<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 June 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.
<TABLE>
<CAPTION>
Class Number of shares outstanding at July 31, 2000
----- ---------------------------------------------
<S> <C>
Class A Common Stock 16,209,900
Class B Common Stock 38,999,100
</TABLE>
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page #
------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999........................................................... 1
Unaudited Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2000 and 1999............................... 2
Unaudited Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended June 30, 2000................................... 3
Unaudited Condensed Consolidated Statements of Cash Flows For the
Six Months Ended June 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......................... 12
PART II - OTHER INFORMATION
SIGNATURES.......................................................................................... 14
EXHIBIT INDEX....................................................................................... 14
</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>
JUNE 30, DECEMBER 31,
2000 1999
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $113,119 $ 6,257
Marketable securities - available for sale 38,228 4,906
Accounts and notes receivable 59 78
Prepaid hotel rooms 650 938
Current portion of non-cash deferred distribution and marketing costs 4,940 -
Other current assets 2,474 885
------------------ -----------------
Total current assets 159,470 13,064
PROPERTY AND EQUIPMENT
Computer equipment 2,103 1,642
Buildings and leasehold improvements 244 233
Furniture and other equipment 504 453
------------------ -----------------
2,851 2,328
Less accumulated depreciation and amortization (685) (340)
------------------ -----------------
2,166 1,988
OTHER ASSETS
Goodwill, net of amortization of $30,177 and $12,897 at June 30, 2000 and
December 31, 1999, respectively 375,769 187,411
Non-cash deferred distribution and marketing costs, less current portion 8,094 -
Deferred tax asset 4,233 1,638
Other assets 64 64
------------------ -----------------
$549,796 $204,165
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $28,391 $ 16,252
Deferred revenue 38,553 16,447
Amounts due under acquisition agreement 45,639 17,500
Due to USAi, net 7,130 3,923
Other accrued liabilities 3,520 3,696
------------------ -----------------
Total current liabilities 123,233 57,818
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 at June 30, 2000 162 -
Class B common stock, $.01 par value; 150,000,000 shares authorized, 38,999,100
shares outstanding at June 30, 2000 and December 31, 1999 390 390
Additional paid-in capital 419,074 141,923
Retained earnings 7,037 4,122
Accumulated other comprehensive loss (100) (88)
------------------ -----------------
Total stockholders' equity 426,563 146,347
------------------ -----------------
$549,796 $204,165
================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD PERIOD
PREDECESSOR COMPANY PREDECESSOR COMPANY
THREE MONTHS --------------------------- SIX MONTHS ----------------------------
ENDED APRIL 1 TO MAY 11 TO ENDED JANUARY 1 TO MAY 11 TO
JUNE 30, 2000 MAY 10, 1999 JUNE 30, 1999 JUNE 30, 2000 MAY 10, 1999 JUNE 30, 1999
------------- ------------ ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $78,082 $ 14,780 $23,018 $133,345 $ 37,701 $23,018
Operating costs and expenses
Cost of sales 54,050 10,479 16,436 92,553 26,117 16,436
Selling, general and administrative 11,285 2,219 2,918 20,041 6,090 2,918
Non-recurring acquisition related costs - 20,257 - - 20,257 -
Non-cash distribution and marketing 1,271 - - 1,721 - -
Amortization of goodwill 10,591 - 2,809 17,280 - 2,809
---------- ---------- --------- ----------- --------- -----------
Total operating costs and expenses 77,197 32,955 22,163 131,595 52,464 22,163
---------- ---------- --------- ----------- --------- -----------
Operating profit (loss) 885 (18,175) 855 1,750 (14,763) 855
Other income (expense)
Interest income 2,175 188 175 3,021 420 175
Interest expense (4) (2) (3) (31) (5) (3)
Gain on sales of securities - 471 - - 471 -
Other (210) - - - 14 -
---------- ---------- --------- ----------- --------- -----------
Income (loss) before income tax expense 2,846 (17,518) 1,027 4,740 (13,863) 1,027
Income tax expense (1,096) - (380) (1,825) - (380)
---------- ---------- --------- ----------- --------- -----------
Net income (loss) $ 1,750 $(17,518) $ 647 $ 2,915 $(13,863) $647
========== ========== ========= =========== ========= ===========
Basic and diluted earnings (loss)
per common share $ 0.03 $ (0.45) $ 0.02 $ 0.06 $ (0.36) $ 0.02
========== ========== ========= =========== ========= ===========
Weighted average number of shares
used to compute basic earnings
(loss) per common share 55,209 38,999 38,999 50,310 38,999 38,999
========== ========== ========= =========== ========= ===========
Weighted average number of shares
used to compute diluted
earnings (loss) per 55,882 38,999 38,999 50,746 38,999 38,999
========== ========== ========= =========== ========= ===========
</TABLE>
<TABLE>
<S> <C> <C>
PRO FORMA TAX INFORMATION IF PREDECESSOR
WERE A C-CORPORATION
Historical loss before income tax benefit $(17,518) $(13,863)
Pro forma income tax benefit 6,482 5,129
------------- -----------
Pro forma net loss $(11,036) $ (8,734)
============= ===========
Pro forma basic and diluted earnings
per common share 38,999 38,999
Weighted average number of shares used to compute
pro forma basic and diluted loss per share $ (0.28) $ (0.22)
</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>
ADDITIONAL ACCUMULATED 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:
Three months ended March 31, 2000:
Net Income 1,165 - - - - 1,165
Accumulated other comprehensive loss (6) - - - (6) -
Three months ended June 30, 2000:
Net Income 1,750 - - - - 1,750
Accumulated other comprehensive loss (6) - - - (6) -
--------
Comprehensive income 2,903
--------
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 12,500 - - 12,500 - -
-------- ------------ ------------ --------- ----------------- ---------
Balance at June 30, 2000 $426,563 $162 $390 $419,074 $(100) $7,037
======== ============ ============ ========= ================= =========
</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>
PREDECESSOR COMPANY
SIX MONTHS ENDED PERIOD JANUARY 1 PERIOD MAY 11
JUNE 30 TO MAY 10, TO JUNE 30,
2000 1999 1999
----------------- ------------------ ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,915 $ (13,863) $ 647
Adjustment to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 345 119 55
Amortization of goodwill 17,280 - 2,809
Amortization of deferred distribution and marketing costs 1,721 -
Gain on sale of securities - (471) -
Non-cash compensation charge - 12,900 -
Deferred income taxes (2,595) - (346)
Changes in operating assets and liabilities
Accounts and notes receivable 19 20 40
Prepaid hotel rooms 288 (179) (209)
Accounts payable, trade 12,139 7,123 3,728
Deferred revenue 22,106 11,994 1,207
Due to USAi 3,207 - 726
Other accrued liabilities (176) (371) 621
Other current assets, net (1,589) (49) (254)
--------------- ---------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 55,660 17,223 9,024
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 (523) (222) (87)
Purchase of marketable securities (33,335) (8,434) -
Proceeds from sale of marketable securities - 11,631 995
Other, net - 31 -
--------------- ---------------- -------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (38,858) 3,006 (157,077)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution by USAi - - 182,313
Net proceeds from issuance of stock 90,060 - -
--------------- ---------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 90,060 - 182,313
--------------- ---------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 106,862 20,229 34,260
Cash and cash equivalents at beginning of period 6,257 4,964 0
--------------- ---------------- -------------
Cash and cash equivalents at end of period $ 113,119 $ 25,193 $ 34,260
=============== ================ =============
Supplemental Cash Flow Information:
Cash paid for interest $ 31
Cash paid for taxes $ 3,000
Contribution by USAi to fund purchase price liability $ 12,500
Issuance of warrants $ 14,755
</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 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 periods from April 1, 1999 to May 10, 1999 and 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 4 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 twelve
months ended December 31, 1999. Certain amounts in the Unaudited Condensed
Consolidated Financial Statements for the periods ended May 10, 1999 and June
30, 1999 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 combined condensed financial statements and notes
shall 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 in connection with the Company's initial
public offering.
5
<PAGE>
ADVERTISING
Advertising expense for the three-month and six-month periods ending
June 30, 2000 was $1,919 and $3,415 respectively. Advertising expense for the
periods April 1 to May 10, 1999 and May 11 to June 30, 1999 were $501 and
686, 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 June 30, 2000, capitalized advertising is $348.
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 2 - BUSINESS ACQUISITION
On May 10, 1999 the Company completed its acquisition and assumption
of substantially all of the assets and liabilities of TMF, Inc and HRN
Marketing Corp., which operated the Hotel Reservations Network service. The
total purchase price paid through June 30, 2000 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 $45.6 million, which is reflected on the balance sheet as a
liability, and is subject to final adjustment. Subsequent to June 30, 2000,
USAi has funded this preliminary obligation, subject to final adjustment, as
a capital contribution.
The acquisition was accounted for under the purchase method of
accounting. The total amount of goodwill of $405.9 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.
6
<PAGE>
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 $38,391 and
aggregate market value of $38,228, resulting in a pre-tax unrealized loss
of $163. The cumulative unrealized loss of $163 is shown as a component of
comprehensive income net of income tax benefits of $63. 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
will be amortized ratably as non-cash distribution and marketing expenses
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 are nonforfeitable, fully vested and exercisable.
NOTE 6 - COMPREHENSIVE INCOME
Comprehensive income is net income 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 completed its acquisition and assumption
of substantially all of the assets and 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 six months ended June 30, 2000 with 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 June 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 June 30, 2000, we had room supply agreements
with over 1,700 hotels in 60 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 SIX MONTHS ENDED JUNE 30, 2000
(HISTORICAL) COMPARED TO THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1999
(COMBINED HISTORICAL)
REVENUES
For the three months ended June 30, 2000, the Company generated
revenues of $78.1 million, an increase of 107% over the $37.8 million of
revenues generated in the same period in 1999. For the six months ended June
30, 2000, the Company generated revenues of $133.3 million, an increase of
120% over the $60.7 million of revenues generated in same period in 1999. The
increase for the quarter and the six-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 92% and 91% for the three and six
months ended June 30, 2000, respectively from 81% and 75% 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 52% of the total revenues for the quarter and six months of
2000 compared to 41% and 35% 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 eleven new markets during the
quarter, and twenty new markets during the first six months of 2000, reaching
a total of 60 compared to 37 at June 30 1999, representing a 62% increase.
COST OF SALES AND GROSS PROFIT
8
<PAGE>
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 121% to $24.0 million in the second quarter of 2000 from
$10.9 million in the second quarter of 1999. Gross profit margin for the three
months ended June 30, 2000 increased to 30.8% from 28.8% for the prior year
period.
Gross profit increased 125% to $40.8 million for the six months ended
June 30, 2000 from $18.2 million in the same period in 1999. Gross profit
margin for the six months ended June 30, 2000 increased to 30.6% from 29.9%
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 $0.5
million for the second quarter of 1999 and $0.8 million for the six months
ended June 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 120% for the quarter ended June 30, 2000 over the same period in
1999. As a percentage of net revenues, selling, general and administrative
costs for the three months ended June 30, 2000 increased to 14.5% from 13.6%
for the same period in 1999.
Overall selling, general and administrative costs increased 122% for
the six months ended June 30, 2000 over the same period in 1999. As a
percentage of net revenues, selling, general and administrative costs for the
six months ended June 30, 1999 increased to 15.0% from 14.8% for the same
period in 1999.
The increase in selling, general and administrative costs as a
percentage of net revenues for the quarter and six 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 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 $1.3 million
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 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 six-month period in 2000 versus
amortization expense in 1999 from May 11, 1999, the date of acquisition of the
Company's predecessor business.
9
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED JUNE
30, 2000 (HISTORICAL) TO THE PROFORMA RESULTS FOR THE QUARTER AND SIX MONTHS
ENDED JUNE 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.
HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED ACTUAL AND PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------------
PRO FORMA COMBINED PRO FORMA COMBINED
2000 1999 1999 2000 1999 1999
------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $78,082 $37,798 $ 37,798 $133,345 $60,719 $ 60,719
Cost of revenues 54,050 26,915 26,915 92,553 42,553 42,553
------------ ----------- ------------ ------------ ----------- ------------
Gross profit 24,032 10,883 10,883 40,792 18,166 18,166
Operating expenses
Selling general and administrative
expenses 11,111 5,080 5,028 19,696 8,949 8,834
Non-recurring acquisition related costs - - 20,257 - - 20,257
Amortization of non-cash distribution
and marketing expense 1,271 - - 1,721 - -
Amortization of goodwill 10,591 10,591 2,809 17,280 17,280 2,809
Depreciation and amortization 174 109 109 345 174 174
------------ ----------- ------------ ------------ ----------- ------------
Income (loss) from operations $885 $(4,897) $(17,320) $ 1,750 $(8,237) $(13,908)
============ =========== ============ ============ =========== ============
EBITDA $12,921 $5,803 $(14,402) $ 21,096 $ 9,217 $(10,925)
============ =========== ============ ============ =========== ============
</TABLE>
The pro forma information for the three and six months ended June 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 $52,000 and $115,000
for the three and six months ended June 30, 1999 respectively, in order to
present comparable officer's compensation.
10
<PAGE>
EBITDA grew to $12.9 million and $21.1 million for the three and
six-month periods ending June 30, 2000, respectively, a 123% and 129% increase
from the same periods in 1999. EBITDA as a percentage of net revenues
increased to 16.5% and 15.8% for the three and six months ended June 30, 2000,
respectively from 15.4% and 15.2% 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
June 30, 2000, we had $151.3 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.
Net cash provided from operating activities was $55.7 million for the
six months ending June 30, 2000, compared to $26.2 million for the same period
in 1999, representing an increase of 112%. Capital expenditures were $0.5
million for the six months ended June 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 subsequent to June 30,
2000, USA Networks, Inc. made an additional $45.6 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
11
<PAGE>
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.
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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits.
<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
27.1* Financial Data Schedule
27.2* Financial Data Schedule
27.3* Financial Data Schedule
27.4* Financial Data Schedule
27.5* 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.
(b) Reports on Form 8-K.
NONE.
13
<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: August 11, 2000 By: /s/ Jack Rubin
-------------------------------------
Jack Rubin
Chief Financial and Strategic Officer
14
<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
27.1* Financial Data Schedule
27.2* Financial Data Schedule
27.3* Financial Data Schedule
27.4* Financial Data Schedule
27.5* 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.
15
