Carol Breitling(3)...... 2,208 * 1,167 1,041 *
Fred Breitling(3)....... 2,208 * 1,167 1,041 *
Fred & Carol
Breitling(3)........... 1,048 * 1,048 0 *
Mike Breitling(3)....... 1,167 * 1,167 0 *
Tom Breitling........... 838,738 1.9% 50,000 788,738 1.8%
Lisa Brummel(4)......... 13,764 * 13,764 0 *
Cedar Grove Investments
LLC(4)................. 52,691 * 52,691 0 *
Louis Cohen(3).......... 2,098 * 2,098 0 *
Laurent
Coppieters(4)(6)....... 26,293 * 26,293 0 *
Creafund SCRL........... 85,040 * 85,040 0 *
Alfred L. Davis......... 524 * 524 0 *
William W. Ericson(4)... 2,276 * 2,276 0 *
Ed Geifer(3)............ 441 * 233 208 *
Gibbons Living
Trust(3)............... 3,504 * 3,504 0 *
The Gorman Trust(3)..... 3,504 * 3,504 0 *
Paul Goodrich........... 6,169 * 6,169 0 *
Greg Gottsman........... 2,742 * 2,742 0 *
Gerald Grinstein(5)..... 6,169 * 6,169 0 *
David Hehman(4)(7)...... 34,169 * 34,169 0 *
Raymond & Catherine
Hehman(4).............. 2,065 * 2,065 0 *
The Homansky Trust(3)... 2,098 * 2,098 0 *
Hunza Ventures S.A.(4).. 89,527 * 89,527 0 *
Gregory Hutchins(3)..... 875 * 875 0 *
ICV Invest S.C.S. (4)... 28,420 * 28,420 0 *
Peter
Ingelbrecht(4)(8)...... 4,593 * 4,593 0 *
Paul Jennings/Public
Comm. Service.......... 14,018 * 14,018 0 *
Adam & Efthia
Koutelis(3)............ 1,048 * 1,048 0 *
Steven Krause(3)........ 3,112 * 3,112 0 *
Carol Lorenger(4)....... 1,459 * 774 685 *
Madrona Managing
Director Fund, LLC(4).. 16,139 * 16,139 0 *
Madrona Venture Fund I-
B, LP(4)............... 8,541 * 8,541 0 *
Madrona Venture Fund I-
A, LP(4)............... 110,811 * 110,811 0 *
Jeff Marquis(3)......... 81,690 * 81,690 0 *
Andrew Quartner(3)...... 8,761 * 8,761 0 *
Terry Raab(3)........... 1,752 * 1,752 0 *
Robert Ratliffe(4)...... 3,441 * 3,441 0 *
Redstone Capital(3)..... 17,523 * 17,523 0 *
John W. Robertson(4).... 339 * 339 0 *
Erick Rodriguez(3)...... 11,670 * 11,670 0 *
William Ruckelshaus..... 6,169 * 6,169 0 *
Sporting Ventures,
LLC(4)(9).............. 7,742 * 7,742 0 *
Robert Stone(3)......... 1,048 * 1,048 0 *
Christine Swenden(4).... 21,808 * 21,808 0 *
David Talla(3).......... 8,761 * 8,761 0 *
Martin & Colleen Taucher
JT TEN(4).............. 16,517 * 16,517 0 *
Gary Teplis/VII
Investors, LLC......... 1,048 * 1,048 0 *
Daniel Terheggen(3)..... 5,257 * 5,257 0 *
Curtis Thompson(4)...... 387 * 387 0 *
Rick Thompson(4)........ 34,411 * 34,411 0 *
Chris E. Toby(4)........ 51,328 * 6,882 44,446 *
Larry Trout(4).......... 3,650 * 1,936 1,714 *
Alan Whittern(4)........ 6,972 * 3,484 3,488 *
Steve & Sandra Young JT
TEN(4)................. 8,818 * 8,818 0 *
Cathy Ziegler(4)........ 10,290 * 5,458 4,832 *
Mary Zimmer/DRW
Investors, LLC......... 9,678 * 9,678 0 *
</TABLE>
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<PAGE>
--------
(1) Based on 44,489,000 shares outstanding as of June 30, 2000.
(2) The ownership percentages are calculated based on the assumption that all
shares issuable to the Selling Shareholder upon the exercise of options or
warrants by such shareholder (but only such shareholder) have been issued.
(3) The shares being offered for sale consist of shares of common stock issued
to such shareholder in conjunction with the March 2000 acquisition by
Expedia of Travelscape.
(4) The shares being offered for sale consist of shares of common stock issued
to such shareholder in conjunction with the March 2000 acquisition by
Expedia of VacationSpot.
(5) Director, Expedia, Inc.
(6) Consulting agreement with VacationSpot.com, Inc.; Service agreement with
VacationSpot S.A.
(7) Corporate Development, Expedia, Inc.
(8) General Manager, VacationSpot S.A. (Belgium).
(9) Fund Manager is David Hehman, Corporate Development, Expedia, Inc.
* Less than one percent of the outstanding shares of common stock.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 120,000,000 shares of common stock,
$0.01 par value and 10,000,000 shares of preferred stock, $0.01 par value.
Common Stock
Holders of our common stock have no cumulative voting rights and no
preemptive or conversion rights. There are no redemption or sinking fund
provisions available to the common stock. All outstanding shares of common
stock are fully-paid and non-assessable. Taking into consideration preferences
that may be applicable to any then-outstanding preferred stock, holders of
common stock will be entitled to receive ratably any dividends that may be
declared by our Board of Directors out of funds legally available for these
dividends. In the event of a liquidation, dissolution or winding up of Expedia,
holders of common stock will be entitled to share ratably in all assets
remaining after payment of liabilities and any liquidation preference to any
then-outstanding holders of preferred stock.
There are 44,489,000 shares of common stock outstanding as of June 30, 2000.
Preferred Stock
Our Articles of Incorporation authorize us to issue preferred stock in one
or more classes or series or upon authorization by our Board of Directors. Our
Board of Directors, without further approval of the shareholders, is authorized
to fix the dividend rights and terms, conversion rights, voting rights,
redemption rights and terms, liquidation preferences and any other rights,
preferences, privileges and restrictions applicable to each class or series of
preferred stock. The issuance of preferred stock, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power of the holders of our common stock and could
make it more difficult for a third party to gain control of us, discourage bids
for our common stock at a premium, or otherwise adversely affect the market
price of our common stock.
We currently have no plans to issue any preferred stock.
Business Combination Statute
The Washington Business Act, Section 23B.19 of the Revised Code of
Washington, prohibits a "target corporation," with some exceptions, from
engaging in "significant business transactions," such as a merger or sale of
assets with an "acquiring person" who acquires more than 10% of the voting
securities of the target corporation for a period of five years after the
acquisition of the voting securities, unless the transaction is approved by the
majority of the members of the target corporation's board of directors prior to
the date of the transaction, or unless the aggregate amount of the cash and the
market value of non-cash consideration received by holders of outstanding
shares of any class or series of stock of the target corporation is equal to
specified minimum amounts.
Warrants and Other Rights
In August 2000, we anticipate completing the $60 million private placement
of 3,613,551 shares of common stock and warrants to purchase 722,711 shares of
common stock with an exercise price of $16.60 per share.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
Listing
Our common stock is traded on the Nasdaq National Market under the trading
symbol "EXPE."
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<PAGE>
PLAN OF DISTRIBUTION
This prospectus relates to a total of 900,000 shares of common stock
currently outstanding and held by the selling shareholders. These shares may be
sold from time to time between August 1, 2000 and August 13, 2000 by the
selling shareholders. As used in this prospectus, "selling shareholders"
include transferees, donees, pledgees, legatees, heirs or legal representatives
authorized to sell shares received from the named selling shareholder after the
date of this prospectus.
The selling stockholders have advised us that they have not entered into any
agreements, understandings, or arrangements with any underwriters or broker-
dealers regarding the sale of their securities, nor is there an underwriter or
coordinating broker acting in connection with the proposed sale of shares by
the selling stockholders. At the time a particular offering of common stock is
made and to the extent required, the aggregate number of shares being offered,
the name or names of the selling stockholders, and the terms of the offering,
including the name of names of any underwriters, broker-dealers or agents, any
discounts, concessions or commissions and other terms constituting compensation
from the selling stockholders, and any discounts, concessions or commissions
allowed or reallowed or paid to broker-dealers, will be set forth in an
accompanying prospectus supplement.
Sales of the common stock offered hereby may be effected by or for the
account of the selling stockholders from time to time in transactions, which
may include block transactions, in the over-the-counter market, in negotiated
transactions, through a combination of such methods of sale, or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to the prevailing market price, or at negotiated
prices. The selling stockholders may effect these transactions by selling the
common stock offered hereby directly to purchasers, through broker-dealers
acting as agents for the selling stockholders, or to broker-dealers that may
purchase such shares as principals and thereafter sell the shares from time to
time in transactions, which may include block transactions, in the over-the-
counter market, in negotiated transactions, through a combination of such
methods of sales or otherwise. In effecting sales, broker-dealers engaged by
selling stockholders may arrange for other broker-dealers to participate. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions, or commissions from the selling stockholders and/or the purchasers
of the common stock offered hereby for whom such broker-dealers may act as
agents or to whom they may sell as principals, or both. As to a particular
broker-dealer, such compensation might be in excess of customary commissions.
The selling stockholders may resell the shares of common stock being
registered for resale hereby
. in transactions that are exempt from registration under the Securities
Act, or
. as long as the registration statement there is a qualification in effect
under, or an available exemption from, any applicable state securities
law with respect to the resale of such shares.
There is no assurance that any selling shareholder will sell any common
stock offered hereby, and any selling shareholder may transfer, devise or gift
the common stock by other means not described in this prospectus. For example,
in addition to selling pursuant to the registration statements of which this
prospectus is a part or to which it relates, the selling stockholders also may
sell under Rule 144.
The selling stockholders and any broker-dealers, agents, or underwriters
that participate with the selling stockholders in the distribution of common
stock offered hereby may be deemed to be "underwriters" within the meaning of
the Securities Act. Accordingly, the selling stockholders will be subject to
the prospectus delivery requirements of the Securities Act. Any commissions
paid or any discounts or concessions allowed to any such persons, and any
profits received on the resale of the common stock offered hereby and purchased
by them, may be deemed to be underwriting commissions or discounts under the
Securities Act. We will not pay any compensation to any NASD member in
connection with this offering. Brokerage commissions, if any, attributable to
the sale of the shares of common stock offered hereby will be borne by the
selling stockholders.
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<PAGE>
We will not receive any proceeds from the sale of any shares of common stock
by the selling stockholders. We have agreed to bear all expenses, other than
selling commissions, in connection with the registration and sale of the common
stock being offered by the selling stockholders. We have agreed to indemnify
certain of the selling stockholders against certain liabilities under the
Securities Act. Each selling shareholder may indemnify any broker-dealer that
participates in transactions involving sales of the shares against certain
liabilities, including liabilities arising under the Securities Act.
To comply with the securities laws of certain jurisdictions, if applicable,
the shares of common stock offered hereby will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the common stock offered hereby may not be sold
unless they have been registered or qualified for sale in the applicable state
or an exemption from the registration or qualifications requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the common stock offered pursuant to this
prospectus may be limited in its ability to engage in market activities with
respect to the common stock. Without limiting the foregoing, each selling
shareholder will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including Regulation M. Those rules and
regulations may limit the timing of purchases and sales of any of the common
stock offered by the selling stockholders pursuant to this prospectus, which
may affect the marketability of the common stock offered hereby.
The selling stockholders also may pledge the shares of common stock being
registered for resale hereby to NASD broker/dealers pursuant to the margin
provisions of each selling shareholder's customer agreements with such
pledgees. Upon default by a selling shareholder, the pledgee may offer and sell
shares of common stock from time to time as described above.
VALIDITY OF THE COMMON STOCK
The validity of the common stock offered hereby will be passed upon for us
by our counsel, Preston Gates & Ellis LLP, Seattle, Washington.
EXPERTS
The financial statements of Expedia as of June 30, 1999 and 1998 and for the
three-year period ended June 30, 1999 included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of VacationSpot.com, Inc. as of June 30, 1999 and
1998 and for the year ended June 30, 1999 and the period from December 2, 1997
(inception) through June 30, 1998 included in this prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The combined and consolidated financial statements of Las Vegas Reservation
Systems, Inc., Travelscape.com, Inc. (a Nevada Corporation), Professional
Travel Services, Inc. and Travelscape.com, Inc. (a Delaware corporation) as of
December 31, 1998 and 1999, and for each of the years in the three-year period
ended December 31, 1999, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
62
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement. For further information with respect to
Expedia and the common stock offered in this offering, we refer you to the
registration statement and to the attached exhibits and schedules. Statements
made in this prospectus concerning the content of any document referred to in
this prospectus are not necessarily complete. With respect to each such
document filed as an exhibit to the registration statement, we refer you to the
exhibit for a more complete description of the matter involved.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, NY 10048, and the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661. You may obtain copies of all or
any part of our registration statement from the Securities and Exchange
Commission upon payment of prescribed fees. You may also inspect reports, proxy
and information statements and other information regarding registrants that
file electronically with the Securities and Exchange Commission without charge
at a website maintained by the Securities and Exchange Commission at
www.sec.gov.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Expedia, Inc.
Independent Auditors' Report............................................... F-2
Statements of Operations................................................... F-3
Balance Sheets............................................................. F-4
Statements of Changes in Stockholders' Equity (Owner's Net Deficit)........ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
Travelscape.com, Inc.
Report of Independent Auditors............................................. F-19
Combined and Consolidated Balance Sheets................................... F-20
Combined and Consolidated Statements of Operations......................... F-21
Combined and Consolidated Statements of Stockholders' Deficiency........... F-22
Combined and Consolidated Statements of Cash Flows......................... F-23
Notes to Combined and Consolidated Financial Statements.................... F-24
VacationSpot.com, Inc.
Independent Auditors' Report............................................... F-34
Balance Sheets............................................................. F-35
Statements of Operations................................................... F-36
Statements of Stockholders' Equity......................................... F-37
Statements of Cash Flows................................................... F-38
Notes to Financial Statements.............................................. F-39
VacationSpot.com, Inc.
Condensed Consolidated Balance Sheets...................................... F-46
Condensed Consolidated Statements of Operations............................ F-47
Condensed Consolidated Statements of Stockholders' Equity.................. F-48
Condensed Consolidated Statements of Cash Flows............................ F-49
Notes to Condensed Consolidated Financial Statements....................... F-50
Expedia, Inc.
Unaudited Pro Forma Consolidated Statements of Operations.................. F-51
Notes to Unaudited Pro forma Consolidated Statements of Operations......... F-52
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Microsoft Corporation
Redmond, Washington
We have audited the accompanying balance sheets of Expedia, an operating
unit of Microsoft Corporation, as of June 30, 1999 and 1998, and the related
statements of operations, stockholders' equity (owner's net deficit), and cash
flows for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of Expedia's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Expedia as of June 30, 1999 and 1998, and
the results of its operations and its cash flows for the three-year period
ended June 30, 1999, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared from the records
maintained by Microsoft Corporation and may not necessarily be indicative of
the conditions that would have existed or the results of operations if Expedia
had been operated as an unaffiliated entity. Portions of certain expenses
represent allocations made from and applicable to Microsoft Corporation as a
whole.
/s/ Deloitte & Touche LLP
Seattle, Washington
October 26, 1999
(July 6, 2000 as to Note 7)
F-2
<PAGE>
EXPEDIA
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
Years ended June 30, March 31,
---------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net revenues................. $ 2,742 $ 13,827 $ 38,699 $ 25,127 $ 64,956
Cost of revenues............. 3,279 9,692 15,950 11,292 32,896
-------- -------- -------- -------- --------
Gross profit (loss).......... (537) 4,135 22,749 13,835 32,060
Operating expenses:
Product development........ 16,211 18,506 21,180 15,314 14,610
Sales and marketing........ 8,820 10,823 14,888 7,695 38,672
General and
administrative............ 3,353 4,284 6,283 4,189 6,892
Amortization of goodwill
and intangibles........... -- -- -- -- 2,332
Recognition of stock-based
compensation.............. -- -- -- -- 46,911
-------- -------- -------- -------- --------
Total operating expenses..... 28,384 33,613 42,351 27,198 109,417
-------- -------- -------- -------- --------
Loss from operations......... (28,921) (29,478) (19,602) (13,363) (77,357)
Interest income, net......... -- -- -- -- 1,457
-------- -------- -------- -------- --------
Loss before provision for
income taxes................ (28,921) (29,478) (19,602) (13,363) (75,900)
Provision for income taxes... -- -- -- -- --
-------- -------- -------- -------- --------
Net loss..................... $(28,921) $(29,478) $(19,602) $(13,363) $(75,900)
======== ======== ======== ======== ========
Pro forma basic and diluted
net loss per common share... $ (0.59) $ (2.09)
======== ========
Weighted average shares used
to compute pro forma basic
and diluted net loss per
common share................ 33,000 36,335
======== ========
</TABLE>
See accompanying notes
F-3
<PAGE>
EXPEDIA
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30
------------------ March 31,
1998 1999 2000
-------- -------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................... $ -- $ -- $ 72,825
Accounts receivable......................... 7,059 4,970 14,661
Due from Microsoft.......................... -- -- 390
Prepaid expenses and other current assets... 360 -- 4,541
-------- -------- --------
Total current assets...................... 7,419 4,970 92,417
Property and equipment, net................... 514 386 7,155
Investments and deposits...................... 400 400 7,040
Intangible assets, net........................ -- -- 99,482
Goodwill, net................................. -- -- 95,088
-------- -------- --------
Total assets.............................. $ 8,333 $ 5,756 $301,182
======== ======== ========
LIABILITIES
-----------
Current liabilities:
Accounts payable............................ $ 462 $ 1,216 $ 22,041
Accrued expenses............................ -- -- 14,230
Current portion of notes payables........... -- -- 35
Current portion of capital lease
obligations................................ -- -- 285
Current portion of unearned revenue......... 2,143 2,364 24,210
-------- -------- --------
Total current liabilities................. 2,605 3,580 60,801
Notes payables, net of current portion........ 1,393
Capital lease obligations, net of current
portion...................................... 297
Unearned revenue, net of current portion...... 5,820 3,851 3,336
-------- -------- --------
Total liabilities......................... 8,425 7,431 65,827
-------- -------- --------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY (OWNER'S NET DEFICIT)
------------------------------------------
Net contribution from Microsoft............... 67,070 85,089 --
Common stock, $.01 par value, 120,000,000
shares authorized, 44,331,000 issued and
outstanding as of March 31, 2000............. -- -- 443
Preferred stock, $.01 par value, 10,000,000
shares authorized, none outstanding as of
March 31, 2000............................... -- -- --
Additional paid-in-capital.................... -- -- 369,392
Unearned stock-based compensation............. -- -- (63,592)
Accumulated deficit........................... (67,162) (86,764) --
Retained deficit.............................. -- -- (70,950)
Accumulated other comprehensive income:
Cumulative currency translation adjustment.. -- -- 62
-------- -------- --------
Total stockholders' equity (owner's net
deficit)................................. (92) (1,675) 235,355
-------- -------- --------
Total liabilities and stockholder's equity
(owner's net deficit).................... $ 8,333 $ 5,756 $301,182
======== ======== ========
</TABLE>
See accompanying notes
F-4
<PAGE>
EXPEDIA
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (OWNER'S NET DEFICIT)
<TABLE>
<CAPTION>
Net
Contribution Common Stock Additional Unearned Currency
from Accumulated ------------- Paid-in Stock-based Retained Translation
Microsoft Deficit Shares Amount Capital Compensation Deficit Adjustment Total
------------ ----------- ------ ------ ---------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996... $ 9,364 $(8,763) $ 601
Net loss................ -- (28,921) (28,921)
Net contribution from
owner................... 27,599 -- 27,599
-------- ------- ------ ---- -------- --------- -------- --- --------
Balance, June 30, 1997.. 36,963 (37,684) (721)
Net loss................ -- (29,478) (29,478)
Net contribution from
owner................... 30,107 -- 30,107
-------- ------- ------ ---- -------- --------- -------- --- --------
Balance, June 30, 1998.. 67,070 (67,162) (92)
Net loss................ -- (19,602) (19,602)
Net contribution from
owner................... 18,019 -- 18,019
-------- ------- ------ ---- -------- --------- -------- --- --------
Balance, June 30, 1999.. 85,089 (86,764) (1,675)
Net contribution from
Microsoft (unaudited)... 6,252 -- -- -- -- -- -- -- 6,252
Conversion of
Microsoft's net
investment and
additional contributed
assets to common stock
and paid-in capital
(unaudited)............. (91,341) 91,714 33,000 $330 $ 3,376 -- -- -- 4,079
Proceeds from issuance
of common stock, net of
issuance costs of $7,074
(unaudited)............. -- -- 5,980 60 76,586 -- -- -- 76,646
Capitalization of
unearned stock-based
compensation
(unaudited)............. -- -- -- -- 111,630 $(111,630) -- -- --
Proceeds from exercise
of options (unaudited).. -- -- 418 4 983 -- -- -- 987
Recognition of stock-
based compensation
(unaudited)............. -- -- -- -- -- 46,911 -- -- 46,911
Net loss (unaudited).... -- (4,950) -- -- -- -- (70,950) -- (75,900)
Acquisition of
Travelscape, including
paid acquisition costs
(unaudited)............. -- -- 2,654 26 96,305 -- -- -- 96,331
Acquisition of
VacationSpot
(unaudited)............. -- -- 2,279 23 81,639 -- -- -- 81,662
Forfeiture of stock-
based compensation
(unaudited)............. -- -- -- -- (1,127) 1,127 -- -- --
Other comprehensive
income:
Currency translation
adjustment
(unaudited)........... -- -- -- -- -- -- -- $62 62
-------- ------- ------ ---- -------- --------- -------- --- --------
Balance, March 31, 2000
(unaudited)............. $ -- $ -- 44,331 $443 $369,392 $ (63,592) $(70,950) $62 $235,355
======== ======= ====== ==== ======== ========= ======== === ========
</TABLE>
See accompanying notes
F-5
<PAGE>
EXPEDIA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
Years ended June 30, March 31,
---------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss................... $(28,921) $(29,478) $(19,602) $(13,363) $(75,900)
Adjustments to reconcile
net loss to net cash used
by operating activities:
Depreciation............. 487 750 778 669 1,246
Recognition of stock-
based compensation...... -- -- -- -- 46,911
Amortization of goodwill
and intangibles......... -- -- -- -- 2,332
Cash provided (used) by
changes in operating
assets and liabilities,
net of effects of
purchases of
Travelscape.com and
VacationSpot.com:
Accounts receivable
(increase) decrease..... (1,012) (6,047) 2,089 1,349 (8,262)
Due from Microsoft
increase................ -- -- (390)
Prepaid expenses and
other current assets
(increase) decrease..... -- (360) 360 360 (2,662)
Accounts payable and
accrued expenses
increase................ 17 445 754 433 19,659
Unearned revenue increase
(decrease).............. 2,349 5,214 (1,748) (1,550) (987)
-------- -------- -------- -------- --------
Net cash used by
operating activities.... (27,080) (29,476) (17,369) (12,102) (18,053)
-------- -------- -------- -------- --------
Investing activities:
Additions to property and
equipment................. (519) (631) (650) (586) (4,319)
Cash acquired from
acquisition of
Travelscape.com, net of
acquisition costs........ -- -- -- -- 11,137
Cash acquired from
acquisition of
VacationSpot.com, net of
acquisition costs......... -- -- -- -- 7,200
Funding of long-term
deposits.................. -- -- -- -- (4,137)
-------- -------- -------- -------- --------
Net cash provided/(used)
by investing
activities.............. (519) (631) (650) (586) 9,881
-------- -------- -------- -------- --------
Financing activities:
Repayment of notes
payable................... -- -- -- -- (7,021)
Repayment of capital lease
obligations............... -- -- -- -- (8)
Net proceeds from issuance
of stock.................. -- -- -- -- 76,646
Net proceeds from exercise
of options................ -- -- -- -- 987
Net contribution from
Microsoft................. 27,599 30,107 18,019 12,688 10,331
-------- -------- -------- -------- --------
Net cash provided by
financing activities.... 27,599 30,107 18,019 12,688 80,935
-------- -------- -------- -------- --------
Effect of foreign exchange
rates changes on cash and
cash equivalents............ -- -- -- -- 62
-------- -------- -------- -------- --------
Net increase in cash and cash
equivalents................. -- -- -- -- 72,825
Cash and cash equivalents at
beginning of period......... -- -- -- -- --
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period............... $ -- $ -- $ -- $ -- $ 72,825
======== ======== ======== ======== ========
Supplemental disclosures to
cash flow statements:
Cash paid for interest..... $ -- $ -- $ -- $ -- $ 70
Unearned stock-based
compensation.............. -- -- -- -- 110,503
Acquisition of
Travelscape.com........... -- -- -- -- 95,566
Acquisition of
VacationSpot.com.......... -- -- -- -- 81,662
Equity investment received
for advertising services -- 400 -- -- --
</TABLE>
See accompanying notes
F-6
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS
Note 1: Description of Business and Summary of Significant Accounting Policies
Description of business: Expedia (the Company), an operating unit of
Microsoft Corporation (Microsoft), provides Internet-based travel-related
services to retail consumers and corporate clients. The Company is a provider
of branded online travel services for leisure and small business travelers. The
Company operates websites, including Expedia.com and international versions of
Expedia.com, and licenses components of its technology to provide the platform
for travel websites operated by others. The Company derives its revenues from
commissions from transactions on its websites, sales of advertisements on its
websites and licensing fees. Services provided include the reservation and
purchase of airline tickets, hotel rooms, and car rentals as well as vacation
planning and destination information. In addition, the Company receives fees
for website advertising and for the licensing of components of its technology
and editorial content to selected airlines and corporate travel agencies as a
platform for their websites. In October 1999, Microsoft contributed the assets,
liabilities and operations of the Company to Expedia, Inc.
On August 23, 1999, the Company was incorporated in the state of Washington.
The authorized share capital of the Company is 120,000,000 shares of common
stock and 10,000,000 shares of preferred stock.
Basis of presentation: The financial statements present the results of
operations, balance sheets, stockholders' equity (owner's net deficit) and cash
flows applicable to the operations of the Company. The financial statements of
the Company are derived from the historic books and records of Microsoft.
The Company does not maintain corporate treasury, legal, tax, purchasing,
and other similar corporate support functions. For purposes of preparing the
accompanying financial statements, certain Microsoft corporate costs were
allocated to the Company using the allocation method described in Note 3.
Estimates and assumptions: Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, and expenses. Actual results could differ
from those estimates.
Cash and cash equivalents: The Company considers all highly liquid
instruments purchased with original maturities of 90 days or less to be cash
equivalents.
Property and equipment: Property and equipment is stated at cost. Property
and equipment is depreciated using the straight-line method over the estimated
useful life of the assets, ranging from one to 37 years.
Investment: The Company owns an interest of under 20% of the outstanding
equity in a related party and accounts for this investment under the cost
method.
Certain risks and concentrations: The Company is potentially subject to a
concentration of credit risk from its accounts receivable. The Company
maintains allowances for potential credit losses.
Commissions and related revenues accounted for 80%, 71%, and 69% of total
net revenues for fiscal 1997, 1998, and 1999, respectively. The Company relies
on unrelated service entities to accumulate, process, and remit these revenues.
Discontinuance of these services could result in disruption to the Company's
business and accordingly may have a material adverse effect on the Company's
results of operations, financial position, and cash flows.
The Company's business is subject to other risks and uncertainties common to
growing technology-based companies, including rapid technology change, growth
and commercial acceptance of the Internet, dependence
F-7
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
on third-party technology, new service introductions and other activities of
competitors, dependence on key personnel, international expansion, and limited
operating history.
Revenue recognition: Transaction revenues consist of commissions and related
revenues for air travel, hotel rooms, and car rentals, net of allowances for
cancellations. Revenues from air travel are recognized when the reservation is
made and secured by a credit card. Commission revenues from hotel and car
rental reservations are recognized either on receipt of the commission payment
or on notification of entitlement by a third party.
Additional revenues are derived from sales of advertising on the Company's
websites. Revenues from sales under per-transaction agreements are recognized
upon display of each individual advertisement. Revenues from sales under flat
fee agreements are recognized ratably over the period in which the advertising
is displayed, provided that no significant obligations for the Company remain,
collection of the resulting receivable is probable and evidence of an
arrangement exists.
Software license revenue recognition policies are in compliance with
American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification
of SOP 97-2, With Respect to Certain Transactions. Revenues for significant
contracts have been recognized ratably over the license term.
Product development: Product development costs consist primarily of payroll
and related expenses for website and software development and are expensed as
incurred.
Capitalized software costs: Financial accounting standards require the
capitalization of certain software product costs after technological
feasibility of the software is established. To date, the period between
achieving technological feasibility and the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
Advertising costs: The Company expenses advertising costs as incurred.
Income taxes: As of June 30, 1999, the Company was not a separate taxable
entity for federal, state, or local income tax purposes and its operations are
included in the consolidated Microsoft returns. The Company's tax provision has
been prepared in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes on a separate return basis.
Accordingly, no tax benefit for the Company's net operating losses has been
recognized.
Deferred taxes result from differences between the financial and tax bases
of the Company's assets and liabilities and are adjusted for changes in tax
rates and tax laws when changes are enacted. Valuation allowances are recorded
to reduce deferred tax assets when it is more likely than not that a tax
benefit will not be realized by the Company.
Stock-based compensation: The Company accounts for stock-based compensation
arrangements in accordance with provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and complies with the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
Earnings per share: The Company is not a separate legal entity and has no
historical capital structure. Therefore, historical earnings per share have not
been presented in the financial statements.
F-8
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro-forma net loss per share (unaudited): In October 1999, the net
contribution from owner was converted into an aggregate of 33 million shares of
$.01 par value common stock.
Pro forma net loss per share has been computed in accordance with SFAS No.
128, Earnings per Share, and SEC Staff Accounting Bulletin (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. Common equivalent shares
related to stock options are excluded from the calculation as their effect is
antidilutive. Accordingly, basic and diluted loss per share are equivalent.
Pro forma basic and diluted net loss per share is as follows (in thousands,
except per share amount):
<TABLE>
<CAPTION>
Year ended Nine months ended
June 30, 1999 March 31, 2000
------------- -----------------
(unaudited)
<S> <C> <C>
Net loss..................................... $(19,602) $(75,900)
Weighted average shares used to compute pro
forma basic and diluted net loss per common
share....................................... 33,000 36,335
-------- --------
Pro forma basic and diluted net loss per
common share.............................. $ (0.59) $ (2.09)
======== ========
</TABLE>
Segment information: The Company has organized and managed its operations in
a single operating segment providing travel-related services, advertising, and
licenses for related software products. Revenues from customers outside of the
United States were less than 10% of net revenues for all periods presented in
the accompanying statements of operations.
Unaudited interim financial information: The interim financial information
as of March 31, 2000, and for the nine-month periods ended March 31, 1999, and
2000 are unaudited. The unaudited information, in management's opinion was
prepared by the Company in a manner consistent with the audited financial
statements and pursuant to the rules and requirements of the Securities and
Exchange Commission and reflect all adjustments that are of a normal recurring
nature and that are necessary to present fairly the results for the periods
presented. The results of operations for the nine-month period ended March 31,
2000 are not necessarily indicative of the results to be expected for the
entire year.
Both Travelscape.com and VacationSpot.com were acquired on March 17, 2000.
The financial statements include their results from March 18, 2000 through
period-end. Significant intercompany transactions and balances have been
eliminated.
Recent accounting pronouncements: In March 1998, the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1,
Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 will be effective for the Company's fiscal year ending June 30,
2000. SOP 98-1 provides guidance on accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The Company will begin capitalizing these
costs in the fiscal year ending June 30, 2000.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 will be effective for the Company's fiscal year ending
June 30, 2000. SOP 98-5 provides guidance on the financial reporting of start-
up costs and organization costs. It requires the costs of start-up activities
and organization costs to be expensed as incurred. Subsequent to June 30, 1999,
the Company was incorporated and related organization costs will be expensed as
incurred.
F-9
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2: Property and Equipment, net
A summary of property and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
---------------- March 31,
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Land.......................................... $ -- $ -- $ 416
Building...................................... -- -- 1,285
Furniture and equipment....................... -- -- 857
Computer equipment............................ 1,771 3,045 3,072
Leasehold improvements........................ -- -- 2,511
------- ------- ------
1,771 3,045 8,141
Accumulated depreciation and amortization..... (1,257) (2,659) (986)
------- ------- ------
Property and equipment, net................. $ 514 $ 386 $7,155
======= ======= ======
</TABLE>
Fully depreciated computer equipment of $624,000 was transferred into the
Company from Microsoft in the year ended June 30, 1999.
Note 3: Related Party Transactions
Equity investment in related party: In March 1998, the Company received an
equity interest in VacationSpot.com, Inc. in exchange for a link on the
Company's website to the VacationSpot.com, Inc.'s website to be provided over a
two-year period. An executive officer of the Company is a member of the Board
of Directors of VacationSpot.com, Inc. The fair value of the advertising
services provided to the investee was estimated at $400,000.
Allocated costs: As discussed in Note 1, 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.
The following summarizes the corporate costs allocated to the Company (in
thousands):
<TABLE>
<CAPTION>
Years ended June 30, Three months
----------------------- ended September 30,
1997 1998 1999 1999
------- ------- ------- -------------------
(unaudited)
<S> <C> <C> <C> <C>
Cost of revenues................ $ 1,754 $ 2,912 $ 2,147 $ 924
Product development............. 8,367 4,250 6,727 557
Sales and marketing............. 1,591 1,622 998 1,497
General and administrative...... 2,921 3,633 5,754 2,086
------- ------- ------- ------
$14,633 $12,417 $15,626 $5,064
======= ======= ======= ======
</TABLE>
Subsequent to June 30, 1999, the Company entered into a services agreement
with Microsoft under which it will pay Microsoft directly for many of the
services that Microsoft formerly provided on an allocated basis. See Note 6.
F-10
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following summarizes the amounts under the services agreement (in
thousands):
<TABLE>
<CAPTION>
Nine months ended
March 31, 2000
-----------------
(unaudited)
<S> <C>
Net revenues............................................. $ 88
Cost of revenues......................................... 1,617
Product development...................................... 1,451
Sales and marketing...................................... 900
General and administrative............................... 1,165
------
$5,045
======
</TABLE>
Note 4: Income Taxes
No provision for income taxes has been recorded because the Company has
incurred net losses since inception and the Company has received no benefit for
such losses from the consolidated Microsoft group. The Company has gross
deferred tax assets related primarily to unearned revenue that is currently
income for tax purposes. Management believes that, based on a number of
factors, the available objective evidence creates sufficient uncertainty
regarding the realizability of the deferred tax assets such that a full
valuation allowance has been recorded.
Deferred tax assets at June 30 are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Unearned revenue........................................... $ 2,752 $ 2,105
Other...................................................... 7 35
------- -------
Gross deferred tax assets.................................. 2,759 2,140
------- -------
Deferred tax asset valuation allowance..................... (2,759) (2,140)
------- -------
$ -- $ --
======= =======
</TABLE>
The Company has entered into a tax allocation agreement with Microsoft. The
agreement would not allow Expedia, Inc. to utilize tax net operating losses
previously generated by Expedia as an operating unit of Microsoft. Under the
agreement, the Company will calculate its own tax liability as if it had filed
a separate tax return. Generally, if the Company contributes a tax benefit
which reduces Microsoft's consolidated tax liability, Microsoft will compensate
the Company in an amount equal to 92.5% of the benefit. Microsoft will be
entitled to deduct on its separate tax return a portion of the cost
attributable to the Microsoft stock options that the Company assumes. The
parties will take this deduction into account under the normal tax accounting
rules, so the deduction will generally occur on the exercise of the options.
The portion of this cost that Microsoft will deduct is equal to the excess of
the fair market value of the shares to be acquired on exercise of the option on
the date the Company employs the optionee over the exercise price of the
assumed option. The Company will determine this amount on the date that an
optionee is employed.
Note 5: Employee Benefit Plans
Employees of the Company participate in stock-based compensation and savings
plans that are administered through Microsoft and involve options to acquire
Microsoft stock. Accordingly, option and expense information presented herein
represents the Company's portion of the overall plans.
Employee stock purchase plan: Microsoft has an employee stock purchase plan
for all eligible employees. Under the plan, shares of Microsoft's common stock
may be purchased at six-month intervals at 85% of the
F-11
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
lower of the fair market value on the first or the last day of each six-month
period. Employees may purchase shares having a value not exceeding 10% of their
gross compensation during an offering period. During 1997, 1998, and 1999,
employees of the Company purchased 43,600, 29,700, and 18,900 shares,
respectively, at average prices of $14.91, $27.21, and $52.59 per share.
401(k) savings plan: Microsoft has a savings plan which qualifies under
401(k) of the Internal Revenue Code. Participating employees may defer up to
15% of pretax salary, but not more than statutory limits. Microsoft contributes
50 cents for each dollar a participant contributes, with a maximum contribution
of 3% of a participant's earnings. Matching contributions for employees of the
Company were $126,000, $279,000, and $351,000 in 1997, 1998, and 1999,
respectively.
Stock option plans: Microsoft stock option plans for directors, officers,
and employees provide for nonqualified and incentive stock options. Options
granted prior to 1995 generally vest over four and one-half years and expire
ten years from the date of the grant. Options granted during and after 1995
generally vest over four and one-half years and expire seven years from the
date of the grant, while certain options vest over seven and one-half years and
expire after ten years.
The Company and Microsoft will require all permanent employees who transfer
to the Company, subject to specific tax and legal requirements, to participate
in a program involving the cancellation of all of their unvested options to
purchase Microsoft common stock and the issuance by the Company of new options
to acquire the Company's common stock. The new options will have comparable
terms, vesting schedules and in-the-money value as the canceled options. This
issuance will be treated as a new grant of stock options. As a result, the
Company will incur a non-cash charge of approximately $100 to $150 million as
the exercise price of the new options will be significantly less than the
initial public offering price of the Company's common stock. This non-cash
charge will be amortized over the vesting period of the new options, ranging
from one month to 54 months.
Expedia stock plans: In October 1999, the Board of Directors of the Company
adopted the following stock plans:
1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of
300,000 shares of common stock have been reserved for issuance under the
Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code. The first offering period will commence on January
1, 2000.
1999 Stock Option Plan (the "Stock Option Plan"). In addition to the
options issued to replace the cancelled unvested Microsoft options, a total
of 4,000,000 shares of common stock has been reserved for issuance under
the Stock Option Plan for grants to employees, officers and employee
directors of nonstatutory stock options.
1999 Stock Option Plan for Non-Employee Directors (the "Directors'
Plan"). A total of 135,000 shares of common stock has been reserved for
issuance under the Directors' Plan, which sets a maximum of 10,000 shares
for which options may be granted to any one non-employee director in any
year, 15,000 shares in the year in which the director is first elected.
401(k) savings plan. In October 1999, the Board of Directors of the Company
adopted the 401(k) savings plan which qualifies under 401(k) of the Internal
Revenue Code. Participating employees may defer up to 15% of pretax salary, but
not more than statutory limits. Expedia contributes 50 cents for each dollar a
participant contributes, with a maximum contribution of 3% of a participant's
earnings.
F-12
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following information represents data reflecting outstanding Microsoft
employee stock options for Company employees for the three-year period ended
June 30, 1999. Upon the initial public offering, Company employees will be able
to retain their vested Microsoft stock options. Unvested Microsoft options will
be converted to Expedia, Inc. options. The transfer of Microsoft employees into
and out of Expedia are presented below as transfers in and out.
<TABLE>
<CAPTION>
Microsoft options
outstanding
-----------------------------
Number Weighted average
outstanding exercise price
----------- ----------------
<S> <C> <C>
Balance, June 30, 1996......................... 3,342,027 $ 4.47
Granted........................................ 1,130,720 14.24
Transfers in................................... 1,611,600 4.68
Exercised...................................... (1,131,704) 3.73
Cancelled and transfers out.................... (1,428,116) 5.25
----------
Balance, June 30, 1997......................... 3,524,527 7.62
Granted........................................ 1,007,096 31.74
Transfers in................................... 3,661,380 7.30
Exercised...................................... (1,611,934) 4.50
Cancelled and transfers out.................... (1,374,234) 10.68
----------
Balance, June 30, 1998......................... 5,206,835 12.22
Granted........................................ 434,554 54.21
Transfers in................................... 639,800 12.76
Exercised...................................... (791,887) 6.27
Cancelled and transfers out.................... (795,180) 16.26
----------
Balance, June 30, 1999......................... 4,694,122 16.50
==========
</TABLE>
F-13
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Microsoft options
Microsoft options outstanding at June 30, exercisable at June 30,
1999 1999
-------------------------------------------- --------------------------
Weighted Weighted average Weighted
Number average remaining Number average
Range of exercise prices outstanding exercise price contractual life outstanding exercise price
------------------------ ------------ -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.85-$ 5.34.......... 1,335,772 $ 3.82 3.0 years 1,335,772 $ 3.82
5.35- 12.64.......... 997,840 9.53 3.7 years 810,331 9.12
12.65- 29.73.......... 1,186,421 14.50 4.8 years 572,144 14.32
29.74- 47.97.......... 826,495 32.24 6.1 years 118,050 31.77
47.98- 83.28.......... 347,594 54.66 6.1 years --
--------- ---------
4,694,122 2,836,297
========= =========
</TABLE>
Fair value disclosures: Under SFAS No. 123, employee stock options are
valued at the grant date using the Black-Scholes valuation model and the
related compensation cost is recognized ratably over the vesting period. Had
compensation cost for the Microsoft's stock option and employee stock purchase
plans been determined based on the Black-Scholes value at the grant dates for
awards as prescribed by SFAS No. 123, the pro forma net loss for fiscal 1997,
fiscal 1998 and fiscal 1999 would have been $30,100,000, $32,800,000, and
$26,900,000, respectively.
F-14
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company calculated the minimum fair value of each option grant at the
date of grant using the Black-Scholes pricing model with the following
assumptions for the years ended June 30:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (years)....... 5 5 5
Risk-free interest rate..... 6.5% 5.7% 4.9%
Expected volatility......... 30% 32% 32%
Dividend rate............... 0% 0% 0%
</TABLE>
Note 6: 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. In addition, certain communication
and capacity fees are paid. The Company expenses these amounts as the services
are provided.
The Company is party to a cooperative advertising agreement with a corporate
airline customer that requires the Company to set aside monies received from
transactions to be used for joint advertising initiatives. Such commitments
amounted to $87,000 and $245,000 in 1998 and 1999, respectively.
The Company has entered into a services agreement with Microsoft whereby
Microsoft will provide the Company with employee, administrative and
operational services. Employee services will be provided until the earlier of
May 20, 2000 or upon notice by the Company that employee services are no longer
required. Administrative and operational services will be provided until
December 31, 2000 but the parties may agree to extend the expiration date. Fees
will be paid to Microsoft for the services under this agreement on either an
estimated or actual cost reimbursement, including any sales and occupancy
taxes. Minimum payments are approximately $365,000 per month. In addition, the
Company will be obligated to pay additional amounts based on its headcount and
usage of services, which would approximate $450,000 per month based on current
head count of 150 employees.
The Company has entered into a five-year carriage and cross promotion
agreement with Microsoft under which the Company will receive premium placement
on Microsoft's MSN.com website, the Hotmail email service and the WebTV
platform. Under the terms of the agreement, Microsoft is able to generate
revenues by selling up to 52.0 million banner advertisements on the Company's
website during the first year of this agreement and up to 57.2 million banner
advertisements during the second year of the agreement. The Company will pay
Microsoft a flat annual fee of $2.0 million in fiscal 2000 and $2.2 million in
fiscal 2001 as well as incentive fees to the extent that the number of
completed airline transactions from 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.
On October 13, 1999, Priceline.com Incorporated filed a lawsuit against
Microsoft and the Company alleging patent infringement and use of unfair and
deceptive acts. The lawsuit seeks unspecified damages, including treble and
punitive damages, an injunction against further alleged infringement and from
continuing to operate the Company's Hotel Price Matcher or any similar service,
among other items. Since the lawsuit was recently filed and discovery has not
yet commenced, the Company is unable to estimate the likelihood of an adverse
result or range of possible loss relating to this matter. However, the Company
does not believe this claim has merit and intends to vigorously defend against
this lawsuit.
On October 7, 1999, Reed Elsevier Inc. filed a lawsuit against Microsoft and
the Company alleging a material breach of an agreement between Microsoft and
Reed Elsevier, Inc. The suit alleges conversion and
F-15
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
misappropriation of Reed Elsevier Inc.'s proprietary database, unfair
competition, breach of implied covenant of good faith and fair dealing and
interference with a business relationship. The suit seeks unspecified damages,
including punitive and permanent injunction requiring compliance with the
agreement, among other iteMs. Since the lawsuit was recently filed and
discovery has not yet commenced, the Company is unable to estimate the
likelihood of an adverse result or the range of possible loss relating to this
matter. The Company intends to vigorously defend against this lawsuit and does
not expect the outcome of this lawsuit to have a material adverse effect on the
Company's business.
The Company is also subject to various legal proceedings and claims that
arise in the ordinary course of business. The resolution of such matters will
not have a material impact to the financial position, results of operations or
cash flows of the Company.
Note 7: Subsequent Events (unaudited)
Initial public offering of common stock
On November 10, 1999, the Company completed an initial public offering in
which it sold 5,980,000 shares of common stock at a price of $14.00 per share,
raising $83.7 million in gross proceeds. After deducting $5.3 million in
aggregate underwriters discounts and commissions and $1.8 million in related
expenses, net proceeds from this offering totaled $76.6 million.
Microsoft cancelled all of the unvested options of Microsoft employees who
joined Expedia, Inc. prior to its initial public offering. The Company replaced
the cancelled options with Expedia, Inc. options that have equivalent vesting
schedules and in-the-money values and comparable other terms as the canceled
Microsoft options. Vested options of Microsoft employees who joined Expedia,
Inc. were not converted to Expedia, Inc. stock and remained vested options in
Microsoft stock. The number of Company options that were issued in order to
replace each of the cancelled Microsoft options was a function of the offering
price of the Company's common stock and the market price of Microsoft common
stock on the date of the offering, which resulted in a conversion rate of one
Microsoft option to 6.3482 Expedia options. The issuance of these Expedia, Inc.
options was treated as a new grant. As a result, the Company recorded a non-
cash stock-based compensation charge to stockholders' equity because the
exercise price of the new options was significantly less than the initial
public offering price of the Company's common stock. The Company is amortizing
this unearned stock-based compensation over the vesting periods of the Expedia,
Inc. options in accordance with Financial Accounting Standards Board
Interpretation No. 28. The unearned stock-based compensation will be fully
amortized by December 2004.
<TABLE>
<CAPTION>
Expedia options outstanding
-----------------------------
Number Weighted average
outstanding exercise price
----------- ----------------
<S> <C> <C>
Balance, July 1, 1999.......................... -- $ --
Granted........................................ 1,715,037 16.61
Transfers in................................... 13,668,525 5.83
Exercised...................................... (466,953) 2.53
Cancelled...................................... (165,274) 6.41
---------- ------
Balance, March 31, 2000........................ 14,751,335 $ 7.18
========== ======
</TABLE>
F-16
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Commitments and Contingencies
On December 27, 1999, Expedia, Inc. filed a federal court action for
trademark infringement in the Central District of California against Xpedior,
Inc., a newly formed subsidiary of Metamor Worldwide. Xpedior filed its answer
to the complaint on January 14, 2000. The lawsuit alleges that Xpedior's use of
the XPEDIOR trademark constitutes unfair competition, trademark infringement
and is likely to dilute the brand strength and awareness of the EXPEDIA mark.
On December 6, 1999, the five-year lease agreement to rent our office
premises had been executed in the name of Microsoft Corporation; however, the
Company makes all lease payments directly to the landlord. On February 11,
2000, Microsoft Corporation assigned the lease to Expedia, Inc.
Acquisitions
The Company acquired Travelscape.com on March 17, 2000 by issuing
approximately 3.0 million shares, stock options and warrants of Expedia, Inc.
in exchange for all outstanding shares, stock options and warrants of
Travelscape.com. The total value of the shares, stock options and warrants
exchanged was approximately $96 million. VacationSpot.com was also acquired on
March 17, 2000 by issuing approximately 2.6 million shares and stock options of
Expedia, Inc. in exchange for all of the outstanding shares and stock options
of VacationSpot.com. The total value of the shares and stock options exchanged
was approximately $82 million.
The Company has accounted for these transactions under the purchase method
of accounting in accordance with the APB Opinion No. 16. Under the purchase
method of accounting, the purchase price was allocated to the assets acquired
and liabilities assumed based on their estimated fair values. The estimated
fair values are preliminary in nature and may not be indicative of the final
purchase price allocation, which will be based on an assessment of fair value
to be performed by an independent appraiser. Certain intangible assets have
been identified and capitalized as part of these transactions. The amortization
periods on these intangibles range from two to four years. Both transactions
resulted in the recording of goodwill, which will be amortized over five years.
All amortization is being done on a straight-line basis. The following table
summarizes the purchase accounting for the acquisitions:
<TABLE>
<CAPTION>
Travelscape VacationSpot Total
----------- ------------ --------
($ in thousands)
<S> <C> <C> <C>
Current and long term assets.............. $ 22,111 $ 9,410 $ 31,521
Intangibles and goodwill.................. 121,718 75,143 196,861
Liabilities assumed....................... (45,880) (1,274) (47,154)
-------- ------- --------
Purchase price............................ 97,949 83,279 181,228
Less: acquisition costs................... (2,383) (1,617) (4,000)
-------- ------- --------
Common stock issued....................... $ 95,566 $81,662 $177,228
======== ======= ========
</TABLE>
F-17
<PAGE>
EXPEDIA
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table presents the results of operations of Expedia, Inc. on a
pro forma basis. These results are based on the individual historical results
of Expedia, Inc., Travelscape, and VacationSpot and reflect adjustments to give
effect to the acquisitions as if they had occurred at the beginning of the
periods presented:
<TABLE>
<CAPTION>
Pro forma
Nine Months Ended
March 31,
-------------------
1999 2000
-------- ---------
($ in thousands)
<S> <C> <C>
Net revenues........................................... $ 44,067 $ 138,384
-------- ---------
Gross profit........................................... 16,086 45,245
-------- ---------
Operating expenses (excluding stock compensation charge
and amortization of goodwill and intangibles)......... 37,868 93,442
-------- ---------
Stock compensation charge and amortization of goodwill
and intangibles....................................... 46,522 94,574
Other income/(expense)................................. (839) (267)
-------- ---------
Net loss............................................... $(69,143) $(143,038)
======== =========
Basic and diluted net loss per common share............ $ (3.59)
=========
Weighted average shares used to compute basic and
diluted net loss per common share..................... 39,809
=========
</TABLE>
Credit Card Transactions
In March 2000, the Company recorded a one-time charge of $4.1 million
related to the usage of fraudulent credit cards on our websites.
Private placement of common stock and warrants
In June 2000, the Company announced the pending private placement of
warrants to purchase 722,711 shares of common stock and 3,613,551 shares of
common stock totaling $60 million, $10 million of which will come from
Microsoft. The placement is anticipated to close in August 2000.
F-18
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Las Vegas Reservation Systems, Inc.,
Travelscape.com, Inc. (a Nevada corporation),
Professional Travel Services, Inc. and
Travelscape.com, Inc. (a Delaware corporation):
We have audited the accompanying combined balance sheet of Las Vegas
Reservation Systems, Inc., Travelscape.com, Inc. (a Nevada corporation) and
Professional Travel Services, Inc. as of December 31, 1998 and the related
combined statements of operations, stockholders' deficiency and cash flows for
the years ended December 31, 1997 and 1998 and the consolidated balance sheet
of Travelscape.com Inc. (a Delaware corporation) as of December 31, 1999 and
the related statements of operations, stockholders' deficiency and cash flows
for the year then ended. The combined and consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the combined and consolidated financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined and consolidated financial statements referred
to above present fairly, in all material respects, the combined financial
position of Las Vegas Reservation Systems, Inc., Travelscape.com, Inc. and
Professional Travel Services, Inc. as of December 31, 1998 and the results of
their operations and their cash flows for the years ended December 31, 1997 and
1998 and the consolidated financial position of Travelscape.com, Inc. as of
December 31, 1999 and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Las Vegas, Nevada
February 18, 2000
F-19
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
COMBINED (1998) AND CONSOLIDATED (1999) BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents......................... $ 265,674 $ 4,701,950
Officer receivable................................ -- 234,988
Prepaid expenses.................................. 177,788 1,630,976
Other current assets.............................. -- 177,859
----------- ------------
Total current assets............................ 443,462 6,745,773
Property, plant and equipment, net (notes 2, 5 and
10)................................................ 2,647,401 3,453,257
Other assets (note 8)............................... 752,853 2,720,689
Intangible assets, net.............................. -- 1,761,356
----------- ------------
$ 3,843,716 $ 14,681,075
=========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities:
Borrowings under lines of credit (note 4)......... $ 91,144 $ 34,737
Current portion of notes payable (note 5)......... 32,926 37,409
Current portion of capital lease obligations
(notes 2 and 10)................................. 182,274 293,025
Accounts payable.................................. 2,063,549 7,274,624
Accrued room payable.............................. 660,571 3,813,884
Accrued expenses.................................. 461,072 1,453,927
Deferred revenue.................................. 1,983,472 10,572,246
----------- ------------
Total current liabilities....................... 5,475,008 23,479,852
Notes payable, less current portion (note 5)........ 1,399,524 7,901,176
Capital lease obligations, less current portion
(notes 2 and 10)................................... 528,815 358,122
Related party loan (note 3)......................... 46,684 --
----------- ------------
Total liabilities............................... 7,450,031 31,739,150
----------- ------------
Stockholders' deficiency (note 6):
Common stock, $.01 par value. Authorized
50,000,000 shares; issued and outstanding
15,042,500 shares................................ -- 150,425
Common stock, no par value. Authorized 2,500
shares; issued and outstanding 200 shares........ -- --
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
5,000,000 shares................................. 5,000 --
Common stock, no par value. Authorized 2,500
shares; issued and outstanding 1,000 shares...... 40,000 --
Preferred stock, $.01 par value. Authorized
1,272,569 shares; issued and outstanding
1,272,569 shares................................. -- 5,611,604
Additional paid-in capital........................ 2,623,305 8,558,891
Deferred stock compensation (note 9).............. -- (2,179,134)
Stockholder loans (note 3)........................ (91,786) (65,266)
Accumulated deficit............................... (6,182,834) (29,134,595)
----------- ------------
Net stockholders' deficiency.................... (3,606,315) (17,058,075)
Commitments, contingencies and subsequent event
(notes 6, 8, 10 and 11)............................
----------- ------------
$ 3,843,716 $ 14,681,075
=========== ============
</TABLE>
See accompanying notes to combined and consolidated financial statements.
F-20
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
COMBINED (1997 AND 1998) AND CONSOLIDATED (1999) STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Room sales........................... $11,715,836 $18,851,718 $ 60,449,327
Airfare sales........................ 716,121 2,027,067 6,377,871
Other sales.......................... -- -- 200,535
----------- ----------- ------------
Total revenues..................... 12,431,957 20,878,785 67,027,733
Cost of sales.......................... 8,200,004 14,697,664 48,817,357
----------- ----------- ------------
Gross profit....................... 4,231,953 6,181,121 18,210,376
----------- ----------- ------------
Operating expenses:
General and administrative........... 3,065,933 5,420,838 12,002,277
Sales and marketing.................. 990,601 4,109,105 23,159,686
Systems development.................. 114,896 896,753 2,365,182
Stock compensation................... -- -- 1,141,474
----------- ----------- ------------
Total operating expenses........... 4,171,430 10,426,696 38,668,619
----------- ----------- ------------
Operating income (loss)............ 60,523 (4,245,575) (20,458,243)
----------- ----------- ------------
Other income (expense):
Interest expense, net................ (76,602) (183,949) (1,158,741)
Other income (loss).................. 17,994 2,884 (1,133,940)
Loss on sale of equipment............ -- -- (200,837)
----------- ----------- ------------
Total other income (expense)....... (58,608) (181,065) (2,493,518)
----------- ----------- ------------
Net income (loss).................. $ 1,915 $(4,426,640) $(22,951,761)
=========== =========== ============
</TABLE>
See accompanying notes to combined and consolidated financial statements.
F-21
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
COMBINED (1997 AND 1998) AND CONSOLIDATED (1999) STATEMENTS OF
STOCKHOLDERS' DEFICIENCY (NOTES 8 AND 9)
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Common
stock/
additional Deferred Net
Preferred paid-in stock Stockholder Accumulated stockholders'
stock capital compensation loans deficit deficiency
---------- ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $ -- $ 40,000 $ -- $ -- $ (965,703) $ (925,703)
Net income.............. -- -- -- -- 1,915 1,915
Distributions........... -- -- -- -- (792,406) (792,406)
---------- ---------- ----------- -------- ------------ ------------
Balance at December 31,
1997................... -- 40,000 -- -- (1,756,194) (1,716,194)
Net loss................ -- -- -- -- (4,426,640) (4,426,640)
Contributions........... -- 2,628,305 -- (91,786) -- 2,536,519
---------- ---------- ----------- -------- ------------ ------------
Balance at December 31,
1998................... -- 2,668,305 -- (91,786) (6,182,834) (3,606,315)
Net loss................ -- -- -- -- (22,951,761) (22,951,761)
Contributions (notes 3
and 6)................. 5,611,604 -- -- 26,520 -- 5,638,124
Deferred stock
compensation (note 9).. -- 3,184,650 (2,179,134) -- -- 1,005,516
Stock warrants (note
5)..................... -- 844,403 -- -- -- 844,403
Stock awards and
warrants (note 6)...... -- 135,958 -- -- -- 135,958
Reorganization
adjustment (note 1).... -- 1,876,000 -- -- -- 1,876,000
---------- ---------- ----------- -------- ------------ ------------
Balance at December 31,
1999................... $5,611,604 $8,709,316 $(2,179,134) $(65,266) $(29,134,595) $(17,058,075)
========== ========== =========== ======== ============ ============
</TABLE>
See accompanying notes to combined and consolidated financial statements.
F-22
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
COMBINED (1997 AND 1998) AND CONSOLIDATED (1999) STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ 1,915 $(4,426,640) $(22,951,761)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Loss on sale of equipment.......... -- -- 200,837
Depreciation and amortization...... 96,836 160,444 656,530
Amortization of debt discount and
issuance costs.................... -- -- 550,041
Stock compensation................. -- -- 1,141,474
Changes in operating assets and
liabilities:
Increase in officer receivable... -- -- (234,988)
Increase in prepaid expenses and
other current assets............ (54,818) (99,700) (1,631,047)
Increase (decrease) in other
assets.......................... 198,751 (417,621) (1,690,347)
Increase (decrease) in accounts
payable and accrued expenses.... 913,683 1,376,452 9,357,243
Increase in deferred revenue..... 169,581 1,205,770 8,588,774
----------- ----------- ------------
Net cash provided by (used in)
operating activities.......... 1,325,948 (2,201,295) (6,013,244)
----------- ----------- ------------
Cash flows from investing activities:
Acquisition of property and
equipment........................... (2,036,228) (66,877) (1,412,106)
Sale of investments.................. 32,310 -- --
Proceeds from sale of equipment...... -- -- 50,950
----------- ----------- ------------
Net cash used in investing
activities.................... (2,003,918) (66,877) (1,361,156)
----------- ----------- ------------
Cash flows from financing activities:
(Distributions to) contributions from
stockholders, net................... (792,406) 2,536,519 5,611,604
Repayments of loan from
stockholders........................ (9,800) (21,791) (20,164)
Advances from (repayments of) line of
credit, net......................... 35,780 (6,436) (56,407)
Proceeds from (repayments of) notes
payable............................. 1,470,390 (37,940) 6,998,703
Payment of debt issuance costs....... -- -- (475,695)
Repayments of capital lease
obligations......................... -- -- (247,365)
----------- ----------- ------------
Net cash provided by financing
activities.................... 703,964 2,470,352 11,810,676
----------- ----------- ------------
Net increase in cash and cash
equivalents................... 25,994 202,180 4,436,276
Cash and cash equivalents:
Beginning of year.................... 37,500 63,494 265,674
----------- ----------- ------------
End of year.......................... $ 63,494 $ 265,674 $ 4,701,950
=========== =========== ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for
interest............................ $ 8,722 $ 85,613 $ --
=========== =========== ============
Supplemental disclosures of noncash
financing activities:
Equipment acquired under capital
lease............................... $ -- $ 711,089 $ 187,423
Stockholder loans.................... -- 91,786 --
Deferred compensation................ -- -- 2,179,134
Stock awards and warrants............ -- -- 135,958
Original issue discount.............. -- -- 844,403
Intangible assets.................... -- -- 1,876,000
=========== =========== ============
</TABLE>
See accompanying notes to combined and consolidated financial statements.
F-23
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation and Description of Business
For 1997 and 1998, the accompanying financial statements combine the
accounts of Las Vegas Reservation Systems, Inc. (LVRS), Travelscape.com, Inc.
(a Nevada corporation) and Professional Travel Services, Inc. (PTS)
(collectively referred to as the Company). The entities were owned and
controlled principally by common ownership and management and part of a
reorganization. Following the reorganization, the accompanying 1999
consolidated financial statements include the accounts of Travelscape.com, Inc.
(a Delaware corporation) and its wholly owned subsidiaries. All intercompany
transactions have been eliminated in combination and consolidation.
LVRS, a Nevada corporation, sells hotel room packages in Las Vegas, Reno,
Laughlin and Lake Tahoe to individual and group customers. In the normal course
of business, certain hotel properties require cash deposits or letters of
credit to secure hotel room inventory.
In March 1998, LVRS established its web site www.lvrs.com to sell rooms over
the Internet. The success of the web site prompted management to begin an
effort to replicate its Las Vegas based system across the United States through
Old Travelscape, which was created in April 1998. Travelscape.com, Inc. (a
Nevada corporation) created its own web site www.travelscape.com in which it
offers its services. The Internet offers the Company advertising and
distribution means to market and sell its rooms to a worldwide audience in a
cost-effective manner.
Effective September 30, 1998, LVRS merged with Fort Apache, Inc. whose
principal business was to hold a building and land in Las Vegas. Fort Apache,
Inc. shared common owners with LVRS; accordingly, the transaction was recorded
as a reorganization of entities under common control and the historical-cost
basis of the net assets of Fort Apache, Inc. was carried over to LVRS. Prior
year financial statements have been restated to reflect this reorganization.
PTS operates a travel agency in Las Vegas. PTS provides transportation
arrangements primarily for business travel.
On January 21, 1999, the Company completed a reorganization whereby LVRS,
Travelscape.com, Inc. (a Nevada Corporation) (Old Travelscape) and PTS became
wholly owned subsidiaries of Travelscape.com, Inc. (Travelscape), a Delaware
corporation. The transaction was accounted for principally as a reorganization
of entities under common control. Accordingly, the combined financial
statements of LVRS, Old Travelscape and PTS for the years presented herein are
predecessor operations to the comparable entity which exists after January 21,
1999. At the time of the reorganization, 20% of the common stock of Old
Travelscape was not owned by the common control group. The exchange of
Travelscape shares for this 20% interest was considered a purchase of a
minority interest. The consideration exceeded historical book value by
$1,876,000 which was allocated to goodwill in the accompanying balance sheet.
Goodwill is amortized on a straight-line basis over 15 years.
The financial statements as of and for the year ended December 31, 1999 are
combined through January 22, 1999 (the date of the organizational
restructuring) and consolidated through and as of December 31, 1999.
F-24
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Cash Equivalents
Cash equivalents include highly liquid investments purchased with an
original maturity date of three months or less.
(c) Property, Plant and Equipment
Property and equipment are recorded at cost and depreciated on a straight-
line basis over estimated useful lives ranging from 3-20 years. Expenditures
for maintenance and repairs are expensed when incurred. Property and equipment
under capital leases are stated at the present value of minimum lease payments.
Amortization of property and equipment held under capital leases and
leasehold improvements is computed on a straight-line basis over the shorter of
the lease term or estimated useful lives of the asset.
(d) Revenue Recognition
Revenues from sales of hotel rooms and airline tickets, as well as the
related cost of sales, including the associated taxes, and other travel
products and services for which the Company is the credit card merchant of
record, are recorded at the aggregate retail value upon booking. Such revenues
are deferred until the customer checks in to the hotel or completes their air
travel. Revenues earned from sales of travel products and services in which the
travel provider is the credit card merchant of record are recognized upon
receipt of cash and are recorded at the commission amount.
(e) Systems Development
Systems development expenses are comprised primarily of compensation to the
Company's information systems and technical staff, payments to outside
contractors for information systems and technical services, data communications
lines, web hosting services and other expenses associated with operating the
Company's web sites.
(f) Use of Estimates
Management of the Company has made estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(g) Income Taxes
Prior to January 22, 1999, LVRS and PTS were taxed as S Corporations under
provisions of the Internal Revenue Code. Under these provisions, LVRS and PTS
do not pay income tax on their income. Instead, the stockholders of LVRS and
PTS were liable for income tax on the taxable income as it effects the
stockholders' income tax returns. Accordingly, a provision for income taxes has
not been included in the accompanying combined financial statements for LVRS
and PTS as of and for the years ended December 31, 1997 and 1998.
Old Travelscape is a Nevada C Corporation which is subject to federal income
tax. Old Travelscape accounted for income taxes under the asset and liability
method whereby deferred income taxes are recognized
F-25
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years those
temporary differences are expected to be recovered or settled. The effect on
deferred taxes of a change in the tax rates is recognized in income for the
period that includes enactment date.
Effective with the reorganization, LVRS, Old Travelscape and PTS became
wholly owned subsidiaries of Travelscape, and accordingly, Travelscape recorded
net deferred tax assets of $1,200,000 related to the cumulative differences
between the basis of certain assets and liabilities for financial reporting and
income tax purposes. Travelscape recorded a corresponding 100% valuation
allowance due to the uncertainty regarding Travelscape's ability to utilize its
deferred tax assets to offset future tax liabilities.
(h) Start-Up Costs
Start-up costs are expensed as incurred.
(i) Sales and Marketing Expenses
The Company expenses advertising as incurred. Advertising expense aggregated
$990,601, $4,109,105 and $23,159,686 for the years ended December 31, 1997,
1998 and 1999, respectively.
(j) Stock Compensation
The Company has adopted Statement of Financial Accounting Standards
Statement, or SFAS, No. 123, Accounting for Stock-Based Compensation, and has
elected to measure compensation cost under Accounting Principles Board Opinion
No. 25 and comply with the pro forma disclosure requirements of SFAS No. 123,
except for options and warrants granted to nonemployees, which are accounted
for under SFAS No. 123.
(k) Long-Lived Assets
The Company accounts for long-lived assets at amortized costs. As part of an
ongoing review of the valuation and amortization of long-lived assets,
management assesses the carrying value of such assets if facts and
circumstances suggest that such assets may be impaired. If this review
indicates that the assets will not be recoverable, as determined by the
nondiscounted cash flow analysis over the remaining amortization period, the
carrying value of the assets would be reduced to its estimated fair market
value, based on discounted cash flows.
(2) Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Land.................................................. $ 408,000 $ 408,000
Building and improvements............................. 1,549,756 1,621,539
Computer hardware and software........................ 729,807 1,706,656
Furniture and office equipment........................ 263,817 415,428
---------- ----------
2,951,380 4,151,623
Less accumulated depreciation and amortization........ 303,979 698,366
---------- ----------
$2,647,401 $3,453,257
========== ==========
</TABLE>
F-26
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum capital lease payments as of December 31, 1999 are:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ---------
<S> <C> <C>
Year ending December 31:
2000.................................................. $309,740 $ 89,566
2001.................................................. 207,997 88,989
2002.................................................. 130,704 88,989
2003.................................................. 108,920 88,989
2004.................................................. -- 49,810
-------- --------
Net minimum lease payments.......................... 757,361 $406,343
========
Less amounts representing interest..................... 106,214
--------
Present value of net minimum capital lease payments... 651,147
Less current portion of obligations under capital
leases................................................ 293,025
--------
Obligations under capital leases excluding current
portion............................................ $358,122
========
</TABLE>
The Company leases office equipment under operating leases, which expire in
2001. Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$25,510, $24,603 and $25,283, respectively.
(3) Stockholder Transactions
At December 31, 1998, PTS had loans from the stockholders of $46,684 for
start-up costs of the business. This non-interest bearing loan with no fixed
repayment terms was repaid during 1999. As of December 31, 1998, Old
Travelscape had loans of $91,786 to officers of the Company for the purchase of
common stock. As of December 31, 1999, the remaining balance was $65,266 which
is due in 2001. This amount is reported as an increase in stockholders'
deficiency.
(4) Borrowings under Lines of Credit
Borrowings under unsecured lines of credit with various financial
institutions are as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Wells Fargo Bank, interest is 11.25% at December 31, 1999,
expires on June 30, 2000................................. $41,144 $34,737
Bank West of Nevada, expired on March 27, 1999............ 50,000 --
------- -------
$91,144 $34,737
======= =======
</TABLE>
The Bank West of Nevada line of credit was not renewed. The Wells Fargo Bank
credit line has a borrowing capacity of $50,000.
F-27
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
First mortgage note payable in monthly installments
of $7,681, at an interest rate of prime plus 1.5%
(9.5% as of December 31, 1999), maturity date of
June 30, 2017, secured by real property............ $ 801,687 $ 782,545
First mortgage note payable in monthly installments
of $4,781, at an interest rate of 6.85%, maturity
date of November 11, 2017, secured by real
property........................................... 609,645 592,862
Second mortgage note payable in monthly installments
of $303, at an interest rate of prime plus 1.5%
(9.5% as of December 31, 1999), maturity date of
June 30, 2007, secured by real property............ 21,118 19,047
Senior notes payable, net of discount, at an
interest rate of 10% for initial 12 months and 12%
for the subsequent 12 months, maturity date in
February 2001, unsecured........................... -- 7,036,700
Less original issue discount........................ -- (492,569)
---------- ----------
1,432,450 7,938,585
Less current portion................................ 32,926 37,409
---------- ----------
$1,399,524 $7,901,176
========== ==========
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000............................................................ $ 37,409
2001............................................................ 7,077,176
2002............................................................ 43,801
2003............................................................ 47,406
2004............................................................ 51,316
Thereafter...................................................... 1,174,046
----------
$8,431,154
==========
</TABLE>
During February 1999, Travelscape completed a private placement of 70.367
units of Travelscape senior notes and common stock purchase warrants were
subscribed for a total value of $100,000 per unit or $7,036,700. Each unit
consists of a note with a face value of $100,000 bearing interest at 10% prior
to February 2000 and 12% thereafter and a warrant to purchase 7,500 shares of
Travelscape common stock, par value $.01 per share. The notes have a stated
maturity of two years from the date of issuance. The notes' maturity
accelerates and the warrants convert to common stock at a "trigger event,"
which is generally defined as either an initial public offering of the
Company's common stock or a sale of the Company. The fair value of the warrants
issued in connection with the private placement of $844,403 has been allocated
to a debt discount and will be amortized over the effective-interest method.
The warrants are exercisable over three years. Warrants for a total of 527,752
shares of common stock were issued in connection with the private placement.
The fair value of the warrants was determined pursuant to Black-Scholes model
for calculating the fair value of
F-28
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
equity instruments. The discount will be amortized to interest expense over the
term of the senior notes using the effective-interest method. Upon repayment
prior to the due date, any outstanding balance of the discount will be written
off to interest expense. The aforementioned share numbers have been adjusted to
give effect to a 3-for-2 split of Travelscape's common stock. As a result of
the pending sale of the Company (see note 11), the notes will mature on March
15, 2000 and convert to common stock on this date.
(6) Stockholders' Deficiency
(a) Preferred Stock
During December 1999, Travelscape completed a private placement for
$5,611,604 in net proceeds through the sale of 1,272,569 shares of Series A
Convertible Preferred Stock with a par value of $.01 per share. Holders of
preferred stock are entitled to receive dividends when and if declared by the
Board of Directors.
Preferred stock may be converted at the option of the holder at a rate of
one share of preferred stock to one share of common stock.
Holders of preferred stock have a liquidation preference over common stock
holders. Upon liquidation, holders of preferred stock shall be entitled to
receive $4.44 per share.
The preferred stock will automatically convert to common stock upon the
consummation of certain events. As a result of the pending sale of the Company
(see note 11), the preferred stock will be converted to common on March 15,
2000.
(b) Common Stock
Effective April 24, 1999, Travelscape's Board of Directors approved an
increase in the number of authorized shares from 25,000,000 to 50,000,000
shares. The financial statements reflect this increase. The number of shares
outstanding of Travelscape.com, Inc. common stock reflects the effect of a 3-
for-2 split of common stock completed in June 1999.
(c) Stock Warrants
The Company issued stock warrants to purchase 475,833 shares of common stock
at exercise prices that range from $4-$7 per share to third parties in lieu of
services rendered. The fair value of the stock warrants of $19,508 has been
recognized in additional paid-in capital and stock compensation expense. Of the
total stock warrants, 400,000 are subject to certain vesting conditions. As of
December 31, 1999, none of the 400,000 stock warrants had vested. The warrants
vest immediately if there is a certain change in the control of the Company. As
a result of the pending sale of the Company (see note 11), the warrants will
become fully vested on March 15, 2000.
In addition, the Company issued stock awards of 42,500 shares of common
stock for a total fair value of $116,450.
F-29
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Income Taxes
The components of the net deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss
carryforwards........... $ 1,152,615 $ 8,419,059
Deferred revenue......... (98,644) (137,681)
Other.................... 166,014 240,116
----------- -----------
1,219,985 8,521,494
Valuation allowance...... (1,219,985) (8,521,494)
----------- -----------
Deferred tax asset, net
of valuation
allowance............. $ -- $ --
=========== ===========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon generation of future taxable income. A 100% valuation allowance
has been provided for the net deferred tax assets since the likelihood of
taxable income sufficient enough to realize the entire balance of deferred tax
assets in the future is uncertain.
At December 31, 1999, the Company has approximately $24,500,000 of net
operating loss carryforwards available for federal tax reporting purposes,
which expire in 2014. The ultimate realization of the net operating loss
carryforwards will be subject to certain limitations due to changes in the
Company's ownership and will be dependent upon the Company attaining future
taxable earnings.
If certain substantial changes in the Company's ownership should occur,
there would be an annual limitation on the amount of the tax loss carryforwards
that can be utilized, which could result in such losses expiring before they
are used.
(8) Commitments and Contingencies
(a) Litigation
The Company is involved in legal proceedings from outside parties involving
routine business matters. Management believes that the ultimate resolution of
these matters will not have a material adverse affect on the Company's
financial condition or results of operations.
F-30
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Advertising Contracts
The Company has entered into several advertising contracts, including
various Internet web sites, which run through the year 2001. The agreements
provide for monthly and quarterly payments and are summarized as follows as of
December 31, 1999:
<TABLE>
<S> <C>
Year ending December 31:
2000......................................................... $22,790,254
2001......................................................... 152,000
-----------
$22,942,254
===========
</TABLE>
(c) Letters of Credit
The Company has an agreement with Bank West of Nevada to extend letters of
credit on behalf of the Company to certain hotel properties to secure payment
for the potential purchase of blocks of hotel rooms. Letters of credit with
Bank West of Nevada at December 31, 1999 were $2,059,000. The letter of credit
agreements require the Company to place 100% of a required hotel deposit in a
certificate of deposit with the bank. If the Company were to default on the
payment of a block of rooms, the hotel would exercise the letter of credit. As
of December 31, 1999, the Company has placed $2,059,000 in a certificate of
deposit under this arrangement. These deposits are restricted and are included
in other assets.
(9) Stock Options
The Financial Accounting Standards Board issued SFAS No. 123 which defines a
fair-value method of accounting for an employee stock option or similar
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it allows an entity to
continue to measure the compensation cost for these plans using the intrinsic-
value-based method of accounting prescribed by Accounting Principles Board
Opinion, or APB, No. 25, Accounting for Stock Issued to Employees. Entities
electing to remain with the accounting in APB No. 25 must make pro forma
disclosures of net earnings and earnings per share, as if the fair-value-based
method of accounting defined in SFAS No. 123 had been applied.
Stock options outstanding are as follows:
<TABLE>
<CAPTION>
Weighted-average
Number of shares exercise price
---------------- ----------------
<S> <C> <C>
Balance at December 31, 1997............. -- $ --
Granted.................................. 1,027,500 1.33
--------- ------
Balance at December 31, 1998............. 1,027,500 1.33
Granted.................................. 3,127,500 3.18
Canceled................................. (185,000) (1.33)
--------- ------
Balance at December 31, 1999............. 3,970,000 $ 2.79
========= ======
</TABLE>
F-31
<PAGE>
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock options outstanding are as follows:
<TABLE>
<CAPTION>
Outstanding at Weighted- Weighted-
December 31, average average
Range of prices 1999 exercise price contract life
--------------- -------------- -------------- -------------
<S> <C> <C> <C>
$1.33-6.00...... 3,970,000 $2.79 3
========= ===== ===
</TABLE>
Old Travelscape accounted for these options pursuant to APB No. 25. These
options were issued with an option price substantially equal to the fair value
of the common stock on the date of the grant. The options vest over a three-
year period.
As a result of the 1999 option grants, the Company recorded compensation
expense of $1,005,516 for the year ended December 31, 1999 and will amortize
deferred stock compensation expense of $2,179,134 over the future vesting
period of the options, calculated under APB No. 25 for employees and SFAS No.
123 for nonemployees. The deferred stock compensation is recorded as a
component of net stockholders' deficiency in the accompanying balance sheet.
The total number options exercisable was 1,114,413 at December 31, 1999.
All outstanding options to purchase common stock prior to January 21, 1999
were assumed by Travelscape and will retain all of the same terms included in
the initial grant.
Had the Company complied with SFAS No. 123 for financial reporting purposes,
the impact on net loss for the year ended December 31, 1999 would be to
increase the net loss to $23,269,105. The granting of options in 1998 did not
give rise to any additional compensation expense as none of the options were
exercisable at December 31, 1998. The pro forma net loss is based on the
following assumptions: risk-free interest rate of 6.5%, volatility of 20%,
dividend yield of 0% and economic life of the option of four years.
(10) Lease Commitments
The Company is obligated under various capital leases, for certain office
equipment, that expire at various dates through 2003. The gross amount of
office equipment and related accumulated depreciation capitalized and recorded
under capital leases at December 31, 1999 was as follows:
<TABLE>
<S> <C>
Office equipment................................................. $248,940
Less accumulated depreciation.................................... 93,385
--------
$155,555
========
</TABLE>
(11) Subsequent Event
On January 31, 2000, the Company was acquired by Expedia, Inc. for total
consideration aggregating approximately $100 million. As a result of this
acquisition, Expedia, Inc. will record the assets and liabilities of the
Company at their respective fair values. No adjustments have been made to the
accompanying financial statements for this transaction. As a result of this
acquisition, certain equity and debt instruments will become fully vested
and/or be converted to common stock.
F-32
<PAGE>
FINANCIAL STATEMENTS OF VACATIONSPOT
VACATIONSPOT.COM, INC.
FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 1999,
AND THE PERIOD FROM DECEMBER 2, 1997 (inception)
TO JUNE 30, 1998, AND INDEPENDENT AUDITORS' REPORT
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
VacationSpot.com, Inc.
Seattle, Washington
We have audited the accompanying balance sheets of VacationSpot.com, Inc. as
of June 30, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the year ended June 30, 1999, and the
period from December 2, 1997 (inception) through June 30, 1998. These financial
statements are the responsibility of VacationSpot.com, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of VacationSpot.com, Inc. as of June 30, 1999
and 1998, and the results of its operations and its cash flows for the year
ended June 30, 1999, and the period from December 2, 1997 (inception) through
June 30, 1998, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 17, 2000
F-34
<PAGE>
VACATIONSPOT.COM, INC.
BALANCE SHEETS
June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents............................ $ 6,593,492 $ 178
Accounts receivable.................................. 29,796
Prepaid expenses..................................... 29,126 1,400
----------- ---------
Total current assets............................... 6,652,414 1,578
PROPERTY AND EQUIPMENT, net (Note 2)................... 179,729 28,870
INTANGIBLE ASSETS, net (Note 3)........................ 805,042 441,875
----------- ---------
TOTAL.............................................. $ 7,637,185 $ 472,323
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable..................................... $ 187,446 $ 33,620
Accrued expenses..................................... 74,792 3,365
Unearned revenue..................................... 93,084
----------- ---------
Total current liabilities.......................... 355,322 36,985
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $0.0001 par
value--Authorized, 1,346,666 shares; issued and
outstanding, 1,010,000 shares with liquidation
preference of $0.50 per share....................... 101 --
Series A-1 convertible preferred stock, $0.0001 par
value--Authorized, 1,346,666 shares; none issued and
outstanding liquidation preference of $0.50 per
share...............................................
Series B convertible preferred stock, $0.0001 par
value--Authorized, 4,600,000 shares; issued and
outstanding, 3,562,500 shares with liquidation
preference of $2.00 per share....................... 356 --
Series B-1 convertible preferred stock, $0.0001 par
value--Authorized, 4,600,000 shares; none issued and
outstanding with liquidation preference of $2.00 per
share...............................................
Common stock, $0.0001 par value--Authorized,
30,000,000 shares; issued and outstanding, 6,314,350
shares.............................................. 631 --
Additional paid-in capital........................... 11,042,882 --
Member contributions................................. 705,000
Unearned stock-based compensation.................... (102,931)
Notes receivable from affiliated parties (Note 8).... (114,510) (115,694)
Accumulated deficit.................................. (3,544,666) (153,968)
----------- ---------
Total stockholders' equity......................... 7,281,863 435,338
----------- ---------
TOTAL.............................................. $ 7,637,185 $ 472,323
=========== =========
</TABLE>
See notes to financial statements
F-35
<PAGE>
VACATIONSPOT.COM, INC.
STATEMENTS OF OPERATIONS
Year Ended June 30, 1999, and
Period from December 2, 1997 (inception) to June 30, 1998
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
NET REVENUES............................................ $ 360,169 $ 28,606
COST OF REVENUES........................................ (975,639) (29,279)
----------- ---------
Gross margin........................................ (615,470) (673)
OPERATING EXPENSES:
Product development................................... 715,692 65,710
Sales and marketing................................... 1,403,192 21,857
General and administrative............................ 713,622 65,705
----------- ---------
2,832,506 153,272
LOSS FROM OPERATIONS.................................... (3,447,976) (153,945)
OTHER INCOME (EXPENSE).................................. 57,278 (23)
----------- ---------
NET LOSS................................................ $(3,390,698) $(153,968)
=========== =========
</TABLE>
See notes to financial statements
F-36
<PAGE>
VACATIONSPOT.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended June 30, 1999, and
Period from December 2, 1997 (inception) to June 30, 1998
<TABLE>
<CAPTION>
Series A Series B Notes
convertible convertible receivable
Common stock preferred stock preferred stock Additional Unearned from
---------------- ---------------- ---------------- paid-in Member stock-based affiliated
Shares Amount Shares Amount Shares Amount capital contributions compensation parties
--------- ------ --------- ------ --------- ------ ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
2, 1997.......... -- $ -- -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of
membership units
to founders..... 200,000
Issuance of
preferred
membership
units........... 505,000
Notes receivable
from affiliated
parties......... (115,694)
Net loss........
--------- ----------
BALANCE, June 30,
1998............. 705,000 (115,694)
Conversion of
founders'
membership units
to common
stock........... 4,000,000 400 199,600 (200,000)
Conversion of
preferred
membership units
to Series A
preferred stock
and common stock
warrants........ 1,010,000 101 880,282 (505,000)
Issuance of
common stock.... 1,855,570 185 2,087,323
Issuance of
common stock for
asset
purchases....... 458,780 46 526,457
Issuance of
Series B
preferred
stock........... 3,562,500 356 7,124,644
Capitalization
of stock-based
compensation.... 224,576 (224,576)
Recognition of
stock-based
compensation.... 121,645
Payment on notes
receivable from
affiliated
parties......... 1,184
Net loss........
--------- ----- --------- ----- --------- ----- ----------- --------- ---------- ----------
BALANCE, June 30,
1999............. 6,314,350 $ 631 1,010,000 $ 101 3,562,500 $ 356 $11,042,882 $ -- $(102,931) $(114,510)
========= ===== ========= ===== ========= ===== =========== ========= ========== ==========
<CAPTION>
Accumulated Stockholders'
deficit equity
------------ -------------
<S> <C> <C>
BALANCE, December
2, 1997.......... $ -- $ --
Issuance of
membership units
to founders..... 200,000
Issuance of
preferred
membership
units........... 505,000
Notes receivable
from affiliated
parties......... (115,694)
Net loss........ (153,968) (153,968)
------------ -------------
BALANCE, June 30,
1998............. (153,968) 435,338
Conversion of
founders'
membership units
to common
stock...........
Conversion of
preferred
membership units
to Series A
preferred stock
and common stock
warrants........ 375,383
Issuance of
common stock.... 2,087,508
Issuance of
common stock for
asset
purchases....... 526,503
Issuance of
Series B
preferred
stock........... 7,125,000
Capitalization
of stock-based
compensation....
Recognition of
stock-based
compensation.... 121,645
Payment on notes
receivable from
affiliated
parties......... 1,184
Net loss........ (3,390,698) (3,390,698)
------------ -------------
BALANCE, June 30,
1999............. $(3,544,666) $ 7,281,863
============ =============
</TABLE>
See notes to financial statements
F-37
<PAGE>
VACATIONSPOT.COM, INC.
STATEMENTS OF CASH FLOWS
Year Ended June 30, 1999, and
Period from December 2, 1997 (inception) to June 30, 1998
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................... $(3,390,698) $(153,968)
Adjustment to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................ 1,000,155 67,875
Recognition of stock-based compensation.............. 121,645 --
Recognition of sales and marketing expense for
warrants for common stock........................... 375,383 --
Cash provided (used) by changes in operating assets
and liabilities:
Accounts receivable and prepaid expenses........... (57,522) (1,400)
Accounts payable and accrued expenses.............. 225,253 36,985
Unearned revenue................................... 93,084 --
----------- ---------
Net cash used by operating activities............ (1,632,700) (50,508)
INVESTING ACTIVITIES:
Additions to property and equipment.................... (266,431) (33,620)
Purchase of intangible assets.......................... (833,000) --
----------- ---------
Net cash used by investing activities............ (1,099,431) (33,620)
FINANCING ACTIVITIES:
Member contributions................................... 1,184 84,306
Proceeds from issuance of common and preferred stock... 9,324,261 --
----------- ---------
Net cash provided by financing activities........ 9,325,445 84,306
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 6,593,314 178
CASH AND CASH EQUIVALENTS:
Beginning of period.................................... 178 --
----------- ---------
End of period.......................................... $ 6,593,492 $ 178
=========== =========
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
ACTIVITIES:
Issuance of equity for advertising..................... $ -- $ 505,000
Receivable from affiliated parties..................... 115,694
Issuance of equity for intangible assets............... 414,750 --
Conversion of member contributions to common stock..... 705,000 --
</TABLE>
See notes to financial statements
F-38
<PAGE>
VACATIONSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 1999, and
Period from December 2, 1997 (inception) to June 30, 1998
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business: VacationSpot.com, Inc. (the Company) was originally
formed as Reservation Works LLC, a Washington Limited Liability Corporation
(LLC), on December 2, 1997. On April 21, 1999, Rezworks Corporation filed a
Certificate of Incorporation in Delaware, and shares of Rezworks Corporation
common stock were issued in exchange for the outstanding membership units of
Reservation Works LLC. On December 1, 1999, Rezworks Corporation changed its
name to VacationSpot.com, Inc.
The Company is an online reservation network for vacation homes, rental
condos, inns, villas, and bed and breakfasts around the world, offering more
than 100,000 leisure lodging units in 44 countries via the Internet. The
Company operates its own website, located at VacationSpot.com, and derives its
revenues from listing fees associated with the leisure lodging units hosted on
its website and commissions from lodgings booked via its website. The Company
also develops and sells a comprehensive software solution for independent
lodging establishments that facilitates online reservations via the Internet.
Estimates and assumptions: Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, and expenses. Actual results could differ
from those estimates.
Cash and cash equivalents: The Company considers all highly liquid
instruments purchased with original maturities of 90 days or less to be cash
equivalents.
Property and equipment: Property and equipment consists primarily of
computer equipment, furniture and fixtures, and purchased software, which are
stated at cost. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets, which range from one to
five years.
Intangible assets: Intangible assets consist of an advertising agreement as
of June 30, 1998, as well as permits and licenses, proprietary rights,
contracts and commitments, noncompete agreements, and customer lists as of June
30, 1999. Intangible assets are being amortized on a straight-line basis over
lives ranging from one to five years.
Revenue recognition: Revenues from listing fees are recognized ratably over
the listing period. Commission revenues from lodgings booked are recognized
either on receipt of the commission payment or on notification of entitlement
by a third party. Software sales are recognized as the software is shipped, in
compliance with American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9,
Modification of SOP 97-2, With Respect to Certain Transactions.
Product development: Product development costs consist primarily of payroll
and related expenses for website and software development, and are expensed as
incurred.
Capitalized software costs: Financial accounting standards require the
capitalization of certain software product costs after technological
feasibility of the software is established. To date, the period between
achieving technological feasibility and the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
F-39
<PAGE>
VACATIONSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Advertising costs: The Company expenses advertising costs as incurred.
Income taxes: Prior to April 21, 1999, the Company was an LLC under
provisions of the Internal Revenue Code. Under these provisions, the Company
did not pay income taxes on its income. Instead, the taxable loss of the
Company was passed to the shareholders of the LLC. Subsequent to April 21,
1999, the Company recognized a taxable loss for the period ended June 30, 1999,
and, therefore, no current tax provision was recorded. A net deferred tax asset
has been recognized by the Company aggregating $250,000, which consists
primarily of net operating loss carryforwards of $700,000 which expire in 2019.
A 100% valuation allowance has been provided against the net deferred tax
assets since the likelihood of taxable income sufficient enough to realize the
entire balance of the deferred tax assets in the future is uncertain.
Stock-based compensation: The Company accounts for stock-based compensation
arrangements in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and complies
with the disclosure provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation.
Segment information: The Company has organized and managed its operations in
a single reportable segment providing travel-related services and licenses for
related software products. Revenues from customers outside of the United States
were less than 10% of net revenues for all periods presented in the
accompanying statements of operations.
Recent accounting pronouncements: In March 1998, the AICPA issued SOP 98-1,
Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 will be effective for the Company's fiscal year ending June 30,
2000. SOP 98-1 provides guidance on accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The Company will begin capitalizing these
costs in the fiscal year ending June 30, 2000. In April 1998, the AICPA issued
SOP 98-5, Reporting on the Costs of Start-Up Activities, effective for the
Company's fiscal year ending June 30, 2000. SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs. It requires the
costs of start-up activities and organization costs to be expensed as incurred.
The Company's organization costs were expensed as incurred.
NOTE 2: PROPERTY AND EQUIPMENT, NET
A summary of property and equipment at June 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- -------
<S> <C> <C>
Furniture and fixtures................................... $ 15,295 $ --
Computer equipment....................................... 204,756 33,620
Software................................................. 80,000 --
--------- -------
300,051 33,620
Accumulated depreciation................................. (120,322) (4,750)
--------- -------
Property and equipment, net............................ $ 179,729 $28,870
========= =======
</TABLE>
F-40
<PAGE>
VACATIONSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 3: INTANGIBLE ASSETS
A summary of intangible assets at June 30, is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Permits and licenses................................... $ 11,000 $ --
Advertising agreement.................................. 505,000 505,000
Proprietary rights..................................... 185,000 --
Contracts and commitments.............................. 365,000 --
Noncompete agreements.................................. 31,250 --
Customer lists......................................... 655,500 --
---------- --------
1,752,750 505,000
Accumulated amortization............................... (947,708) (63,125)
---------- --------
Intangible assets, net............................... $ 805,042 $441,875
========== ========
</TABLE>
NOTE 4: COMMITMENTS
The Company is obligated under various operating leases for office space and
various office equipment. Future minimum lease payments under these operating
leases as of June 30, 1999, are as follows:
<TABLE>
<CAPTION>
Years ending June 30
--------------------
<S> <C>
2000.............................. $219,916
2001.............................. 133,770
2002.............................. 136,500
2003.............................. 141,960
2004.............................. 147,420
--------
$779,566
========
</TABLE>
Rent expense under leases for office space for the periods ended June 30,
1999 and 1998, was $82,285 and $10,589, respectively, net of $27,479 and
$5,713, respectively, received under sublease agreements.
NOTE 5: LINE OF CREDIT
In September 1998, the Company entered into a line-of-credit agreement with
a bank with a maximum principal of $150,000 with annual interest at prime plus
1% (8.75% at June 30, 1999), which expired in September 1999. No principal was
outstanding at June 30, 1999.
NOTE 6: STOCKHOLDERS' EQUITY
The authorized capital of the Company is 30,000,000 shares of common stock
and 18,000,000 shares of preferred stock. The Company's authorized capital, and
the accompanying financial statements, reflect a two-for-one stock split which
was authorized by the Board of Directors on June 3, 1999, and effected in July
1999.
The preferred stock is nonredeemable and comprised of the following series
with the rights and preferences as indicated:
Series A preferred stock: 1,346,666 shares authorized, 1,010,000 shares
issued and outstanding to an affiliated party as of June 30, 1999. Series A
preferred stockholders have a dividend preference over common
F-41
<PAGE>
VACATIONSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
stockholders of $0.04 per share per annum, a liquidation preference over common
stockholders of $0.50 per share, plus declared and unpaid dividends with rights
to remaining assets in aggregate of $1.00 per share, and a conversion ratio of
1:1 to exchange Series A preferred stock to common stock. The holder of each
share of Series A stock has voting rights equal to each share of common stock
into which such preferred stock can be converted. The affiliated party has
elected one member to the Board of Directors and is entitled to this election
while owning at least 700,000 shares of Series A preferred stock.
Series A-1 preferred stock: 1,346,666 shares authorized, none issued and
outstanding as of June 30, 1999. Series A-1 preferred stockholders have a
dividend preference over common stockholders of $0.04 per share per annum, a
liquidation preference over common stockholders of $0.50 per share plus
declared and unpaid dividends with rights to remaining assets in aggregate of
$1.00 per share, and a conversion ratio of 1:1 to exchange Series A preferred
stock to common stock. The holder of each share of Series A stock has voting
rights equal to each share of common stock into which such preferred stock
could then be converted.
Series B preferred stock: 4,600,000 shares authorized, 3,562,500 shares
issued and outstanding as of June 30, 1999. Series B preferred stockholders
have a dividend preference over common stockholders of $0.16 per share per
annum, a liquidation preference over common stockholders of $2.00 per share
plus declared and unpaid dividends with rights to remaining assets in aggregate
of $4.00 per share, and a conversion ratio of 1:1 to exchange Series B
preferred stock to common stock. The holder of each share of Series B stock has
voting rights equal to each share of common stock into which such preferred
stock could then be converted. The Series B stockholders have elected two
members to the Board of Directors and is entitled to this election while owning
at least 700,000 shares of Series B preferred stock.
Series B-1 preferred stock: 4,600,000 shares authorized, none shares issued
and outstanding as of June 30, 1999. Series B-1 preferred stockholders have a
dividend preference over common stockholders of $0.16 per share per annum, a
liquidation preference over common stockholders of $2.00 per share plus
declared and unpaid dividends with rights to remaining assets in aggregate of
$4.00 per share and a conversion ratio of 1:1 to exchange Series B-1 preferred
stock to common stock. The holder of each share of Series B-1 stock has voting
rights equal to each share of common stock into which such preferred stock
could then be converted.
In December 1999, the Board of Directors approved another series of
preferred stock with the rights and preferences as indicated:
Series C and C-1 preferred stock: 3,000,000 shares authorized for each in
December 1999; no shares authorized, issued, or outstanding as of June 30,
1999. Series C and C-1 preferred stockholders have a dividend preference over
common shareholders of $0.32 per share per annum, a liquidation preference over
common stockholders of $4.00 per share plus declared and unpaid dividends with
rights to remaining assets in aggregate of $8.00 per share, and a conversion
ratio of 1:1 to exchange Series C and C-1 preferred stock to common stock. The
holder of each share of Series C and C-1 stock has voting rights equal to each
share of common stock into which such preferred stock could then be converted.
At June 30, 1999 and 1998, warrants to purchase 49,000 and -0- shares,
respectively, of common stock at a purchase price of $1.125 per share were
outstanding. In November 1999, warrants were exercised to purchase 34,300
shares of common stock.
NOTE 7: EMPLOYEE BENEFIT PLANS
401(k) savings plan: VacationSpot.com, Inc. has a savings plan which
qualifies under 401(k) of the Internal Revenue Code. Participating employees
may defer up to 15% of their pretax salary, but not more than statutory limits.
The Company contributes a matching dollar for each dollar a participant
contributes, with a
F-42
<PAGE>
VACATIONSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
maximum matching contribution of 5% of a participant's earnings. Matching
contributions for employees of the Company were $-0- and $11,173 in 1998 and
1999, respectively. In March 2000, the Company's 401(k) savings plan was
terminated in conjunction with the acquisition of the Company by Expedia, Inc.
(Note 9).
Stock option plan: In April 1999, the Board of Directors of the Company
adopted the 1999 Stock Option Plan (the 1999 Stock Option Plan). The 1999 Stock
Option Plan replaced the 1998 Unit Incentive Plan of the predecessor company,
Reservation Works LLC, with the same number of stock options having similar
terms and conditions being issued to replace the then outstanding partnership
unit options. A total of 2,500,000 shares of common stock have been reserved
for issuance under the 1999 Stock Option Plan for grants to employees,
officers, and directors of the Company. The majority of stock options issued
under the 1999 Stock Option Plan are intended to qualify as incentive stock
options, as provided in the Internal Revenue Code of 1986, as amended. Options
granted generally vest over four years, with certain acceleration provisions,
and expire after 10 years.
The following information represents the Company's outstanding stock options
for the period from inception to June 30, 1999. Upon the conversion of the
Company from an LLC to a C corporation on April 21, 1999, options covering
1,268,220 units of the LLC were exchanged for options covering shares of the C
corporation with substantially the same terms and conditions, and are included
below as April 21, 1999, cancellations and grants.
<TABLE>
<CAPTION>
Options outstanding
---------------------
Weighted
average
Number exercise
outstanding price
----------- --------
<S> <C> <C>
Inception, December 2, 1997
Granted.............................................. 72,000 $0.64
----------
Balance, June 30, 1998................................. 72,000 0.64
Granted.............................................. 1,547,220 0.99
April 21, 1999, cancellation of LLC options.......... (1,268,220) 0.94
April 21, 1999, grant of corporation options......... 1,268,220 0.94
Cancelled............................................ (35,000) 0.50
----------
Balance, June 30, 1999................................. 1,584,220 0.98
==========
</TABLE>
At June 30, 1999, options outstanding and exercisable are as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------- --------------------
Weighted Weighted
average Weighted average average
Number exercise remaining Number exercise
Exercise prices outstanding price contractual life outstanding price
--------------- ----------- -------- ---------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.50........... 353,220 $0.50 9.4 years 170,110 $0.50
1.12........... 1,231,000 1.12 9.9 60,875 1.12
--------- -------
1,584,220 230,985
========= =======
</TABLE>
F-43
<PAGE>
VACATIONSPOT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair value disclosures: Under SFAS No. 123, employee stock options are
valued at the grant date using the Black-Scholes valuation model and the
related compensation cost is recognized ratably over the vesting period. Net
loss for the period from December 2, 1997 (inception) to June 30, 1998, and
the fiscal year ended December 31, 1999, would not have been significantly
impacted had compensation cost been determined based on the Black-Scholes
value at the grant dates for awards as prescribed by SFAS No. 123.
The Company calculated the minimum fair value of each option grant at the
date of grant using the Black-Scholes pricing model with the following
assumptions: No dividends, zero expected volatility, an expected life of five
years, and a risk-free interest rate of 4.9% and 5.7% for the year ended June
30, 1999, and the period from December 2, 1997 (inception) to June 30, 1998,
respectively.
NOTE 8: RELATED PARTY TRANSACTIONS
Notes receivable from officers of the Company are due on demand with 7.5%
interest charged per annum.
In March 1998, the Company granted an equity interest to Expedia, Inc., an
operating unit of Microsoft Corporation, in exchange for a link on the Expedia
website to the VacationSpot.com website to be provided over a two-year period.
In October 1999, Microsoft Corporation contributed the assets of Expedia, Inc.
to Expedia, Inc., including the aforementioned equity interest. An executive
officer of Expedia, Inc. is a member of the Company's Board of Directors. The
fair value of the stock issued to Expedia, Inc. was estimated at $505,000.
Expedia, Inc. received warrants to purchase 336,666 shares of common stock at
a purchase price of $0.01 per share. During the year ended June 30, 1999, the
Company recognized noncash sales and marketing expense of $375,383 related to
these warrants.
NOTE 9: SUBSEQUENT EVENTS
In July 1999, VacationSpot.com, Inc. issued 1,609,946 shares of common
stock and 799,998 shares of Series B preferred stock, with a combined value of
approximately $4,800,000 in exchange for approximately 96.4% of the
outstanding stock and warrants of VHR International, s.a. in a transaction
that was accounted for under the purchase method of accounting. The 3.6% of
the outstanding stock of VHR International, s.a. not originally purchased by
VacationSpot.com, Inc. is owned by a founder of VHR International, s.a. and is
subject to a call option via a July 1999 shareholders' agreement between the
Company and the shareholder. Under the terms of the agreement, the Company may
acquire the remaining 3.6% (or 1,000 shares) of VHR International, s.a. for
90,055 shares of VacationSpot.com, Inc. common stock and $15,000 on or before
August 31, 2000.
On March 17, 2000, the Company was acquired by Expedia, Inc. All of the
outstanding shares, options, and warrants of the Company were exchanged for
approximately $82,877,000 of 2,600,000 unregistered Expedia, Inc. shares and
options.
F-44
<PAGE>
UNAUDITED CONDENSED FINANCIAL STATEMENTS OF VACATIONSPOT
VACATIONSPOT.COM, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998 (unaudited)
F-45
<PAGE>
VACATIONSPOT.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1999 and June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ -----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents.......................... $11,442,269 $ 6,593,492
Accounts receivable................................ 128,112 29,796
Prepaid expenses................................... 56,890 29,126
----------- -----------
Total current assets............................ 11,627,271 6,652,414
PROPERTY AND EQUIPMENT, net.......................... 335,427 179,729
GOODWILL, net........................................ 4,665,708
INTANGIBLE ASSETS, net............................... 677,732 805,042
----------- -----------
TOTAL........................................... $17,306,138 $ 7,637,185
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable................................... $ 472,439 $ 187,446
Accrued expenses................................... 271,669 74,792
Unearned revenue................................... 108,851 93,084
----------- -----------
Total current liabilities....................... 852,959 355,322
COMMITMENTS
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $0.0001 par
value--Authorized, 1,346,666 shares; issued and
outstanding, 1,010,000 shares with liquidation
preference of $0.50 per share..................... 101 101
Series A-1 convertible preferred stock, $0.0001 par
value--Authorized, 1,346,666 shares; none issued
and outstanding liquidation preference of $0.50
per share Series B convertible preferred stock,
$0.0001 par value--Authorized, 4,600,000 shares;
issued and outstanding, 4,362,498 and 3,562,500
shares, respectively, with liquidation preference
of $2.00 per share................................ 436 356
Series B-1 convertible preferred stock, $0.0001 par
value--Authorized, 4,600,000 shares; none issued
and outstanding with liquidation preference of
$2.00 per share................................... 200
Series C convertible preferred stock, $0.0001 par
value--Authorized, 3,000,000 shares; issued and
outstanding, 1,999,900 shares with liquidation
preference of $4.00 per share.....................
Series C-1 convertible preferred stock, $0.0001 par
value--Authorized, 3,000,000 shares; none issued
and outstanding with liquidation preference of
$4.00 per share...................................
Common stock, $0.0001 par value--Authorized,
30,000,000 shares; issued and outstanding,
8,067,996 and 6,314,350 shares, respectively...... 806 631
Additional paid-in capital......................... 23,943,759 11,042,882
Unearned stock-based compensation.................. (102,931) (102,931)
Notes receivable from affiliated parties........... (114,510) (114,510)
Accumulated deficit................................ (7,190,408) (3,544,666)
Accumulated other comprehensive loss:
Cumulative currency translation adjustment........ (84,274)
----------- -----------
Total stockholders' equity...................... 16,453,179 7,281,863
----------- -----------
TOTAL........................................... $17,306,138 $ 7,637,185
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-46
<PAGE>
VACATIONSPOT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six-Month Periods Ended December 31, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET REVENUES.......................................... $ 479,595 $ 143,560
COST OF REVENUES...................................... (1,258,836) (53,829)
----------- -----------
Gross margin........................................ (779,241) 89,731
OPERATING EXPENSES:
Product development................................. 1,057,166 454,872
Sales and marketing................................. 1,332,452 531,305
General and administrative.......................... 654,602 377,973
----------- -----------
3,044,220 1,364,150
----------- -----------
LOSS FROM OPERATIONS.................................. (3,823,461) (1,274,419)
OTHER INCOME.......................................... 177,719 19,513
----------- -----------
NET LOSS.............................................. (3,645,742) $(1,254,906)
===========
OTHER COMPREHENSIVE LOSS:
Currency translation adjustment..................... (84,274)
-----------
COMPREHENSIVE LOSS.................................... $(3,730,016)
===========
</TABLE>
See notes to consolidated financial statements
F-47
<PAGE>
VACATIONSPOT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six-Month Period Ended December 31, 1999 (unaudited)
<TABLE>
<CAPTION>
Series A Series B Series C Notes
convertible convertible convertible receivable
Common stock preferred stock preferred stock preferred stock Additional Unearned from
---------------- ---------------- ---------------- ---------------- paid-in stock-based affiliated
Shares Amount Shares Amount Shares Amount Shares Amount capital compensation parties
--------- ------ --------- ------ --------- ------ --------- ------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30,
1999............. 6,314,350 $631 1,010,000 $101 3,562,500 $356 $11,042,882 $(102,931) $(114,510)
Issuance of
Series C
preferred
stock........... 1,999,900 $200 7,999,400
Issuance of
stock related to
acquisition of
VHR
International,
s.a. ........... 1,609,946 161 799,998 80 4,819,647
Issuance of
common stock.... 143,700 14 81,830
Other
comprehensive
loss:
Currency
translation
adjustment......
Net loss........
--------- ---- --------- ---- --------- ---- --------- ---- ----------- --------- ---------
Balance, December
31, 1999......... 8,067,996 $806 1,010,000 $101 4,362,498 $436 1,999,900 $200 $23,943,759 $(102,931) $(114,510)
========= ==== ========= ==== ========= ==== ========= ==== =========== ========= =========
<CAPTION>
Cumulative
Accumulated translation Stockholders'
deficit adjustment equity
------------ ----------- -------------
<S> <C> <C> <C>
BALANCE, June 30,
1999............. $(3,544,666) $ 7,281,863
Issuance of
Series C
preferred
stock........... 7,999,600
Issuance of
stock related to
acquisition of
VHR
International,
s.a. ........... 4,819,888
Issuance of
common stock.... 81,844
Other
comprehensive
loss:
Currency
translation
adjustment...... $(84,274) (84,274)
Net loss........ (3,645,742) (3,645,742)
------------ ----------- -------------
Balance, December
31, 1999......... $(7,190,408) $(84,274) $16,453,179
============ =========== =============
</TABLE>
See notes to consolidated financial statements
F-48
<PAGE>
VACATIONSPOT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-Month Periods Ended December 31, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................. $(3,645,742) $(1,254,906)
Adjustment to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization...................... 316,149 404,522
Recognition of sales and marketing expense for
warrants for common stock......................... 86,411
Cash provided (used) by changes in operating assets
and liabilities, net of effects of purchase of VHR
International, s.a.
Accounts receivable and prepaid expenses......... (212,491) (23,837)
Accounts payable and accrued expenses............ 481,870 12,751
Unearned revenue................................. 15,767 52,715
----------- -----------
Net cash used by operating activities.......... (2,958,036) (808,755)
INVESTING ACTIVITIES:
Additions to property and equipment.................. (190,357) (158,814)
Purchase of intangible assets........................ (1,199,854)
----------- -----------
Net cash used by investing activities.......... (190,357) (1,358,668)
FINANCING ACTIVITIES:
Member contributions................................. 2,894,277
Proceeds from issuance of common and preferred
stock............................................... 8,081,444
----------- -----------
Net cash provided by financing activities...... 8,081,444 2,894,277
EFFECT OF FOREIGN EXCHANGE RATES CHANGES ON CASH AND
CASH EQUIVALENTS.................................... (84,274)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............ 4,848,777 726,854
CASH AND CASH EQUIVALENTS:
Beginning of period.................................. 6,593,492 178
----------- -----------
End of period........................................ $11,442,269 $ 727,032
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-49
<PAGE>
VACATIONSPOT.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
notes required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Consolidated operating results for
the six month period ended December 31, 1999 are not necessarily indicative of
the results that may be expected for the year ending June 30, 2000. For further
information, refer to the financial statements for the year ended June 30, 1999
and for the cumulative period from December 2, 1997 (inception) to June 30,
1998 and notes thereto included herein.
Preferred Stock
In December 1999, the Company issued 1,999,900 shares of Series C preferred
stock. Proceeds received from the offering totaled approximately $8,000,000.
Acquisition
In July 1999, VacationSpot.com, Inc. issued 1,609,946 shares of common stock
and 799,998 shares of Series B preferred stock, with a combined value of
approximately $4,800,000 in exchange for approximately 96.4% of the outstanding
stock and warrants of VHR International, s.a. in a transaction that was
accounted for under the purchase method of accounting. The 3.6% of the
outstanding stock of VHR International, s.a. not originally purchased by
VacationSpot.com, Inc. is owned by a founder of VHR International, s.a. and is
subject to a call option via a July 1999 shareholders' agreement between the
Company and the shareholder. Under the terms of the agreement, the Company may
acquire the remaining 3.6% (or 1,000 shares) of VHR International, s.a. for
90,055 shares of VacationSpot.com, Inc. common stock and $15,000 on or before
August 31, 2000.
Subsequent Event
On March 17, 2000, the Company was acquired by Expedia, Inc. All of the
outstanding shares, options, and warrants of the Company were exchanged for
approximately $82,877,000 of 2.6 million unregistered Expedia, Inc. shares and
options.
F-50
<PAGE>
EXPEDIA INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma consolidated statements of operations give
effect to the acquisitions of Travelscape.com, Inc. and VacationSpot.com, Inc.
The acquisitions were accounted for under the purchase method of accounting in
accordance with APB Opinion No. 16. Under the purchase method of accounting,
the purchase price is allocated to the assets acquired and liabilities assumed
based on their estimated fair values. The estimated fair values contained
herein are preliminary in nature, and may not be indicative of the final
purchase price allocation, which will be based on an assessment of fair value
to be performed by an independent appraiser. Such preliminary estimates of the
fair values of the assets and liabilities of Travelscape.com, Inc. and
VacationSpot.com, Inc. have been consolidated with the recorded values of the
assets and liabilities of Expedia, Inc. in the unaudited consolidated
statements of operations.
The unaudited pro forma consolidated statements of operations reflect the
consolidated results of operations of Expedia, Inc., Travelscape.com, Inc. and
VacationSpot.com, Inc. for the year ended June 30, 1999 and for the nine months
ended March 31, 2000 as if the acquisitions had occurred at the beginning of
each of the periods presented.
The unaudited pro forma consolidated statements of operations are presented
for illustrative purposes only and are not necessarily indicative of the
unaudited consolidated results of operations in future periods or the results
that actually would have been realized had Expedia, Inc. Travelscape.com, Inc.
and VacationSpot.com, Inc. been a consolidated company during the specified
periods. The unaudited pro forma consolidated statements of operations should
be read in conjunction with the historical financial statements and notes
thereto of Expedia, Inc., Travelscape.com, Inc. and VacationSpot.com, Inc.
F-51
<PAGE>
EXPEDIA, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
For the year ended June 30, 1999
------------------------------------------------------------------
Pro forma
Expedia VacationSpot Travelscape adjustments Total Notes
-------- ------------ ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 38,699 $ 360 $ 32,483 $ (200) $ 71,342 (4)
Cost of revenues........ 15,950 975 23,519 3,025 43,469 (3)(5)
-------- ------- -------- -------- --------
Gross profit (loss)... 22,749 (615) 8,964 (3,225) 27,873
-------- ------- -------- -------- --------
Operating expenses
Product development... 21,180 716 1,732 (216) 23,412 (3)(5)
Sales and marketing... 14,888 1,403 11,943 2,408 30,642 (3)(4)(5)
General and
administrative....... 6,283 714 8,071 (4,722) 10,346 (3)(5)
Amortization of
intangibles and
goodwill............. -- -- -- 62,127 62,127 (1)(2)
Recognition of stock
based compensation... -- -- -- -- --
-------- ------- -------- -------- --------
Total operating
expenses........... 42,351 2,833 21,746 59,597 126,527
-------- ------- -------- -------- --------
Loss from operations.... (19,602) (3,448) (12,782) (62,822) (98,654)
Other income/(expense),
net.................... -- 57 (1,211) -- (1,154)
-------- ------- -------- -------- --------
(19,602) (3,391) (13,993) (62,822) (99,808)
Provision for income
taxes.................. -- -- -- -- --
-------- ------- -------- -------- --------
Net loss................ $(19,602) $(3,391) $(13,993) $(62,822) $(99,808)
======== ======= ======== ======== ========
Pro forma basic and
diluted net loss per
common share........... $ (0.59) $ (2.72)
======== ========
Weighted average shares
used to compute pro
forma basic and diluted
net loss per common
share.................. 33,000 36,756
======== ========
</TABLE>
F-52
<PAGE>
EXPEDIA, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
For the nine months ended March 31, 2000
-------------------------------------------------------------------
Pro forma
Expedia VacationSpot Travelscape adjustments Total Notes
-------- ------------ ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 59,042 $ 759 $ 79,066 $ (483) $ 138,384 (4)
Cost of revenues........ 27,968 1,762 58,272 5,137 93,139 (3)(5)
-------- ------- -------- -------- ---------
Gross profit (loss)... 31,074 (1,003) 20,794 (5,620) 45,245
-------- ------- -------- -------- ---------
Operating expenses
Product development... 14,408 1,637 2,110 (336) 17,819 (3)(5)
Sales and marketing... 37,370 3,351 21,895 1,488 64,104 (3)(4)(5)
General and
administrative....... 6,573 1,036 10,614 (6,704) 11,519 (3)(5)
Amortization of
intangibles and
goodwill............. -- -- -- 46,521 46,521 (1)(2)
Recognition of stock
based compensation... 46,911 -- 1,142 -- 48,053
-------- ------- -------- -------- ---------
Total operating
expenses........... 105,262 6,024 35,761 40,969 188,016
-------- ------- -------- -------- ---------
Loss from operations.... (74,188) (7,027) (14,967) (46,589) (142,771)
Other income/(expense),
net.................... 1,486 316 (2,069) -- (267)
-------- ------- -------- -------- ---------
(72,702) (6,711) (17,036) (46,589) (143,038)
Provision for income
taxes.................. -- -- -- -- --
-------- ------- -------- -------- ---------
Net loss................ $(72,702) $(6,711) $(17,036) $(46,589) $(143,038)
======== ======= ======== ======== =========
Pro forma basic and
diluted net loss per
common share........... $ (3.59)
=========
Weighted average shares
used to compute pro
forma basic and diluted
net loss per common
share.................. 39,809
=========
</TABLE>
F-53
<PAGE>
EXPEDIA, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma consolidated statements of operations reflect the
acquisitions of Travelscape.com, Inc. and VacationSpot.com, Inc. under the
purchase method of accounting. Under the purchase price method of accounting,
the purchase price is allocated to the assets preliminary acquired and
liabilities assumed based on their estimated fair values.
The unaudited pro forma consolidated statements of operations gives effect
to the issuance of approximately 3.0 million shares, stock options and warrants
of Expedia Inc. common stock and the assumption of all outstanding shares,
stock options and warrants in connection with the acquisition of
Travelscape.com, Inc. The unaudited pro forma consolidated statements of
operations gives effect to the issuance of approximately 2.6 million shares and
stock options of Expedia Inc. common stock and the assumption of all
outstanding shares and stock options in connection with the acquisition of
VacationSpot.com, Inc.
The preliminary purchase price allocations for Travelscape, Inc. and
VacationSpot, Inc. at December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Travelscape VacationSpot Total
----------- ------------ --------
<S> <C> <C> <C>
Current and long term assets.............. $ 12,920 $11,962 $ 24,882
Intangibles and goodwill.................. 117,268 72,570 189,838
Liabilities assumed....................... (32,239) (1,253) (33,492)
-------- ------- --------
Purchase price............................ 97,949 83,279 181,228
Less: Acquisition costs................... (2,383) (1,617) (4,000)
-------- ------- --------
Common stock issued..................... $ 95,566 $81,662 $177,228
======== ======= ========
</TABLE>
The unaudited pro forma consolidated statements of operations give effect to
the following pro forma adjustments necessary to reflect the acquisitions of
Travelscape.com, Inc. and VacationSpot.com, Inc. as if they occurred at the
beginning of each period presented:
(1) The recognition of goodwill being amortized on a straight line
basis over a period of 5 years.
(2) The amortization of identifiable intangibles on a straight line
basis over a period ranging from 2-4 years.
(3) Amounts necessary to conform Travelscape Inc.'s and VacationSpot
Inc.'s depreciation policies to Expedia Inc.'s.
(4) The elimination of intercompany sales between Travelscape Inc. and
Expedia Inc.
(5) The restatement of expenses to conform with Expedia Inc.'s
classification of expenses.
F-54
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Expedia in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount
To Be Paid
----------
<S> <C>
SEC Registration Fee.............................................. $ 4,000
Printing Fees and Expenses........................................ 125,000
Legal Fees and Expenses........................................... 50,000
Accounting Fees and Expenses...................................... 50,000
Blue Sky Qualification Fees and Expenses.......................... 5,000
Miscellaneous..................................................... 10,000
--------
Total........................................................... $244,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Article VII of our Articles of Incorporation authorizes us to indemnify any
present or former director or officer to the fullest extent not prohibited by
the Washington Business Corporation Act ("WBCA") or other applicable law now or
hereafter in force. Chapter 23B.08.510 and .570 of the WBCA authorizes a
corporation to indemnify its directors, officers, employees, or agents in terms
sufficiently broad to permit such indemnification under specific circumstances
for liabilities, including provisions permitting advances for expenses
incurred, arising under the Securities Act.
In addition, we intend to either maintain our own or receive coverage under
Microsoft's directors' and officers' liability insurance under which our
directors and officers are insured against loss, as defined in the policy, as a
result of claims brought against them for their wrongful acts in such
capacities.
Item 15. Recent Sales of Unregistered Securities
(a)(i) On October 1, 1999, we issued to Microsoft 33.0 million shares of
common stock in exchange for assets relating to Expedia's operations.
(ii) On March 17, 2000, we acquired Travelscape 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.
(iii) On March 17, 2000, we also acquired Vacationspot 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.
(iv) On , 2000, we entered into an agreement to issue to TCV IV,
L.P. and TCV IV Strategic Partners, L.P. approximately 3.0 million shares of
common stock, as well as warrants to purchase 602,259 shares of common stock,
in exchange for $50 million. We expect this transaction to close in early
August 2000.
(v) On , 2000, we entered into an agreement to issue to Microsoft
602,258 shares of common stock, as well as warrants to purchase 120,452 shares
of common stock, in exchange for $10 million. We expect this transaction to
close in early August 2000.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
II-1
<PAGE>
The issuances described in Item 15(a)(i), (ii) and (iii) 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. 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 where
affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with Expedia, to information about
Expedia.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Articles of Incorporation of the Registrant+
3.2 Articles of Amendment to Articles of Incorporation dated September 22,
1999+
3.2.1 Articles of Amendment to Articles of Incorporation dated October 25,
1999++
3.3 Bylaws of the Registrant+
4.1 Form of the Registrant's Common Stock Certificate+
5.1 Opinion of Preston Gates & Ellis LLP
10.1 Contribution Agreement between Expedia, Inc. and Microsoft
Corporation, effective October 1, 1999+
10.2 Services Agreement between Expedia, Inc. and Microsoft Corporation,
effective October 1, 1999+
10.3 License Agreement between Expedia, Inc. and Microsoft Corporation,
effective October 1, 1999+
10.4 Map Server License Agreement between Expedia, Inc. and Microsoft
Corporation, effective October 1, 1999+
10.5 Carriage and Cross Promotion Agreement between Expedia, Inc. and
Microsoft Corporation, effective October 1, 1999+
10.6 Tax Allocation Agreement between Expedia, Inc. and Microsoft
Corporation, effective October 1, 1999+
10.7 Shareholder Agreement between Expedia, Inc. and Microsoft Corporation,
effective October 1, 1999+
10.8 CRS Marketing, Services and Development Agreement between Microsoft
Corporation and Worldspan, L.P., dated December 15, 1995 and last
amended on April 1, 1999+**
10.9 Service Agreement between Microsoft Corporation and World Travel
Partners, L.P., dated October 9, 1996 and amended on April 1, 1999+**
10.10 1999 Stock Option Plan+
10.11 1999 Employee Stock Purchase Plan+
10.12 1999 Directors' Stock Option Plan+
10.13 Employment Agreement between Expedia, Inc. and Richard N. Barton+
10.14 Agreement and Plan of Reorganization by and among Expedia, Travel
Enterprises, Inc., Travelscape, and certain principal stockholders of
Travelscape, dated January 31, 2000 and as amended on March 13, 2000
and March 15, 2000++++
10.15 Agreement and Plan of Reorganization by and among Expedia,
VacationSub, Inc., VacationSpot, and the principal stockholders of
VacationSpot, dated January 30, 2000++++
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of Counsel (included in Exhibit 5.1)
23.3 Consent of KPMG LLP, Independent Auditors
27.1 Financial Data Schedule+
</TABLE>
--------
+ Previously filed as an exhibit to Expedia's Form S-1 filed September 23,
1999
++ Previously filed as an exhibit to Expedia's Form S-1/A filed October 26,
1999
II-2
<PAGE>
+++ Previously filed as an exhibit to Expedia's Form S-1/A filed November 8,
1999
++++ Previously filed as an exhibit to Expedia's Form 8-K filed April 3, 2000
** Confidential treatment granted for portions of this agreement pursuant to
Rule 406 of the Securities Act
(b) Financial Statement Schedules
Not applicable.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this its Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Redmond, State of
Washington, on the 21st day of July 2000.
EXPEDIA, INC.
/s/ Richard N. Barton
By: _________________________________
Richard N. Barton
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities indicated on July 21, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Richard N. Barton President, Chief Executive
___________________________________________ Officer, Director (Principal
Richard N. Barton Executive Officer)
/s/ Gregory S. Stanger Vice President, Finance; Chief
___________________________________________ Financial Officer (Principal
Gregory S. Stanger Financial and Accounting
Officer)
* Chairman of the Board
___________________________________________
Gregory B. Maffei
* Director
___________________________________________
Brad Chase
* Director
___________________________________________
Gerald Grinstein
* Director
___________________________________________
Laurie McDonald Jonsson
* Director
___________________________________________
Richard D. Nanula
/s/ Richard N. Barton
*By: ______________________________________
Richard N. Barton
Attorney-in-fact
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Articles of Incorporation of the Registrant+
3.2 Articles of Amendment to Articles of Incorporation dated September 22,
1999+
3.2.1 Articles of Amendment to Articles of Incorporation dated October 25,
1999++
3.3 Bylaws of the Registrant+
4.1 Form of the Registrant's Common Stock Certificate+
5.1 Opinion of Preston Gates & Ellis LLP
10.1 Contribution Agreement between Expedia, Inc. and Microsoft
Corporation, effective October 1, 1999+
10.2 Services Agreement between Expedia, Inc. and Microsoft Corporation,
effective October 1, 1999+
10.3 License Agreement between Expedia, Inc. and Microsoft Corporation,
effective October 1, 1999+
10.4 Map Server License Agreement between Expedia, Inc. and Microsoft
Corporation, effective October 1, 1999+
10.5 Carriage and Cross Promotion Agreement between Expedia, Inc. and
Microsoft Corporation, effective October 1, 1999+
10.6 Tax Allocation Agreement between Expedia, Inc. and Microsoft
Corporation, effective October 1, 1999+
10.7 Shareholder Agreement between Expedia, Inc. and Microsoft Corporation,
effective October 1, 1999+
10.8 CRS Marketing, Services and Development Agreement between Microsoft
Corporation and Worldspan, L.P., dated December 15, 1995 and last
amended on April 1, 1999+**
10.9 Service Agreement between Microsoft Corporation and World Travel
Partners, L.P., dated October 9, 1996 and amended on April 1, 1999+**
10.10 1999 Stock Option Plan+
10.11 1999 Employee Stock Purchase Plan+
10.12 1999 Directors' Stock Option Plan+
10.13 Employment Agreement between Expedia, Inc. and Richard N. Barton+
10.14 Agreement and Plan of Reorganization by and among Expedia, Travel
Enterprises, Inc., Travelscape, and certain principal stockholders of
Travelscape, dated January 31, 2000 and as amended on March 13, 2000
and March 15, 2000++++
10.15 Agreement and Plan of Reorganization by and among Expedia,
VacationSub, Inc., VacationSpot, and the principal stockholders of
VacationSpot, dated January 30, 2000++++
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of Counsel (included in Exhibit 5.1)
23.3 Consent of KPMG LLP, Independent Auditors
27.1 Financial Data Schedule+
</TABLE>
--------
+ Previously filed as an exhibit to Expedia's Form S-1 filed September 23,
1999
++ Previously filed as an exhibit to Expedia's Form S-1/A filed October 26,
1999
+++ Previously filed as an exhibit to Expedia's Form S-1/A filed November 8,
1999
++++ Previously filed as an exhibit to Expedia's Form 8-K filed April 3, 2000
** Confidential treatment granted for portions of this agreement pursuant to
Rule 406 of the Securities Act
