<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NUMBER: 0-29575
HOTEL RESERVATIONS NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2817683
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 / / No /X/
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES OUTSTANDING AT APRIL 30, 2000
----- ----------------------------------------------
<S> <C>
Class A Common Stock.................... 16,209,900
Class B Common Stock.................... 38,999,100
</TABLE>
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 30, 2000 was $123,423,750. For the purpose of the
foregoing calculation only, all directors and executive officers of the
Registrant are assumed to be affiliates of the Registrant.
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HOTEL RESERVATIONS NETWORK, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE #
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<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................. 1
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999........................... 1
Unaudited Condensed Consolidated Statements of Income for
the Three Months Ended March 31, 2000 and 1999.............. 2
Unaudited Condensed Consolidated Statement of Changes in
Stockholders' Equity for the Three Months Ending March 31,
2000........................................................ 3
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 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... 11
PART II--OTHER INFORMATION
Item 3. Changes in Securities and Use of Proceeds................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
SIGNATURES............................................................. 14
EXHIBIT INDEX.......................................................... 15
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
HOTEL RESERVATIONS NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $104,825 $ 6,257
Marketable securities--available for sale................. 31,642 4,906
Accounts and notes receivable............................. 80 78
Prepaid hotel rooms....................................... 422 938
Current portion of non-cash deferred distribution and
marketing costs......................................... 4,918 --
Due from USAi............................................. -- 85
Other current assets...................................... 1,470 885
-------- --------
Total current assets.................................... 143,357 13,149
PROPERTY & EQUIPMENT
Computer equipment........................................ 1,867 1,642
Buildings and leasehold improvements...................... 233 233
Furniture and other equipment............................. 479 453
-------- --------
2,579 2,328
Less accumulated depreciation and amortization............ (511) (340)
-------- --------
2,068 1,988
OTHER ASSETS
Goodwill, net of amortization of $19,586 and $12,897 at
March 31, 2000 and December 31, 1999, respectfully...... 383,721 187,411
Non-cash deferred distribution and marketing costs, less
current portion......................................... 9,387 --
Deferred tax asset........................................ 2,520 1,638
Other assets.............................................. 64 64
-------- --------
$541,117 $204,250
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade................................... $ 24,256 $ 16,252
Deferred revenue.......................................... 38,265 16,447
Amounts due under acquisition agreement................... 43,000 17,500
Due to USAi............................................... 5,968 4,008
Other accrued liabilities................................. 4,891 3,696
-------- --------
Total current liabilities............................... 116,380 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, 16,209,900 shares outstanding............... 162 --
Class B common stock, $.01 par value; 150,000,000 shares
authorized, 38,999,100 shares outstanding............... 390 390
Additional paid-in capital................................ 418,992 141,923
Retained earnings......................................... 5,287 4,122
Accumulated other comprehensive loss...................... (94) (88)
-------- --------
Total stockholders' equity.............................. 424,737 146,347
-------- --------
$541,117 $204,250
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
-------- -------------
(PREDECESSOR)
<S> <C> <C>
NET REVENUES................................................ $55,263 $22,921
Operating costs and expenses
Cost of sales............................................. 38,503 15,638
Selling, general and administrative....................... 8,755 3,871
Non-cash distribution and marketing....................... 450 --
Amortization of goodwill.................................. 6,689 --
------- -------
Total operating costs and expenses...................... 54,397 19,509
------- -------
Operating profit........................................ 866 3,412
Other income (expense)
Interest income........................................... 846 231
Interest expense.......................................... (27) (2)
Other..................................................... 210 14
------- -------
Income before income tax expense............................ 1,895 3,655
Income tax expense.......................................... (730) --
------- -------
Net income................................................ $ 1,165 $ 3,655
======= =======
Basic and diluted earnings per common share............... $ 0.03 $ 0.09
======= =======
Weighted average number of shares used to compute basic
earnings per share...................................... 45,412 38,999
Weighted average number of shares used to compute diluted
earnings per share...................................... 45,611 38,999
PRO FORMA TAX INFORMATION IF COMPANY WERE A C-CORPORATION:
Historical income before income tax......................... $ 3,655
Pro forma income tax........................................ (1,407)
-------
Pro forma net income........................................ $ 2,248
=======
Pro forma basic and diluted earnings per common share....... $ 0.06
=======
Weighted average number of shares used to compute pro forma
basic and diluted earnings 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 LOSS EARNINGS
-------- -------------- -------------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000............ $146,347 $ 0 $390 $141,923 $(88) $4,122
Comprehensive income:
Net income for the three months
ended March 31, 2000.............. 1,165 -- -- -- -- 1,165
Accumulated other comprehensive
loss.............................. (6) -- -- -- (6) --
--------
Comprehensive income.................. 1,159
--------
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
$9,384.............................. 89,978 62 -- 89,916 -- --
Issuance of stock warrants to Internet
affiliates.......................... 14,755 -- -- 14,755 -- --
Capital contribution by USAi related
to the payment of contingent
purchase price...................... 12,500 -- -- 12,500 -- --
-------- ---- ---- -------- ---- ------
Balance at March 31, 2000............. $424,737 $162 $390 $418,992 $(94) $5,287
======== ==== ==== ======== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTH ENDED
MARCH 31,
------------------------
2000 1999
-------- -------------
(PREDECESSOR)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 1,165 $ 3,655
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 171 66
Amortization of goodwill.................................. 6,689 --
Amortization of deferred distribution and marketing
costs................................................... 450 --
Deferred income taxes..................................... (882) 7
Change in current assets and liabilities:
Accounts and notes receivable........................... (2) 34
Prepaid hotel rooms..................................... 516 (169)
Accounts payable........................................ 8,004 1,291
Deferred revenue........................................ 21,818 9,878
Due to USAi............................................. 2,045 --
Other accrued liabilities............................... 1,195 723
Other, net.............................................. (588) 75
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 40,581 15,560
CASH FLOW FROM INVESTING ACTIVITIES:
Payment of purchase price for acquisition of
predecessor............................................. (5,000) --
Capital expenditures...................................... (251) (316)
Purchase of marketable securities......................... (26,740) (8,459)
-------- -------
NET CASH USED IN INVESTING ACTIVITIES................. (31,991) (8,775)
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock....................... 89,978 --
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES............. 89,978 --
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 98,568 (6,785)
Cash and cash equivalents at beginning of period............ 6,257 4,964
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $104,825 $11,749
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 27
Cash paid for taxes....................................... --
Contribution by USAI to fund purchase price liability..... $ 12,500
</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 AND BASIS OF PRESENTATION
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 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
three months ended March 31, 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 4 for further discussion.
RECAPITALIZATION
In conjunction with the Company's initial public offering, the Company
authorized share 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 twelve months ended
December 31, 1999. Certain amounts in the Unaudited Condensed Consolidated
Financial Statements for the quarter ended March 31, 1999 have been reclassified
to conform to the 2000 presentation.
In the opinion of the Company, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist of normal recurring items. Interim results
are not necessarily indicative of results 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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Company's 1999 financial statement included in Registration
Statement on Form S-1 (SEC File No. 333-90601) for a summary of all significant
accounting policies.
ADVERTISING
Advertising expense for the three month period ending March 31, 2000 and
1999 was $1,495 and $874, 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
5
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
months, which approximates the period over which the revenue is earned. As of
March 31, 2000, capitalized advertising is $412. Other advertising costs are
expensed in the period incurred.
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
affiliation agreements as non-cash distribution and marketing expense.
NOTE 3--BUSINESS ACQUISITION
On May 10, 1999 the Company completed its acquisition of substantially all
of the assets and assumption of substantially all of the liabilities of TMF, Inc
and HRN Marketing Corp., which operated the Hotel Reservations Network service.
The total purchase price paid to date is $359.9 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; 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. In addition to amounts paid, the
Company is obligated to make a contingent payment to the sellers of the
predecessor business based on operating performance for the twelve month period
ended March 31, 2000, subject to certain adjustments as defined in the asset
purchase agreement. The amount is estimated to be $43 million, which is
reflected on the balance sheet as a liability. USAi will fund this obligation as
a capital contribution.
The acquisition was accounted for under the purchase method of accounting.
The total amount of goodwill of $403.3 million is being amortized over a life of
ten years.
NOTE 4--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 $90.0 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 5--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 $31,791 and
aggregate market value and $31,642 with a pre-tax unrealized loss of $149. The
cumulative unrealized loss of $149 is shown as a component of comprehensive
income net of income tax benefits of $55.
6
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--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 warrants to purchase 1,428,365 shares of
class A common stock at $16.00 per share.
All stock warrants were accounted for in accordance with EITF 96-18. In
relation to warrants to purchase 1,428,365 shares of class A common stock, the
Company recorded an asset of approximately $14.7 million based on the fair
market value of the warrants at the initial public offering price of $16.00 per
share. The asset will be amortized ratably as non-cash distribution and
marketing expense over the terms of the exclusive affiliation agreements, which
range from two to five years.
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 is
nonforfeitable, fully vested and exercisable.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 March 31, 2000, we had room supply agreements with over 1,700 hotels
in 49 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 ENDED MARCH 31, 2000 (HISTORICAL) AND THE
QUARTER ENDED MARCH 31, 1999 (HISTORICAL)
REVENUES
For the three months ended March 31, 2000, revenues increased by
$32.3 million, or 141%, over the same period in 1999. The increase is primarily
attributable to increased room sales through our Internet sites and from the
significant expansion in our affiliate program. Affiliates generate sales of
rooms in exchange for commissions on those rooms. These sales were further
supported by 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. Internet generated sales for the three months
ended March 31, 2000 increased by $34.5 million or 220%, to $50.2 million
compared to $15.7 million for the three months ended March 31, 1999. As a
percentage of total revenues, Internet generated sales increased to 91% for the
three months ended March 31, 2000 from 69% for the same period in 1999. Sales
from affiliate websites accounted for 52.6% of the total sales compared to 27%
during the same period in 1999. We also expanded into nine new markets during
the quarter reaching a total of 49 compared to 27 at the end of March 1999,
representing an 81% increase.
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 margin decreased slightly from 31.8% to 30.3% for the comparable prior
year period due primarily to competitive conditions and the sales mix of rooms
sold in various markets. Cost of sales and gross profit reflect a
reclassification 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
$0.2 million for the first quarter of 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. The overall increase in selling, general and
administrative costs was due to the increase in our revenue base. For the three
months ended March 31, 2000, personnel costs increased by 98.7% over the same
period in 1999, due to growth in staffing levels. Affiliate fees increased
substantially due to the increase in sales generated from our expanded affiliate
base and increased average
8
<PAGE>
commission rates. Spending on advertising and promotional activities increased
by 71% and telecommunications costs increased by 65% over the quarter ended
March 31, 1999. As a percentage of net revenues, selling, general and
administrative costs declined slightly for the three months ended March 31,
2000, to 15.8% from 16.9% in the same period on 1999.
Non-cash deferred distribution and marketing costs of $450 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.
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.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000 (HISTORICAL) AND
MARCH 31, 1999 (PRO FORMA)
To enhance comparability, the discussion of consolidated results of
operations is supplemented here with separate pro forma financial information
for the three months ended March 31, 1999 that gives effect to the acquisition
of the predecessor business as if it had occurred at the beginning of that
period. Earnings before interest, income taxes, depreciation and amortization
(EBITDA) is defined as operating profit plus depreciation, amortization and
non-cash charges. EBITDA is presented here as a management tool and as a
valuation methodology for companies in the 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.
HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED ACTUAL AND PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
PRO FORMA ACTUAL
2000 1999 1999
-------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C>
Net Revenues......................................... $55,263 $22,921 $22,921
Cost of revenues..................................... 38,503 15,638 15,638
------- ------- -------
Gross Profit......................................... 16,760 7,283 7,283
Operating expenses:
Selling general and administrative expenses........ 8,584 3,868 3,805
Amortization of goodwill........................... 6,689 6,689 --
Amortization of non-cash distribution and marketing
expense.......................................... 450 -- --
Depreciation and amortization...................... 171 66 66
------- ------- -------
Total operating costs and expenses............... 15,894 10,623 3,871
------- ------- -------
Income from operations............................... $ 866 $(3,340) $ 3,412
======= ======= =======
EBITDA............................................... $ 8,176 $ 3,415 $ 3,478
======= ======= =======
</TABLE>
9
<PAGE>
For the three month period ended March 31, 2000, revenues increased
$32.3 million, or 141%, to $55.3 million from $22.9 million compared to pro
forma 1999 for the same three month period. For the three months ended
March 31, 2000, cost of revenues increased by 146% and gross profit increased by
130% compared to the pro forma three month period ended March 31, 1999. For the
three month period ending March 31, 2000, selling, general and administrative
costs increased by 122%, while non-cash charges increased by 8% compared to the
pro forma three month period ended March 31, 1999. Total operating costs and
expenses increased by 50% and income from operations increased by 126% compared
to the pro forma results for the three month period ended March 31, 2000.
EBITDA grew by $4.8 million to $8.2 million for the three month period
ending March 31, 2000, compared to $3.4 million for the pro forma three month
period ending March 31, 1999, representing a 139% increase over the same pro
forma period in 1999. EBITDA as a % of net revenues decreased slightly by 0.1%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operations through cash generated from
operating activities. Our company has historically been debt free. As of
March 31, 2000, we had $136.5 million in cash, cash equivalent and short-term
investments. 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.
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 $90.0 million in proceeds net of offering expenses.
Net cash provided from operating activities was $40.6 million for the three
months ending March 31, 2000, compared to $15.6 million for the same period in
1999, representing an increase of 160.8%. Net cash used in investment activities
was $32.0 million for the three months ended March 31, 2000. Net cash used in
investment activities was primarily related to purchase of marketable securities
in the amount of $26.7 million and payment of $5.0 million for contingent
purchase price payments made to the predecessor business as a result of its
acquisition.
Capital expenditures were $0.3 million for the three months ended March 31,
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. Net cash provided by financing activities
for the three months ended March 31, 2000 was comprised of approximately
$90.0 million in net proceeds from the public offering. Note that 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.
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 operations 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. We currently have no commitments to
make any acquisitions.
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.
10
<PAGE>
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
We occasionally make forward-looking statements 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 desireable 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.
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.
Note that since cash and marketable securities represent a significant portion
of our total current assets we are at risk for an interest rate fluctuation.
Such a fluctuation may impact our income from investments.
11
<PAGE>
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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.
The aggregate offering price was $99.4 million. The amount of all applicable
issuance costs and the underwriting discount incurred by the Company was
approximately $9.4 million. After deducting applicable issuance costs and
expenses, the total net proceeds to the Company was approximately
$90.0 million. The shares had a par value of $0.01. All shares of class A common
stock sold in the offering were registered under the Securities Act of 1933, as
amended, on a Registration Statement on Form S-1 (the "Registration Statement")
(Reg. No. 333-90601) that was declared effective by the Security and Exchange
Commission on February 24, 2000. The managing underwriters were Donaldson,
Lufkin & Jenrette Securities Corporation, Allen & Company Incorporated, Bear,
Sterns & Co. Incorporated, Thomas Weisel Partners LLC and DLJ direct
Incorporated.
The net proceeds from the public offering are currently being invested in
debt instruments that are highly liquid, of high-quality investment grade, and
predominantly have maturities of less than one year. Since we generated a
significant amount of cash through operating activities, we have not used the
net proceeds from the offering for operational purposes yet. We intend to use a
portion of net proceeds for general corporate purposes, to acquire or invest in
businesses, technologies, products or services, although no specific
acquisitions are planned and no portion of the net proceeds has been allocated
for any acquisition.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS EXHIBITS
- --------------------- ------------------------------------------------------------
<C> <S>
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** Assumption Agreement by and between the Company and USAi
10.2** Tax Sharing Agreement by and between the Company and USAi
10.3** 2000 Stock Option Plan
10.4** Directors' Stock Option Plan
10.5** Amended and Restated Asset Purchase Agreement by and among
the Company, USAi, TMF, Inc., HRN Marketing Corp., David
Litman and Robert Diener
10.6** Form of Warrant
10.7** Form of Performance Warrant
10.8** Employment Agreement with Jack Rubin
10.9** Employment Agreement with Sandra D'Arcy
27.1* Financial Data Schedule
27.2* Financial Data Schedule
</TABLE>
- ------------------------
* Filed herein
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, Registration Number 333-90601, initially filed with the Securities
and Exchange Commission on November 9, 1999, and declared effective on
February 24, 2000.
12
<PAGE>
(b) Reports on Form 8-K.
Our company filed a report on Form 8-K on March 2, 2000 reporting that on
February 25, 2000, we entered into an underwriting agreement in connection with
our initial public offering of 6,210,000 shares of our class A common stock, par
value $.01 per share. The initial closing under the underwriting agreement
occurred on March 1, 2000. A copy of the underwriting agreement was filed as an
Exhibit to the Form 8-K.
13
<PAGE>
HOTEL RESERVATIONS NETWORK, INC. AND SUBSIDIARIES
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.
<TABLE>
<S> <C> <C>
HOTEL RESERVATIONS NETWORK, INC.
Date: May 15, 2000 By: /s/ DAVID LITMAN
-----------------------------------------
David Litman
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: May 15, 2000 By: /s/ JACK RUBIN
-----------------------------------------
Jack Rubin
CHIEF FINANCIAL AND STRATEGIC OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
</TABLE>
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS EXHIBITS
- --------------------- ------------------------------------------------------------
<C> <S>
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** Assumption Agreement by and between the Company and USAi
10.2** Tax Sharing Agreement by and between the Company and USAi
10.3** 2000 Stock Option Plan
10.4** Directors' Stock Option Plan
10.5** Amended and Restated Asset Purchase Agreement by and among
the Company, USAi, TMF, Inc., HRN Marketing Corp., David
Litman and Robert Diener
10.6** Form of Warrant
10.7** Form of Performance Warrant
10.8** Employment Agreement with Jack Rubin
10.9** Employment Agreement with Sandra D'Arcy
27.1* Financial Data Schedule
27.2* Financial Data Schedule
</TABLE>
- ------------------------
* Filed herein
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, Registration Number 333-90601, initially filed with the Securities
and Exchange Commission on November 9, 1999, and declared effective on
February 24, 2000.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH
31, 2000 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 104,825
<SECURITIES> 31,642
<RECEIVABLES> 80
<ALLOWANCES> 0
<INVENTORY> 422
<CURRENT-ASSETS> 143,357
<PP&E> 2,579
<DEPRECIATION> 511
<TOTAL-ASSETS> 541,117
<CURRENT-LIABILITIES> 116,380
<BONDS> 0
0
0
<COMMON> 552
<OTHER-SE> 424,185
<TOTAL-LIABILITY-AND-EQUITY> 541,117
<SALES> 55,263
<TOTAL-REVENUES> 55,263
<CGS> 38,503
<TOTAL-COSTS> 54,397
<OTHER-EXPENSES> 210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> 1,895
<INCOME-TAX> 730
<INCOME-CONTINUING> 1,165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,165
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH
31, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 22,921
<TOTAL-REVENUES> 22,921
<CGS> 15,638
<TOTAL-COSTS> 19,509
<OTHER-EXPENSES> 14
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 3,655
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,655
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
