<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the Transition Period from to
COMMISSION FILE NUMBER: 0-29575
HOTEL RESERVATIONS NETWORK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2817683
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8140 WALNUT HILL LANE
SUITE 800
DALLAS, TEXAS 75231
(Address of principal executive offices)
214-361-7311
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year if changed since last
report)
----------------------------
Indicate by check mark whether registrant (1) has filed all reports required 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Number of shares outstanding at November 1, 2000
----- ------------------------------------------------
Class A Common Stock 16,234,900
Class B Common Stock 38,999,100
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page #
------
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999 ................................................................... 1
Unaudited Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999............................ 2
Unaudited Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 2000................................ 3
Unaudited Condensed Consolidated Statements of Cash Flows For the
Nine Months Ended September 30, 2000 and 1999...................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................... 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk............................ 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
SIGNATURES....................................................................................... 15
EXHIBIT INDEX.................................................................................... 16
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
HOTEL RESERVATIONS NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------------- -------------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $115,669 $6,257
Marketable securities - available for sale 55,184 4,906
Accounts and notes receivable 100 78
Prepaid hotel rooms 1,162 938
Due from USAi - 85
Current portion of non-cash deferred distribution and marketing costs 4,940 -
Other 2,992 885
---------------------- -------------------
Total current assets 180,047 13,149
PROPERTY AND EQUIPMENT
Computer equipment 2,650 1,642
Buildings and leasehold improvements 285 233
Furniture and other equipment 763 453
---------------------- -------------------
3,698 2,328
Less accumulated depreciation and amortization (867) (340)
---------------------- -------------------
2,831 1,988
OTHER ASSETS
Goodwill, net of amortization of $40,768 and $12,897 at September 30, 2000
and December 31, 1999, respectively 365,367 187,411
Non-cash deferred distribution and marketing costs, less current portion 6,859 -
Deferred tax asset 5,938 1,638
Other assets 60 64
---------------------- -------------------
$561,102 $204,250
====================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $29,608 $16,252
Deferred revenue 43,496 16,447
Amounts due under acquisition agreement - 17,500
Income tax payable 5,712 4,008
Due to USAi 1,870 -
Other 4,586 3,696
---------------------- -------------------
Total current liabilities 85,272 57,903
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 20,000,000 shares authorized, none outstanding - -
Class A common stock, $.01 par value; 600,000,000 shares authorized,
16,234,900 shares outstanding at September 30, 2000 163 -
Class B common stock, $.01 par value; 150,000,000 shares authorized,
38,999,100 share outstanding at September 30, 2000 and December 31, 1999 390 390
Additional paid-in capital 465,501 141,923
Retained earnings 9,801 4,122
Accumulated other comprehensive loss (25) (88)
---------------------- -------------------
Total stockholders' equity 475,830 146,347
---------------------- -------------------
$561,102 $204,250
====================== ===================
</TABLE>
The accompanying notes are an integral part of these statements
1
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HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD
THREE MONTHS NINE MONTHS --------------------------------------
ENDED SEPTEMBER 30, ENDED JANUARY 1
------------------------------ TO MAY 11 TO
SEPTEMBER 30. MAY 10, 1999 SEPTEMBER 30,
2000 1999 2000 (PREDECCESSOR) 1999
--------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 94,618 $ 47,652 $ 227,963 $ 37,701 $ 70,670
Operating costs and expenses
Cost of sales 65,723 34,150 158,276 26,117 50,586
Selling, general and administrative 15,169 7,189 35,210 6,090 10,107
Non-recurring acquisition related costs - - - 20,257 -
Non-cash distribution and marketing 1,235 - 2,956 - -
Amortization of goodwill 10,591 5,025 27,871 - 7,834
-------- -------- --------- -------- --------
Total operating costs and expenses 92,718 46,364 224,313 52,464 68,527
------- ------- --------- ------- -------
Operating profit (loss) 1,900 1,288 3,650 (14,763) 2,143
Other income (expense)
Interest income 2,597 586 5,618 420 761
Interest expense (3) (4) (34) (5) (7)
Gain on sales of securities - - - 471 -
Other - - - 14 -
----- ----- ----- ----- ------
Income (loss) before income tax expense 4,494 1,870 9,234 (13,863) 2,897
--------
Income tax expense (1,730) (692) (3,555) - (1,072)
-------- -------- --------- -------- --------
Net income (loss) $ 2,764 $ 1,178 $ 5,679 ($13,863) $ 1,825
======== ======== ========= ======== ========
Basic and diluted earnings (loss)
per common share $ 0.05 $ 0.03 $ 0.11 $ (0.36) $ 0.05
======== ======== ========= ======== ========
Weighted average number of shares
used to compute basic earnings
(loss) per common share 55,214 38,999 51,957 38,999 38,999
======== ======== ========= ======== ========
Weighted average number of shares
used to compute diluted
earnings (loss) per common share 56,487 38,999 52,660 38,999 38,999
======== ======== ========= ======== ========
PRO FORMA TAX INFORMATION IF
PREDECESSOR WERE A C-CORPORATION
Historical loss before income tax benefit ($13,863)
Pro forma income tax benefit 5,129
Pro forma net loss ($ 8,734)
Pro forma basic and diluted earnings
per common share ($ 0.22)
Weighted average number of shares used to
compute pro forma basic and diluted loss per share 38,999
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
Additional OTHER
CLASS A CLASS B PAID-IN COMPREHENSIVE RETAINED
TOTAL COMMON STOCK COMMON STOCK CAPITAL INCOME (LOSS) EARNINGS
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 $146,347 $ - $390 $141,923 ($88) $4,122
Comprehensive income:
Three months ended March 31, 2000:
Net income 1,165 - - - - 1,165
Accumulated other comprehensive loss (6) - - - (6) -
--------
1,159
Three months ended June 30, 2000:
Net income 1,750 - - - - 1,750
Accumulated other comprehensive loss (6) - - - (6) -
--------
1,744
Three months ended September 30, 2000:
Net income 2,764 - - - - 2,764
Accumulated other comprehensive income 75 - - - 75 -
--------
2,839
--------
Comprehensive income $5,742
========
Issuance of common stock in connection
with acquisition of predecessor 159,998 100 - 159,898 - -
Proceeds from issuance of common stock,
net of issuance cost of $9,302 90,060 62 - 89,998 - -
Issuance of stock warrants to Internet
affiliates 14,755 - - 14,755 - -
Capital contribution by USAi related to
the payment of contingent purchase price 58,328 - - 58,328 - -
Issuance of common stock upon exercise of
options 401 1 - 400 - -
Income tax benefit related to stock
options exercised 199 - - 199 - -
------------ -------------- -------------- ------------- ----------------- ----------
Balance at September 30, 2000 $475,830 $163 $390 $465,501 ($25) $9,801
============ ============== ============== ============= ================= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED PERIOD JANUARY 1 TO PERIOD MAY 11 TO
SEPTEMBER 30, MAY 10, 1999 SEPTEMBER 30,
2000 (PREDECESSOR) 1999
-------------------- ------------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $5,679 $(13,863) $1,825
Adjustment to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 527 119 184
Amortization of goodwill 27,871 - 7,834
Amortization of deferred distribution and marketing
costs 2,956 - -
Gain on sale of securities - (471) -
Non-cash compensation charge - 12,900 -
Deferred income taxes (4,300) - (979)
Changes in operating assets and liabilities
Accounts and notes receivable (22) 20 10
Prepaid hotel rooms (224) (179) (757)
Accounts payable, trade 13,356 7,123 7,323
Deferred revenue 27,049 11,994 4,839
Due to USAi, net 1,955 - -
Income tax payable 1,903 - -
Other accrued liabilities 890 (371) 3,406
Other current assets, net (2,107) (49) (462)
--------------------- ---------------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 75,533 17,223 23,223
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of TMF and HRN Marketing, net of cash
acquired - (157,985)
Payment of purchase price for acquisition of
predecessor (5,000) - -
Capital expenditures (1,370) (222) (589)
Purchase of marketable securities (50,216) (8,434) (1,500)
Proceeds from sale of marketable securities - 11,631 995
Other, net 4 31 (13)
--------------------- ---------------------- -------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (56,582) 3,006 (159,092)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution by USAi - - 182,313
Net proceeds from issuance of stock 90,461 - -
Dividend distribution to USAi - - (40,000)
--------------------- ---------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 90,461 - 142,313
--------------------- ---------------------- -------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 109,412 20,229 6,444
Cash and cash equivalents at beginning of period 6,257 4,964 -
--------------------- ---------------------- -------------------
Cash and cash equivalents at end of period $115,669 $25,193 $6,444
===================== ====================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $34 $5 $7
Cash paid for taxes $5,984 - -
Capital contribution by USAi to fund purchase price
liability $58,328 - -
Issuance of Warrants $14,755 - -
Issuance of common stock in connection with
acquisition of predecessor $159,998 - -
</TABLE>
The accompanying notes are an integral part of
these statements.
4
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION, RECAPITALIZATION, BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION
Hotel Reservations Network, Inc. ("Hotel Reservations Network" or the
"Company") is a leading consolidator of hotel rooms for resale in the consumer
market in the United States. The Company also sells hotel rooms in Canada and
Western Europe. The Company is a subsidiary of USA Networks, Inc. ("USAi"). On
May 10, 1999, Hotel Reservations Network acquired substantially all of the
assets and assumed substantially all of the liabilities of two companies, which
operated the Hotel Reservations Network service. Thus, the results of operations
for the period from January 1, 1999 to May 10, 1999 represent those of the
Company's predecessor. See Note 3 for further information.
On February 25, 2000, the Company completed an initial public offering of
6,210,000 shares of class A common stock. See Note 3 for further discussion.
RECAPITALIZATION
In conjunction with the Company's initial public offering, the Company
authorized capital of 600,000,000 shares of class A common stock, 150,000,000
shares of class B common stock and 20,000,000 shares of preferred stock. Holders
of class A common stock are entitled to one vote per share and holders of class
B common stock are entitled to 15 votes per share. USAi was issued 38,999,100
shares of class B common stock in exchange for its equity interests. For
financial statement purposes, these shares are presented as outstanding as of
January 1, 1999.
BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements and Notes thereto
of the Company are unaudited and should be read in conjunction with the audited
Consolidated Financial Statements and Notes thereto for the year ended December
31, 1999. Certain prior period amounts have been reclassified to conform to the
2000 presentation.
In the opinion of the Company, all adjustments including normal recurring
adjustments necessary for a fair presentation of such unaudited condensed
consolidated financial statements have been made. Interim results are not
necessarily indicative of results to be expected for a full year. The interim
unaudited condensed consolidated financial statements and notes thereto are
presented as permitted by the Securities and Exchange Commission and do not
contain certain information included in the Company's audited consolidated
financial statements and notes thereto. Accordingly, the accompanying unaudited
condensed consolidated financial statements and notes should be read in
conjunction with the Company's 1999 financial statements included in the
Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission ("SEC") in connection with the Company's initial public
offering.
5
<PAGE>
ADVERTISING
Advertising expense for the three-month and nine-month periods ending
September 30, 2000 was $2.5 million and $5.9 million, respectively. Advertising
expense for the three-month period ending September 30, 1999 was $2 million and
for the periods January 1 to May 10, 1999 and May 11 to September 30, 1999 were
$1.4 million and $2.7 million, respectively. The Company capitalizes costs paid
for advertising to specific target audiences on third party Internet websites
that have resulted in hotel room bookings for which the revenue has not been
recognized as of the balance sheet date. The capitalized costs are amortized
over a period of no longer than three months, which approximates the period over
which the revenue is earned. As of September 30, 2000, capitalized advertising
is $0.3 million. Other advertising costs are expensed in the period incurred.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. SAB 101 is not a rule or
interpretation of the SEC; however, it represents interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant in administering the disclosure requirements of the Federal
securities laws. The Company does not believe that the interpretations outlined
in SAB 101 will have an impact on the Company's revenue recognition policies.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended,
which is required to be adopted in years beginning after June 15, 2002. The
Company does not currently use derivatives and therefore management does not
anticipate that the adoption of the new statement will have any effect on
earning or the financial position of the Company
STOCK WARRANTS
Stock warrants have been issued in conjunction with certain affiliation
agreements. These warrants are accounted for in accordance with EITF 96-18, and
the fair value of the warrants is amortized over the term of the related warrant
agreements as non-cash distribution and marketing expense.
NOTE 2 - BUSINESS ACQUISITION
On May 10, 1999 the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of TMF, Inc. and HRN Marketing
Corp., which operated the Hotel Reservations Network service. The total purchase
price paid through September 30, 2000 is $405 million, which is comprised
primarily of: $145 million paid on May 11, 1999; $5 million related to a
promissory note which was paid on January 31, 2000; $50 million related to
contingent payments based on the operating performance for the year ended
December 31, 1999; $78.4 million related to 4,899,900 shares of class A common
stock issued to the sellers of the predecessor business which represented 10% of
the aggregate value of the Company immediately prior to the initial public
offering in accordance with the asset purchase agreement; $45.8 million based on
operating performance for the twelve-month period ended March 31, 2000, which
amount is subject to certain adjustments as defined in the asset purchase
agreement; and $81.6 million related to 5,100,000 shares of class A common stock
issued to the sellers of the predecessor business in exchange for their release
of the Company's obligation for contingent payments based on operating
performance for the twelve month periods ended March 31, 2001 and 2002. The
class A shares were issued to the sellers at the time of the public offering.
6
<PAGE>
The acquisition was accounted for under the purchase method of accounting.
The total amount of goodwill of $406.1 million is being amortized over a life of
ten years.
NOTE 3 - INITIAL PUBLIC OFFERING OF COMMON STOCK
On February 25, 2000, the Company completed an initial public offering in
which it sold 6,210,000 shares of class A common stock at $16.00 per share,
raising $90.1 million in proceeds, net of offering expenses. Immediately prior
to the offering the Company had 9,999,900 shares of class A common stock issued
to the sellers of the predecessor business and 38,999,100 shares of class B
common stock outstanding.
NOTE 4 - MARKETABLE SECURITIES AVAILABLE FOR SALE
Investments in marketable securities available for sale consist of
government bonds and medium term notes with an aggregate cost of $55.23 million
and aggregate market value of $55.18 million resulting in a pre-tax unrealized
loss of $0.04 million. The cumulative unrealized loss of $0.04 million is shown
as a component of comprehensive income net of income tax benefits of $0.02
million. These investments have maturity dates generally less than one year.
NOTE 5 - AFFILIATION AGREEMENTS
In January 2000, the Company entered into an exclusive affiliate
distribution and marketing agreement with Travelocity and issued to Travelocity
a performance warrant upon the completion of the Company's public offering. The
performance warrant is subject to vesting based on achieving certain performance
targets. If the performance warrant is fully vested and exercisable, it will
entitle the holder to acquire 2,447,955 shares of class A common stock at $16.00
per share.
The Company also entered into other exclusive affiliate distribution and
marketing agreements and has issued fully vested, non-forfeitable warrants to
purchase 1,428,365 shares of class A common stock at $16.00 per share. The
Company recorded an asset of approximately $14.8 million, which represented the
fair value of the warrants at the time of issuance. The asset is amortized
ratably as non-cash distribution and marketing expenses over the terms of
warrant agreements.
The performance warrant, which will be subject to vesting based on the
achievement of defined performance targets, will be valued at the time the award
is probable of being earned. The portion of the value related to the completed
term of the related affiliation agreement will be expensed, and the remaining
non-cash deferred distribution and marketing expense will be amortized over the
remaining term of the affiliation agreement. The value of such related warrants
may be subject to adjustment until such time that the warrants are
nonforfeitable, fully vested and exercisable.
NOTE 6 - COMPREHENSIVE INCOME
Comprehensive income (loss) is net income (loss) plus other comprehensive
income (loss), which consists of changes in unrealized gain (losses) on
marketable securities available for sale.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On May 10, 1999, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of TMF, Inc. and HRN Marketing
Corp., which operated the Hotel Reservations Network service. Thus, the results
of operations for the period from January 1, 1999 to May 10, 1999 represent
those of the Company's predecessor. The results of operations information below
compares the Company's historical information for the three months and nine
months ended September 30, 2000 with the Company's historical information for
the three month's ended September 30, 2000 and the combined results of the
Company's predecessor business for the period from January 1, 1999 through May
10, 1999 and the Company's historical information for the period from May 11,
1999 to September 30, 1999. Unless the context otherwise requires, the terms
"we," "us," "our," "our company," "the Company" and "Hotel Reservations Network"
refer to Hotel Reservations Network, Inc. and our predecessor entities.
GENERAL
Our company is a leading online consolidator of hotel accommodations,
allowing customers to select and book hotel rooms in major cities through our
websites and our toll-free call center. We contract with hotels in advance for
volume purchases and guaranteed availability of hotel rooms at wholesale prices
and sell these rooms to consumers, predominantly at significant discounts to
published rates. In addition, our hotel supply relationships often allow us to
offer our customers hotel accommodation alternatives for otherwise unavailable
dates. At September 30, 2000, we had room supply agreements with over 2,100
hotels in 83 major markets in North America and Western Europe. Our websites
feature traveler oriented interfaces which enable travelers to make informed
decisions about their hotel accommodations by providing easy access to the
description, rates and availability 24 hours a day, 7 days a week.
RESULTS OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000
(HISTORICAL) COMPARED TO THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999
(COMBINED HISTORICAL)
REVENUES
For the three months ended September 30, 2000, the Company generated
revenues of $94.6 million, an increase of 99% over the $47.7 million of revenues
generated in the same period in 1999. For the nine months ended September 30,
2000, the Company generated revenues of $228 million, an increase of 110% over
the $108.4 million of revenues generated in same period in 1999. The increase
for the quarter and the nine-month period was primarily attributable to
increased room sales through our Internet sites and from the significant
expansion in our affiliate program. As a percentage of total revenues, Internet
generated sales increased to 94% and 92% for the three and nine months ended
September 30, 2000, respectively from 85% and 79% for the same periods in 1999.
Affiliates generate sales of rooms in exchange for commissions on those rooms.
Sales from affiliate websites accounted for approximately 53% of the total
revenues for the quarter and nine months of 2000 compared to 44% and 39% during
the same periods in 1999. Revenues also increased due to the addition of new
cities in which we offer hotel rooms, an increase in hotels offered in existing
cities, and an increase in room allotments available for sale. We expanded into
23 new markets during the quarter, and 43 new markets during the first nine
months of 2000, reaching a total of 83 compared to 38 at September 30 1999,
representing a 118% increase.
8
<PAGE>
COST OF SALES AND GROSS PROFIT
Cost of sales includes the cost of rooms sold. The increase in cost of
revenues and gross profit corresponds to the growth in net revenues. Gross
profit increased 114% to $28.9 million in the third quarter of 2000 from $13.5
million in the third quarter of 1999. Gross profit margin for the three months
ended September 30, 2000 increased to 30.5% from 28.3% for the prior year
period.
Gross profit increased 120% to $69.7 million for the nine months ended
September 30, 2000 from $31.7 million in the same period in 1999. Gross profit
margin for the nine months ended September 30, 2000 increased to 30.6% from
29.2% for the prior year period.
The increase in gross profit margin was the result of improved revenue
management, the sale mix of rooms sold in varying markets and a slight increase
in revenue per room night sold.
Cost of sales and gross profit reflect a reclassification in 1999 of
affiliate commissions from cost of sales to selling, general and administrative
costs. This reclassification resulted in a reduction of cost of sales and an
increase of selling, general and administrative costs of $0.8 million for the
third quarter of 1999 and $1.6 million for the nine months ended September 30,
1999.
SELLING GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs consist primarily of (1)
compensation for personnel (2) affiliate commissions (3) credit card fees (4)
advertising and promotion (5) telecommunications and (6) other overhead costs
including occupancy costs. Overall selling, general and administrative costs
increased 111% for the quarter ended September 30, 2000 over the same period in
1999. As a percentage of net revenues, selling, general and administrative costs
for the three months ended September 30, 2000 increased to 16.0% from 15.1% for
the same period in 1999.
Overall selling, general and administrative costs increased 117% for the
nine months ended September 30, 2000 over the same period in 1999. As a
percentage of net revenues, selling, general and administrative costs for the
nine months ended September 30, 1999 increased to 15.4% from 14.9% for the same
period in 1999.
The increase in selling, general and administrative costs as a percentage
of net revenues for the quarter and nine month period were a result of a
substantial increase in affiliate fees corresponding to the increase in the
percentage of net revenues generated through our affiliate network and an
increase in average commission rates, partially offset by economies of scale
recognized in our personnel and telecommunications costs.
Selling, general and administrative costs also reflects the
reclassification of affiliate commissions discussed above.
NON-RECURRING ACQUISITION RELATED COSTS
In 1999, our predecessor business paid discretionary compensation and
bonuses of $0.4 million to its employees and incurred $0.2 million of
professional and advisory fees related directly to the acquisition. In
connection with the sale of substantially all the assets of TMF, Inc. and HRN
Marketing Corp., the principal owners of such entities entered into an agreement
to pay a salesperson engaged by TMF, Inc., for past services, 5% of all net
sales proceeds, including all contingent payments, received by
9
<PAGE>
the principal owners in connection with the sale. During the period January 1 to
May 10, 1999, the predecessor business recorded a charge of $19.7 million in
connection with this obligation.
NON-CASH DISTRIBUTION AND MARKETING
Non-cash deferred distribution and marketing costs of $1.2 million and $3.0
million during the three and nine months ended September 30, 2000, respectively,
consist of amortization of the fair value of warrants issued to certain
affiliates with whom we entered into exclusive distribution and marketing
agreements. The warrants were issued on February 24, 2000 and are amortized over
the term of the warrant agreements.
AMORTIZATION OF GOODWILL
Goodwill is amortized over a life of ten years and relates to amounts
assigned due to the acquisition of the predecessor business, including
contingent payments. The increase in goodwill amortization reflects amortization
expense for the full quarter and nine-month period in 2000 versus amortization
expense in 1999 from May 11, 1999, the date of acquisition of the Company's
predecessor business.
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 (HISTORICAL) TO THE PRO FORMA RESULTS FOR THE QUARTER AND
NINE MONTHS ENDED SEPTEMBER 30, 1999
To enhance comparability, the discussion of consolidated results of
operations is supplemented here with separate pro forma financial information
that gives effect to the acquisition of the predecessor business as if it had
occurred at the beginning of the respective periods presented. Earnings before
interest, income taxes, depreciation and amortization (EBITDA) are defined as
operating profit before depreciation, amortization and non-cash charges. EBITDA
is presented here because we believe it is a widely accepted valuation indicator
for companies in our industry. EBITDA does not purport to represent cash
provided by operating activities. EBITDA should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with
generally accepted accounting principles. EBITDA may not be a comparable
calculation of similarly titled measures by other companies.
The pro forma results are presented for illustrative purposes only and are
not necessarily indicative of the results of operations that would have been
reported had the predecessor business been acquired as of January 1, 1999, nor
are they necessarily indicative of future results of operations.
10
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED ACTUAL AND PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- ----------------------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
2000 1999 1999 2000 1999 1999
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $94,618 $47,652 $47,652 $227,963 $108,371 $108,371
Cost of revenues 65,723 34,150 34,150 158,276 76,703 76,703
Gross profit 28,895 13,502 13,502 69,687 31,668 31,668
Operating expenses
Selling general and administrative
expense 14,987 7,103 7,060 34,683 16,052 15,894
Non-recurring acquisition related costs - - - - - 20,257
Amortization of non-cash distribution
and marketing expense 1,235 - - 2,956 - -
Amortization of goodwill 10,591 10,591 5,025 27,871 27,871 7,834
Depreciation and amortization 182 129 129 527 303 303
------------ ----------- ------------ ------------ ------------ ------------
Income (loss) from operations $1,900 $(4,321) $1,288 $3,650 $(12,558) $(12,620)
============ =========== ============ ============ ============ ============
EBITDA $13,908 $6,399 $6,442 $35,004 $15,616 $(4,483)
============ =========== ============ ============ ============ ============
</TABLE>
The pro forma information for the three and nine months ended September 30,
1999, include adjustments to (1) record goodwill amortization expense for the
full periods, (2) eliminate non-recurring acquisition related cost, and (3)
increase selling general and administrative expenses by $43,000 and $158,000 for
the three and nine months ended September 30, 1999 respectively, in order to
present comparable officer's compensation.
EBITDA grew to $13.9 million and $35.0 million for the three and
nine-month periods ending September 30, 2000, respectively, a 117% and 124%
increase from proforma for the same periods in 1999. EBITDA as a percentage
of net revenues increased to 14.7% and 15.4% for the three and nine months
ended September 30, 2000, respectively from 13.4% and 14.4% from the proforma
for the prior year periods. The increase in EBITDA as a percentage of net
revenues reflects higher gross profit margin percentage partially offset by
higher selling, general and administrative expenses as a percentage of net
revenues.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operations through cash generated from
operating activities. Our company has historically been debt free. In addition,
on February 25, 2000, we completed an initial public offering in which we sold
6,210,000 shares of class A common stock at a price of $16.00 per share, raising
$90.1 million in proceeds net of offering expenses. As of September 30, 2000, we
had $170.9 million in cash, cash equivalents and marketable securities held for
sale. Our company invests excess cash predominantly in debt instruments that are
highly liquid, of high-quality investment grade, and predominantly have
maturities of less than one year with the intent to make such funds readily
available for operating purposes and to support its continued growth, both,
internally and through strategic acquisitions.
11
<PAGE>
Net cash provided from operating activities was $75.3 million for the nine
months ending September 30, 2000, compared to $40.4 million for the same period
in 1999, representing an increase of 86%. Capital expenditures were $1.4 million
for the nine months ended September 30, 2000. As a result of our rapid growth,
we expect to increase capital expenditures for purchased software, internally
developed software, computer equipment and leasehold improvements. Our parent,
USA Networks, Inc. paid $12.5 million to the predecessor business for the
contingent purchase price based upon the attainment of specified targets during
the year ended December 31, 1999, and an additional $45.8 million payment, which
is subject to further adjustment, based upon the operating performance of the
Company for the twelve month period ended March 31, 2000.
Our company generates significant cash flows from operations, and cash
flows are expected to increase as revenues increase due to our billing and
payment policies. Management anticipates that cash on hand and cash provided by
operating activities will be sufficient to fund our working capital requirements
for the next twelve months and for a foreseeable period after twelve months.
Additional funds could be necessary, however, to complete sizable strategic
acquisitions or other business combinations in 2000 or beyond.
SEASONALITY
Our revenues are influenced by the seasonal nature of holiday travel in the
markets we serve, and have historically peaked in the fall. As our business
expands into new markets, the impact of seasonality is expected to lessen.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
The foregoing discussion contains "forward-looking statements" within the
meaning of the securities laws concerning our plans, goals, product and service
offerings, and anticipated financial performance. These forward-looking
statements may generally be identified by introductions such as "outlook" for an
upcoming period of time, or words and phrases such as "should," "expect,"
"hope," "plans," "projected," "believes," "forward-looking" (or variants of
those words and phrases) or similar language indicating the expression of our
opinion or view concerning the future.
These forward-looking statements are subject to risks and uncertainties
based on a number of factors and our actual results or events may differ
materially from those anticipated by such forward-looking statements. These
factors include, but are not limited to: the growth rate of our revenue and
market share; our ability to add desirable cities and hotels to our hotel
product offerings; our ability to grow and service our affiliate network; our
ability to effectively manage our business functions while growing at a rapid
rate; the quality of our plans and strategies, and our ability to execute such
plans and strategies. In addition, forward-looking statements concerning our
expected revenue or earnings levels are subject to many additional uncertainties
applicable to competitors generally and to general economic conditions over
which we have no control.
The time at which a forward-looking statement is made should also be
included in an appropriate understanding of such statement. In that regard, we
do not plan to generally publicly update all prior forward-looking statements
and, accordingly, prior forward-looking statements should not be considered to
be "fresh" simply because we have not made additional comments on those
forward-looking statements.
12
<PAGE>
Other risks, which should be considered in connection with forward-looking
statements, are described under the heading "Risk Factors" in our initial public
offering Prospectus filed with the Securities and Exchange Commission on
February 25, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We currently have no significant floating rate indebtedness, hold no
derivative instruments and do not earn income denominated in foreign currencies.
All of our revenue is recognized in dollars. Accordingly, changes in interest
rates do not generally have a material direct or indirect effect on our
financial position. However, we are subject to minimal risk from currency
fluctuations because the hotel rooms in foreign markets that we contract to
purchase are paid for in the currency of the country where they are located and
are paid for by us after collecting for the rooms we sell to our customers. As
less than 10% of our revenues are currently derived from hotel accommodations in
foreign markets, we do not believe we have any significant foreign currency
exchange risk and, as a result, do not hedge against foreign currency exchange
rate changes. To the extent that changes in interest rates and currency exchange
rates affect general economic conditions, we would be affected by such change.
Since cash and marketable securities represent a significant portion of our
total current assets, we are at risk of reduced income from our investments in
the event of a decrease in interest rates.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBERS EXHIBITS
3.1** Restated Certificate of Incorporation of the Company
3.2** Restated Bylaws of the Company
4.1** Specimen Certificate evidencing Common Stock
10.1* Letter Agreement dated September 4, 2000 between the
Company and Jack Rubin
27.1* Financial Data Schedule
27.2* Financial Data Schedule
27.3* Financial Data Schedule
27.4* Financial Data Schedule
-------------------
* Filed herewith.
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, Registration Number 333-90601, and incorporated herein by reference.
(b) Reports on Form 8-K.
On October 24, 2000, the Company furnished information under Item 9 of Form
8-K regarding its earnings for the third quarter of 2000 and the Company's
expectations for the fourth quarter of 2000 and calendar year 2000.
On October 26, 2000, the Company furnished information under Item 9 of Form
8-K regarding its expectations for the fourth quarter of 2000, and calendar
years 2001 and 2002.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOTEL RESERVATIONS NETWORK, INC.
Date: November 13, 2000 By: /s/ Mel Robinson
-------------------------------
Mel Robinson
Chief Financial and
Strategic Officer
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS EXHIBITS
<S> <C>
3.1** Restated Certificate of Incorporation of the
Company
3.2** Restated Bylaws of the Company
4.1** Specimen Certificate evidencing Common Stock
10.1* Letter Agreement dated September 4, 2000 between
the Company and Jack Rubin
27.1* Financial Data Schedule
27.2* Financial Data Schedule
27.3* Financial Data Schedule
27.4* Financial Data Schedule
</TABLE>
-------------------------
* Filed herewith.
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, Registration Number 333-90601, and incorporated herein by reference.
16
