<PAGE>
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
Commission File Number 0-27429
----------------------
EXPEDIA, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1996083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13810 SE EASTGATE WAY, STE. 400, BELLEVUE, WA 98005
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (425) 564-7200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of
September 30, 2000 was 48,307,000.
--------------------------------------------------------------------------------
<PAGE>
EXPEDIA, INC.
FORM 10-Q
For the Quarter Ended September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
PART I. Financial Information...................................................................... 3
Item 1. Consolidated Financial Statements...................................................... 3
a) Consolidated Statements of Operations and Comprehensive Loss for the Three
Months ended September 30, 1999 and 2000........................................... 3
b) Consolidated Balance Sheets as of June 30, 2000 and September 30, 2000............. 4
c) Consolidated Statement of Changes in Stockholders' Equity for the Period from
July 1, 2000 to September 30, 2000................................................. 5
d) Consolidated Statements of Cash Flows for the Three Months Ended September 30,
1999 and 2000...................................................................... 6
e) Notes to Consolidated Financial Statements......................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 10
PART II. Other Information.......................................................................... 14
Item 1. Legal Proceedings...................................................................... 14
Item 2. Changes in Securities and Use of Proceeds.............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders.................................... 14
Item 6. Exhibits............................................................................... 14
SIGNATURES........................................................................................... 15
</TABLE>
2
<PAGE>
PART I. Financial Information
Item 1. Consolidated Financial Statements
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts) (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
1999 2000
-----------------------
<S> <C> <C>
Agency revenues $ 9,646 $ 21,646
Merchant revenues 199 46,720
Advertising and other revenues 5,423 8,124
-----------------------
Revenues 15,268 76,490
Cost of revenues (excluding recognition of stock-based
compensation of $559 in 2000) 5,364 50,696
-----------------------
Gross profit 9,904 25,794
-----------------------
Operating expenses:
Product development (excluding recognition of stock-based
compensation of $9,087 in 2000) 5,393 5,270
Sales and marketing (excluding recognition of stock-based
compensation of $1,150 in 2000) 6,732 17,899
General and administrative (excluding recognition of stock-based
compensation of $2,821 in 2000) 2,729 5,342
Amortization of goodwill and intangibles - 15,532
Recognition of stock-based compensation - 13,617
-----------------------
Total operating expenses 14,854 57,660
-----------------------
Loss from operations (4,950) (31,866)
Net interest income and other - 1,082
-----------------------
Loss before provision for income taxes (4,950) (30,784)
Provision for income taxes - -
-----------------------
Net loss $(4,950) $(30,784)
=======================
Net loss $(4,950) $(30,784)
Other comprehensive loss:
Currency translation adjustment - (10)
-----------------------
Comprehensive loss $(4,950) $(30,794)
=======================
Pro forma basic and diluted net loss per common share $ (0.15) $ -
=======================
Basic and diluted net loss per common share $ - $ (0.69)
=======================
Weighted average shares used to compute pro forma
basic and diluted net loss per common share 33,000 -
=======================
Weighted average shares used to compute
basic and diluted net loss per common share - 44,849
=======================
</TABLE>
See accompanying notes.
3
<PAGE>
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
2000 2000
-----------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60,670 $ 122,339
Accounts receivable, net 13,997 9,108
Prepaid expenses and other current assets 6,452 8,613
-----------------------------------------
Total current assets 81,119 140,060
Property and equipment, net 6,446 8,535
Restricted deposits 7,064 7,578
Intangible assets, net 88,739 77,995
Goodwill, net 89,682 85,119
-----------------------------------------
Total assets $ 273,050 $ 319,287
=========================================
LIABILITIES
Current liabilities:
Accounts payable $ 20,553 $ 21,476
Accrued expenses 16,582 17,668
Due to Microsoft 2,392 2,275
Current portion of notes payable 300 274
Current portion of unearned revenue 21,170 24,486
-----------------------------------------
Total current liabilities 60,997 66,179
Notes payable, net of current portion 1,607 1,560
Unearned revenue, net of current portion 2,950 -
-----------------------------------------
Total liabilities 65,554 67,739
-----------------------------------------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 120,000 shares authorized,
48,307 issued and outstanding at September 30, 2000 445 483
Preferred stock, $.01 par value, 10,000 shares authorized,
none issued and outstanding at September 30, 2000 - -
Additional paid-in-capital 369,446 430,066
Unearned stock-based compensation (49,261) (35,073)
Retained deficit (113,365) (144,149)
Accumulated other comprehensive income:
Cumulative currency translation adjustment 231 221
-----------------------------------------
Total stockholders' equity 207,496 251,548
-----------------------------------------
Total liabilities and stockholders' equity $ 273,050 $ 319,287
=========================================
</TABLE>
See accompanying notes.
4
<PAGE>
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Unearned Currency
------------------ Paid-in Stock-based Retained Translation
Shares Amount Capital Compensation Deficit Adjustment Total
-------- ------- ---------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 2000 44,489 $ 445 $ 369,446 $ (49,261) $ (113,365) $ 231 $207,496
Proceeds from issuance of common stock,
net of issuance costs 3,654 36 60,447 60,483
Proceeds from exercise of options 164 2 744 746
Recognition of stock-based compensation 13,617 13,617
Forfeiture of stock-based compensation (571) 571 -
Net loss (30,784) (30,784)
Other comprehensive income:
Cumulative currency translation
adjustment (10) (10)
-------- ------- ---------- ----------- ----------- -------- ---------
Balance, September 30, 2000 48,307 $ 483 $ 430,066 $ (35,073) $ (144,149) $ 221 $251,548
======== ======= ========== =========== =========== ======== =========
</TABLE>
See accompanying notes.
5
<PAGE>
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1999 2000
-------------------------
<S> <C> <C>
Operating activities:
Net loss $ (4,950) $ (30,784)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation 264 555
Recognition of stock-based compensation 13,617
Amortization of goodwill and intangibles 15,532
Provision for doubtful accounts 923
Cash provided (used) by changes in operating
assets and liabilities:
Accounts receivable (increase) decrease (927) 3,966
Prepaid expenses and other current assets
increase (2,161)
Accounts payable and accrued expenses increase 133 1,784
Due to Microsoft decrease (117)
Unearned revenue (decrease) increase (173) 366
-------------------------
Net cash (used) provided by operating activities (5,653) 3,681
-------------------------
Investing activities:
Additions to property and equipment (599) (2,644)
Funding of restricted deposits (514)
-------------------------
Net cash used by investing activities (599) (3,158)
-------------------------
Financing activities:
Repayment of notes payable (73)
Net proceeds from issuance of stock 60,483
Net proceeds from exercise of options 746
Net contribution from Microsoft 6,252 -
-------------------------
Net cash provided by financing activities 6,252 61,156
-------------------------
Effect of foreign exchange rate changes on cash and
cash equivalents (10)
-------------------------
Net increase in cash and cash equivalents - 61,669
Cash and cash equivalents at beginning of period - 60,670
-------------------------
Cash and cash equivalents at end of period $ - $ 122,339
=========================
Supplemental disclosures to cash flow statements:
Cash paid for interest $ - $ 64
Forfeiture of stock-based compensation 571
</TABLE>
See accompanying notes.
6
<PAGE>
EXPEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Business Description
In October 1996, Microsoft Corporation ("Microsoft") launched its online
travel services product called Expedia. Since that launch, Expedia, Inc. (the
"Company") has become a leading provider of branded online travel services for
leisure and business travelers. The Company operates a website, located at
Expedia.com, with localized versions in the United Kingdom, Germany and Canada.
The Company offers one-stop travel, shopping and reservation services,
providing real-time access to schedule, pricing and availability information for
airlines, hotels and car rental companies.
The Company was incorporated in the state of Washington on August 23, 1999.
The authorized share capital of the Company was 120,000,000 shares of common
stock and 10,000,000 shares of preferred stock. On October 1, 1999, Microsoft
separated the assets and contributed them in exchange for 33,000,000 shares of
Expedia common stock or 100% of the outstanding common stock at that date.
Concurrent with this, the Company entered into a number of agreements with
Microsoft to facilitate the operation of the Company and its assets after the
separation.
In March 2000, the Company acquired both Travelscape.com, Inc.
("Travelscape"), a Delaware corporation based in Las Vegas, Nevada, and
VacationSpot.com, Inc. ("VacationSpot"), a Delaware corporation based in
Seattle, Washington. Travelscape is a leading branded internet hotel wholesaler
and packager with discounted rate contracts worldwide, and the operator of the
Travelscape.com and LVRS.com websites. VacationSpot is a leading reservation
network for vacation homes, rental condominiums, inns and bed & breakfasts
around the world. The VacationSpot.com and Rent-a-Holiday.com websites, acquired
as part of the acquisition, offer unique properties in vacation destinations and
countries worldwide.
The Company derives revenues from transactions and sales of advertisements
on its websites. Historically, the Company has licensed components of its
technology and editorial content to selected airlines and American Express as a
platform for their websites.
2. Basis of Presentation
The accompanying consolidated balance sheets and related interim
consolidated statements of operations, cash flows, and changes in stockholders'
equity include all adjustments (consisting only of normal recurring items)
necessary for their fair presentation in conformity with accounting principles
generally accepted in the United States of America. Preparing financial
statements requires the Company to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, and expenses. Actual
results may differ from those estimates. Interim results are not necessarily
indicative of results for a full year. Users of the consolidated financial
statements should read the information included in this Form 10-Q in conjunction
with Management's Discussion and Analysis and consolidated financial statements
and notes thereto included in our Annual Report filed on Form 10-K with the
Securities and Exchange Commission on September 28, 2000.
The financial statements are consolidated and include the accounts of
Expedia, Inc. and its wholly-owned subsidiaries. Both Travelscape and
VacationSpot were acquired on March 17, 2000 and have been accounted for under
the purchase method of accounting. Significant inter-company transactions and
balances have been eliminated.
3. Capitalized Software Costs
The Company has capitalized $1.3 million of software development costs
including projects in process at July 1, 2000, for the quarter ended September
30, 2000 in accordance with The Emerging Issues Task Force (EITF) No. 00-02,
Accounting for Website Development Costs. These costs will be amortized over a
one year useful life, beginning upon the release of the website. No amortization
has been recorded to date as the software products were not available for use at
September 30, 2000.
7
<PAGE>
4. Recent Accounting Pronouncements
The Emerging Issues Task Force (EITF) of the Financial Accounting Standards
Board (FASB) reached consensus on Issue No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, which establishes indicators to determine the
statement of operations' presentation of revenue. The Company is currently
evaluating the impact of this consensus, which must be applied by the end of the
fiscal year ending June 30, 2001. If necessary, prior periods may be restated to
apply the impact of this consensus.
In December 1999, the United States Securities and Exchange Commission
(SEC) released Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition
in Financial Statements, which must be applied in the fourth quarter of fiscal
2001. SAB 101 provides guidance on revenue recognition and the SEC staff's views
on the application of accounting principles to selected revenue recognition
issues. The Company does not expect that the adoption of SAB 101 will have a
material impact on the consolidated financial statements.
5. Income Taxes
Effective October 1, 1999, the Company entered into a tax allocation
agreement with Microsoft. The Company may be reimbursed by Microsoft for tax
losses incurred during the period from October 1, 1999 to March 17, 2000 which
are utilized on the Microsoft consolidated U.S. federal tax return. On March 18,
2000, Microsoft's investment in the Company fell below 80% ownership. As such,
from March 18, 2000 onward, the Company must file a separate tax return.
At September 30, 2000, the Company has generated a net operating loss carry
forward of $36 million for federal income tax purposes, expiring in 2020. Any
losses not utilized by Microsoft will be carried forward by the Company and can
be used on the Company's separate return to offset any future taxable income. As
of September 30, 2000, the Company has received no such reimbursement from
Microsoft. Any reimbursement from Microsoft will be recorded as a capital
contribution.
Because of the Company's limited operating history, losses incurred to date
and the difficulty in accurately forecasting future results, the Company has
applied a valuation allowance equivalent to the net operating loss carry
forward. As a result, the Company has not recorded a benefit for federal and
state income taxes or related deferred tax assets. Management evaluates, on a
quarterly basis, the recoverability of the deferred tax assets and the level of
the valuation allowance.
6. Net Loss Per Share
Net loss per share and pro forma net loss per share have been computed in
accordance with SFAS No. 128, Earnings per Share. Pro forma net loss per share
has also been computed in accordance with 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. Net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding. Common stock equivalent shares related to stock options,
warrants and shares subject to repurchase are excluded from the calculation as
their effect is antidilutive. Accordingly, basic and diluted loss per share are
equivalent.
7. Related Party Transactions
Prior to October 1, 1999, the financial statements of the Company reflect
certain allocated corporate support costs from Microsoft. Such allocations and
charges are based on a percentage of total corporate costs for the services
provided, based on factors such as headcount, revenue, gross asset value, or the
specific level of activity directly related to such costs.
8
<PAGE>
Management believes that the allocation methods used are reasonable and
reflective of the Company's proportionate share of such expenses and are not
materially different from those that would have been incurred on a stand-alone
basis.
Costs prior to October 1, 1999 representing allocations from Microsoft (in
thousands):
Three Months Ended
September 30,
--------------------------
1999 2000
--------------------------
Revenues $ - $ -
Cost of revenues 924 -
Product development 557 -
Sales and marketing 1,497 -
General and administrative 2,086 -
--------------------------
$ 5,064 $ -
==========================
Costs and revenue representing charges from the services agreement and
other agreements with Microsoft (in thousands):
Three Months Ended
September 30,
--------------------------
1999 2000
--------------------------
Revenues $ - $ (44)
Cost of revenues - 526
Product development - 383
Sales and marketing - 1,222
General and administrative - 438
--------------------------
$ - $ 2,525
==========================
On August 25, 2000, the Company issued 3,011,293 shares of common stock and
warrants to purchase an additional 602,259 shares of our common stock to TCV IV,
L.P. and TCV IV Strategic Partners, L.P. in exchange for approximately $50
million in cash. As a result of the investment, one of the partners of TCV IV
became a director of Expedia. On that same date, the Company issued 602,258
shares of common stock and warrants to purchase an additional 120,452 shares of
our common stock to Microsoft in exchange for approximately $10 million in cash.
8. Commitments and Contingencies
The Company has multi-year agreements with certain travel service providers
that make available the services accessed through the Company's website. Under
these agreements, the Company pays monthly service fees to the service providers
based on the volume of activity. The Company expenses these amounts as the
services are provided.
The Company 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 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. The Company and Microsoft are currently working on
an amended services agreement 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 taxes.
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 domestic and international MSN.com website, the Hotmail email
service and the WebTV platform. Microsoft will receive a flat annual fee of $2.0
million during the first year of the agreement, which started on December 1,
1999, and will receive $2.2 million during the second year. Microsoft will also
receive incentive fees to the extent that the number of completed airline
transactions from users of the MSN.com website exceeds the Company's forecasts.
The fees and terms of sale of banner advertisements will depend on agreement
between the parties for the remaining three years under this agreement.
On October 13, 1999 and July 14, 2000, Priceline.com Incorporated
("Priceline.com") 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 the Company's 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.
The Company does 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, asserting a counterclaim
that alleges inequitable conduct in the prosecution of the patent in question,
and seeking a declaration that the patent is invalid, unenforceable or not
infringed. Discovery has recently commenced relating to the October 13, 1999
lawsuit. The parties are working through various pre-trial motions relating to
this case. On September 6, 2000, Microsoft and Expedia filed an Answer to
Priceline.com's July 14, 2000 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. Microsoft has also filed a motion to be dismissed from the
lawsuit. Discovery has not commenced in this lawsuit.
In addition to the matters discussed above, the Company is subject to
various legal proceedings and claims that arise in the ordinary course of
business. Management believes that the resolution of all such matters discussed
above will not have a material impact to our financial position, results of
operations or cash flows.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in this section has been derived from our
consolidated financial statements and should be read together with our
consolidated financial statements and related notes included elsewhere in this
10-Q. The discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those expressed or
implied in these forward-looking statements as a result of various factors,
including those set forth under the section entitled "Risk Factors" in our
Registration Statement on Form S-1 (SEC File No. 333-40934) filed on July 21,
2000.
Overview
Prior to October 1, 1999, we conducted business as an operating unit of
Microsoft. Our statements of operations and balance sheets were derived from the
historic books and records of Microsoft and included cost allocations from
Microsoft. We believe that the allocated amounts are reasonable and reflective
of the Company's proportionate share of such expenses and are not materially
different from those that would have been incurred on a stand-alone basis. On
October 1, 1999, the effective date of the contribution agreement, Microsoft
contributed assets in exchange for common stock of Expedia, Inc. From that date
forward, our books and records have been maintained separately from Microsoft's.
Our agency revenues are derived from airline ticket transactions and hotel
and car rental reservations. Airline ticket transactions make up the substantial
majority of these revenues. This revenue represents both commissions and fees
related to the sale of airline tickets. Airline ticket commissions are
determined by individual airlines and billed and collected through the Airline
Reporting Corporation, an industry-administered clearinghouse. As is customary
in the travel industry, travel suppliers are not obligated to pay any specified
commission rate for bookings made through our websites. We recognize transaction
revenues on air transactions when the reservation is made and secured by a
credit card. We recognize transaction revenues on hotel, cruise and car rental
reservations either on receipt of commissions or on notification of entitlement
by a third party.
Our merchant revenue is derived from transactions where we are the merchant
of record and determine the ticket price or room rate. Agreements with hotels
for blocks of rooms that we sell generate the majority of our total merchant
revenues. Hotel Price Matcher and Flight Price Matcher generate the remainder of
the merchant revenue. For all merchant transactions the revenue and related cost
of sales are recorded at gross amounts. If the reservation is non-cancellable,
revenue is recorded when the reservation is made. Otherwise, revenue is deferred
until the actual flight or stay occurs.
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 transactions occur.
We launched our websites in Canada in fiscal 1997, in the United Kingdom in
fiscal 1999 and in Germany in fiscal 2000. Rent-a-Holiday.com, based in Belgium,
was acquired as part of the VacationSpot acquisition. As a result of increased
activity from these websites and future websites in other markets we may enter,
we expect international revenues to continue to increase.
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 call center, and costs related to insertion of
10
<PAGE>
banner and other advertisements. For our merchant of record transactions, cost
of revenues also includes the cost of the hotel room or airline ticket as
charged by the provider along with the credit card merchant fees.
Our direct product development expenses and direct general and
administrative 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. We are currently
working with Microsoft on an amended services agreement to extend the expiration
date. 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. Certain services have been discontinued. 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 over the next several quarters. Additionally, our revenues
are impacted by the seasonality of the travel industry, particularly leisure
travel. These factors could adversely affect our future financial condition and
operating results.
Our fiscal years end on June 30 of each year. References to a fiscal year,
such as fiscal 2001, are to the twelve months ended June 30 of that year.
Results of Operations
The following table sets forth our results of operations as a percentage of
revenues for the three months ended September 30, 2000 compared to the same
period in 1999. Included in this table is a breakdown of revenue from our three
primary sources: agency, merchant, advertising and other.
(As a Percentage of Revenues)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
1999 2000
------------------
<S> <C> <C>
Agency revenues 63% 28%
Merchant revenues 1% 61%
Advertising and other revenues 36% 11%
------------------
Revenues 100% 100%
Cost of revenues (excluding recognition of stock-based
compensation of 1% in 2000) 35% 66%
------------------
Gross profit 65% 34%
------------------
Operating expenses:
Product development (excluding recognition of stock-based
compensation of 12% in 2000) 35% 7%
Sales and marketing (excluding recognition of stock-based
compensation of 1% in 2000) 44% 23%
General and administrative (excluding recognition of stock-based
compensation of 4% in 2000) 18% 7%
Amortization of goodwill and intangibles 0% 20%
Recognition of stock-based compensation 0% 18%
------------------
Total operating expenses 97% 75%
------------------
Loss from operations (32%) (41%)
Net interest income and other 0% 1%
------------------
Loss before provision for income taxes (32%) (40%)
Provision for income taxes 0% 0%
------------------
Net loss (32%) (40%)
==================
</TABLE>
Revenues
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1999 2000 Change in %
------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Agency revenues $ 9,646 $ 21,646 124%
Merchant revenues 199 46,720 23377%
Advertising and other revenues 5,423 8,124 50%
------------------------------------------
Revenues $ 15,268 $ 76,490 401%
==========================================
</TABLE>
Revenues. Agency revenues reflect strong increases as internet commerce,
and especially travel sales, continues to gain acceptance and grow
substantially. As a result, in addition to a greater number of visitors to our
websites, we have also been successful in converting a greater percentage of
those visitors to make purchases. With the acquisition of Travelscape in March
2000 and the introduction of our Expedia Special Rate business in June 2000, we
have significantly increased our revenues since we record the full amount of the
ticket or hotel room sold to our customers as merchant revenue as opposed to
only the amount received from commissions and fees on transactions where we are
not merchant of record. Increases in advertising and licensing-related revenue
comprised the remainder of the increase. The growth rate in this area is less
because a portion of these revenues are fixed over time.
11
<PAGE>
Cost of Revenues (excluding recognition of stock-based compensation of $559,000
in 2000) and Gross Profit
Three Months Ended
September 30,
----------------------
1999 2000 Change in %
---------------------------------------
($ in thousands)
Cost of revenues $ 5,364 $ 50,496 841%
% of revenues 35% 66%
Gross profit $ 9,904 $ 25,794 160%
% of revenues 65% 34%
Cost of Revenues and Gross Profit. The increases in the cost of revenues
and gross profit correspond to the growth in revenues. The decrease in the gross
profit percentage during the quarter ended September 30, 2000 was primarily due
to increases in the merchant business. Because we act as the merchant of record
in these transactions, the revenue and related cost of revenues are presented at
gross amounts, resulting in a lower gross profit percentage on these
transactions. Partially offsetting the declines in the gross profit percentage
mentioned above are increased transaction volumes, which have created economies
of scale, and the growth in advertising and other revenue, which has a high
profit margin.
Product Development (excluding recognition of stock-based compensation of
$9,087,000 in 2000)
Three Months Ended
September 30,
----------------------
1999 2000 Change in %
-----------------------------------
($ in thousands)
Product development $ 5,393 $ 5,270 (2%)
% of revenues 35% 7%
Product Development. During the quarter ended September 30, 2000, we
capitalized $1.3 million in product development costs related to website
development. As a result, product development expenses declined 2%. Excluding
the impact of this capitalization, which was in accordance with new accounting
pronouncements, expenses would have increased 21% from last year reflecting
growth in the number of employees focused on product development. The decreases
in costs combined with significantly larger revenues result in the large
decrease in product development costs as a percentage of revenues.
Sales and Marketing (excluding recognition of stock-based compensation of
$1,150,000 in 2000)
Three Months Ended
September 30,
----------------------
1999 2000 Change in %
-----------------------------------
($ in thousands)
Sales and marketing $ 6,732 $ 17,899 166%
% of revenues 44% 23%
Sales and Marketing. The increases in expenses are primarily attributable
to increased promotional activities intended to bring additional customers to
our websites. Our promotional activities range from radio to paper media
advertising, and include domestic television ads. We anticipate increasing our
spending in this area in order to build greater brand awareness and increase the
number of internet users who access our websites. Although the costs increased,
the significantly larger revenues resulted in the large decrease in sales and
marketing costs as a percentage of revenues.
General and Administrative (excluding recognition of stock-based compensation of
$2,821,000 in 2000)
Three Months Ended
September 30,
--------------------
1999 2000 Change in %
------------------------------------
($ in thousands)
General and administrative $ 2,729 $ 5,342 96%
% of revenues 18% 7%
General and Administrative. These costs increased in absolute terms but
decreased as a percentage of revenues. The increase is mainly due to three
factors. First, we have hired employees to perform certain functions that were
not previously necessary when Expedia was an operating unit of Microsoft.
Second, the acquisitions of Travelscape and VacationSpot in March 2000 have
increased our general and administrative costs through increased headcount as
well as other related expenses. Third, through our periodic review of
potentially uncollectible accounts, we have booked an additional reserve of
approximately $900,000 during the quarter ended September 30, 2000. Although the
costs increased, the significantly larger revenues result in the large decrease
in general and administrative costs as a percentage of revenues.
Amortization of Goodwill and Intangibles
Three Months Ended
September 30,
------------------
1999 2000 Change in %
------------------------------
($ in thousands)
Amortization of goodwill and intangibles $ - $ 15,532 n/a
% of revenues 0% 20%
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles was related to our acquisitions of Travelscape and VacationSpot in
March 2000.
12
<PAGE>
Recognition of Stock-based Compensation
Three Months Ended
September 30,
------------------
1999 2000 Change in %
--------------------------------
($ in thousands)
Recognition of stock-based compensation $ - $ 13,617 n/a
% of revenues 0% 18%
Three Months Ended
September 30, 2000 % of Revenues
------------------------------------
($ in thousands)
Recognition of stock-based compensation
Cost of revenues $ 559 1%
Product development 9,087 12%
Sales and marketing 1,150 1%
General and administrative 2,821 4%
------------------------------------
$13,617 18%
====================================
Recognition of Stock-based Compensation. On the completion of the initial
public offering, all the unvested options to purchase Microsoft common stock
held by Expedia employees were converted to Expedia options. These stock option
issuances were deemed to be new grants and created non-cash compensation expense
for the difference between the option exercise price and the fair market value
of the common stock at the date of grant. The starting date for amortization
coincides with the initial public offering date of November 10, 1999.
Net Interest Income and Other
Three Months Ended
September 30,
------------------
1999 2000 Change in %
-----------------------------------
($ in thousands)
Net interest income and other $ - $ 1,082 n/a
% of revenues 0% 1%
Net interest income and other. All of our operations were funded by
Microsoft prior to their contribution of assets on October 1, 1999. Expedia,
Inc. now invests its own cash, the majority of which were net proceeds from our
initial public offering of stock on November 10, 1999 and our private placement
of stock and warrants on August 25, 2000.
Liquidity and Capital Resources
Prior to October 1, 1999, as a division of Microsoft, we financed our
activities through Microsoft. As a result, during the three months ended
September 30, 1999, operating and allocated expenses were recorded as a
contribution from owner.
In November 1999, we raised $76.6 million from our initial public offering.
In August 2000, we completed a private placement of warrants and common stock
consisting of $50.0 million from Technology Crossover Ventures and $10.0 million
from Microsoft. Proceeds from these sales of stock have been the primary source
of funding our operations.
During the three months ended September 30, 2000, net cash provided by
operating activities was $3.7 million. The net loss for this period, excluding
the non-cash charges for goodwill amortization and recognition of stock
compensation, was $1.6 million. A decrease in accounts receivable and increase
in accounts payable and accrued expenses, combined with non-cash charges,
contributed towards the cash generated by operating activities.
Net cash used in investing activities for the three months ended September
1999 and 2000, was $600,000 and $3.2 million, respectively. These investing
activities consisted primarily of capital expenditures, which totaled $2.6
million during the three months ended September 30, 2000. Of this amount, $1.3
million relates to the capitalization of website development costs and $600,000
relates to new system related costs. The remaining capital expenditures reflect
normal expenditure levels consistent with our growth as a company. We anticipate
other significant capital expenditures during the next twelve months for
computers and other system-related costs associated with our expected growth.
Additional costs will also be capitalized related to further website development
efforts.
Stock option exercises were a source of approximately $700,000 of cash. We
anticipate additional stock option exercises going forward.
As of September 30, 2000, we had $122.3 million in cash and cash
equivalents. We anticipate increasing our level of marketing and other
expenditures for the next several quarters which may result in negative
operating cash flows. However, we do not currently anticipate needing any other
additional cash funding as we believe that our current cash on hand will
sufficiently fund these negative cash flows on operations.
We have adopted the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, beginning July 1, 2000. We have not held
derivative financial instruments at any time, therefore, this pronouncement did
not have any impact on the consolidated financial statements. The majority of
the debt we have has fixed interest rates. Accordingly, we have not been exposed
to near-term adverse changes in interest rates or other market prices. We may,
however, experience such adverse changes if we incur variable-rate debt or hold
derivative financial instruments in the future. Our international operations
expose us to some foreign currency risk. We do not expect any of these risks to
have a material effect on our financial results.
13
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
See Note 8 to Consolidated Financial Statements ("Commitments and
Contingencies").
Item 2. Changes in Securities and Use of Proceeds
a) Recent Sales of Unregistered Securities
(i) On August 25, 2000, we issued 3,011,293 shares of our common stock
and warrants to purchase an additional 602,259 shares of our common stock to
TCV IV, L.P. and TCV IV Strategic Partners, L.P. in exchange for approximately
$50 million in cash. On that same date, we issued 602,258 shares of our common
stock and warrants to purchase an additional 120,452 shares of our common stock
to Microsoft Corporation in exchange for approximately $10 million in cash. The
exercise price for the warrants issued in these transactions is $16.604167 per
share, subject to adjustment for dilutive events.
(ii) On March 17, 2000, we acquired Travelscape.com, Inc. by issuing
approximately 3.0 million shares, stock options and warrants in exchange for all
outstanding shares, stock options and warrants of Travelscape. The total value
of the stock exchanged was approximately $96 million.
(iii) On March 17, 2000, we also acquired VacationSpot.com, Inc. by issuing
approximately 2.6 million shares and stock options in exchange for all of the
outstanding shares and stock options of VacationSpot. The total value of the
stock exchanged was approximately $82 million.
The issuances described above were deemed to be exempt from registration under
the Securities Act in reliance upon Section 4(2) thereof as a transaction by an
issuer not involving any public offering and/or reliance upon Regulation D. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends where
affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with Expedia, to information about
Expedia.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on November 9, 2000
for the purposes of (i) electing seven directors to serve until the Annual
Meeting of Shareholders to be held in 2001; and (ii) approving the amendment of
the Company's Stock Option Plan to provide for increases in the number of shares
of the Company's Common Stock reserved for issuances under the plan. Both
proposals were approved. The table below shows the results of the shareholders'
voting:
<TABLE>
<CAPTION>
Votes
Votes in Favor Withheld
-------------- --------
<S> <C> <C>
Proposal No. 1
Election of Directors:
Richard N. Barton 45,132,988 22,200
Brad Chase 44,254,580 900,608
Gerald Grinstein 45,133,471 21,717
Jay C. Hoag 45,133,571 21,617
Laurie McDonald Jonsson 45,007,997 147,191
Gregory B. Maffei 45,131,650 23,538
Richard D. Nanula 45,133,371 21,817
Votes in Votes
Favor Against Abstentions Broker Non-Vote
---------- --------- -------------- ---------------
Proposal No. 2
Approve the amendment to the
Expedia 1999 Stock Option Plan 40,683,004 2,044,478 20,008 2,407,698
</TABLE>
Item 6. Exhibits
(A) Exhibit 10.1 Amendment No. 2 to Microsoft Corporation/World Travel
Partners Service Agreement effective July 1, 2000*
Exhibit 10.2 Travelscape Office Lease and assignment thereto dated
August 1, 2000
Exhibit 27 Financial Data Schedule
--------------
* Confidential treatment requested for portions of this agreement.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000
By /s/ Gregory S. Stanger
--------------------------------
Gregory S. Stanger
Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
15
