5
To our stockholders
2005 was an exhausting and exhilarating year for Expedia, Inc. While the spin-off that was finalized
in August caused a minimum of disruption to our underlying operations, it and the challenges of the
business Ì together with a full scale reorganization of the Company and its executive team Ì made even
the most energetic of our staff draw on their every reserve. But I believe the result is a focused and
coherent collection of industry-leading travel brands ... the promise of which is exhilarating (and though
I'm in a different age class, the youth and energy of Expedia is something mighty to behold).
As a stand-alone entity, current and prospective investors can now much more effectively understand,
analyze and ultimately evaluate our fortunes. And as to the size of that opportunity for fortune, it's
invigorating to know that our over $15 billion in gross bookings1 represents less than 2% of the
approximately $900 billion in annual travel spend across the globe. Even in the United States, our very
first market and one where our $12 billion in bookings is nearly double the size of our next nearest online
competitor, we represent less than 5% of the total travel spend.
For long-term investors, this significant untapped global opportunity, combined with Expedia's
substantial leadership position (we are the third largest travel company in the world), is the foundation on
which to anchor an attractive investment thesis.
But for the thesis to prove out, a fuller, and more sober evaluation is mandatory, as capturing the next
$15 billion of bookings on a profitable basis Ì long a hallmark of this company Ì is going to be a lot
harder than the first $15 billion.
As to our current profitability, Expedia continued to lead the way in 2005 with OIBA2 of
$627 Million (nearly 30% of our revenue), and free cash flow3 of $798 million. This performance is a fine
indication of the underlying strength of our business model Ì despite the added pressures of both the
reconfiguration and an almost total reorganization of the entire Company, performance was there Ì and
also there given the increased competition everywhere Ì from travel suppliers with their product offerings
improving and aggressive marketing campaigns touting the virtues and rewards of "booking direct' to online
travel agencies other than Expedia continuing to expand their product and service offerings, improving
their customers' experience and investing in marketing and technology.
And for added soberness, 2006 is going to be no cakewalk either. Profitability is going to be
compromised as we experience continued efforts from product suppliers to reduce their costs of
distribution, lower marketing efficiencies, full-year expenses associated with our becoming an independent
public company and increased headcount in various functional areas.
Also pressuring profitability in the near-term will be the critical technology investments which
Expedia is undertaking. Our CEO, Dara Khosrowshahi, will cover this in greater detail below, but we are
convinced these are the right investments to make on behalf of our travelers, our supplier partners and our
long-term stockholders. These initiatives will be neither inexpensive nor will they have immediate returns,
but they are absolutely essential if we are to continue the Company's leadership position and capture more
of the immense opportunity in this huge global travel industry.
2006 is going to be a rough year for Expedia, but sometimes you have to take a step backwards in
order to leap forward. And if we are right, the investments we are making begin coming home next year.
On the winds of the internet revolution we have built a wonderful business. But with the inevitable
competition that early success has attracted, the revolution itself won't carry us far enough or make us a
Company worthy of your continuing interest ... what will is our succeeding in becoming a first in class
travel merchant Ì a true retailer rather than a transaction processor. Everything we are doing is in pursuit
of that Ì every investment we make, every initiative Ì is designed and justified by how much closer it
gets us to that goal. It is our faith in the rightness of that premise and the belief we are making real
progress that energizes our days and allows us to be optimistic for the future.
We have a great past, a very challenging present, and a future that is not yet in evidence Ì the kind
of environment that demands strategic clarity and exceptional execution, and I'm convinced both are in
hand.
Sincerely,
Barry Diller Ì Chairman & Senior Executive
May, 2006
2005 was a successful year for Expedia, Inc. I want to spend some time on just a subset of the
noteworthy financial and operational accomplishments which my 6,500 colleagues at Expedia delivered in
2005.
Our financial highlights included:
‚ $15.6 billion in worldwide gross bookings, up 22% over 2004;
‚ $2.1 billion in revenue with $627 million in OIBA, maintaining an OIBA margin near 30%; and
‚ $850 million in cash flow from operations and $798 million in free cash flow
In keeping with long-standing Expedia tradition, we continued to innovate on behalf or our travelers
and supplier partners in 2005: we introduced the Expedia Promise and the Expedia Best Price Guarantee,
formalizing our commitment to our travelers and introducing the industry's broadest and richest price
guarantee Ì offering not merely to match competitor prices, but to also offer a $50 travel coupon to our
valued travelers. We introduced our Personal Trip Guides, offering travelers extensive post-booking content
about their destinations, including weather forecasts, sites of interest and activities, great restaurants and
maps of the surrounding area.
We laid the foundation to radically improve our relations with suppliers through the formation of our
Partner Services Group, or ""PSG.'' PSG is dedicated to partnering with, serving, and adding incremental
demand and value to our travel supply partners. One example of this activity was an innovative three-year
strategic partnership with Marriott International, designed to reward Expedia for delivering business to
Marriott's properties during off-peak travel periods. We live in the intersection of travel supply and
demand, and with scale, and improved technical capabilities and supplier relations, we will increasingly be
positioned to optimize our front end demand with available supply to the mutual benefit of our travelers,
suppliers, and our ultimate profitability.
We made progress on our multi-brand strategy: successfully re-branding our Hotels.com franchise,
resulting in four straight quarters of accelerating growth; aggressively growing TripAdvisor, the premier
global information and advice destination on the web and now the world's second most visited travel
website; nearly doubling Hotwire's profitability; and placing our high end Classic Vacations on the growth
path again, expanding into Tahiti as its newest destination.
Finally, we continued to develop our highest growth areas Ì International and Corporate Travel.
International bookings hit nearly $3.5 billion, up 50% from 2004 and accounting for 22% of our worldwide
gross bookings. Unlike our significant competitors, we have established our leading position in Europe
almost entirely through organic growth, and most recently we launched an Australian point of sale at
www.expedia.com.au, our second Asia Pacific market, and the eighth worldwide Expedia-branded website.
Our Expedia Corporate Travel business has come into its own, reaching over 3,000 cumulative clients,
driving 85% domestic online adoption and growing more than 90% to over $700 million in gross bookings,
making it a top-10 corporate travel agency.
We cannot, however, rest on our laurels. The travel distribution business is intensely competitive, and
we anticipate that the year ahead will be our most challenging and competitive yet, on a global basis. In
order to stay ahead of our competition, we have embarked on an ambitious investment plan in our content,
technology, systems, and capabilities in three key areas:
‚ First, we are building our services to be more than simple transactional engines. We are creating
value-added content to inspire our travelers at the very start of their trip planning process,
expanding our merchandising capabilities to sell a greater variety of product, and Ì once our
travelers have purchased our products Ì providing them with the content and services to maximize
the enjoyment of their trip.
‚ Second, we are improving our ability to attract and retain our travelers by investing in our direct
marketing capabilities and technology, developing broad promotion and loyalty programs, and
making significant investments in improving traveler service across our brand portfolio.
‚ Finally, we are investing in backend systems and platforms to automate previously manual
processes, scale our business, and fundamentally integrate what have been disparate operations at
Expedia, Hotels.com and Hotwire.
The development of these capabilities will require considerable management attention, technology and
capital resources, including the design and delivery of a new enterprise data warehouse and a fundamental
re-architecting of our global technology platform. Each of these initiatives has operational risk Ì driving
multiple work streams concurrently is a significant management and execution challenge. But this is at the
core of what we love to do Ì we know exactly where we are headed, we will build great products, we will
continually improve our services, and we will execute with speed, purpose and passion.
I'm confident that Expedia, Inc. enters 2006 with the team, the vision and the strategy to enhance
stockholder value over the long-term, and delight millions of travelers with the many services and offerings
that our supply partners have to offer. I look forward to reporting on our progress throughout this year and
beyond.
Sincerely,
Dara Khosrowshahi Ì CEO & President
May, 2006
(1) Gross bookings represent the total retail value of transactions recorded for both agency and merchant
transactions at the time of booking. Please see ""Operating Metrics'' on page 33 of this Annual
Report.
(2) ""OIBA'' (Operating income before amortization), is a Non-GAAP financial measure as defined by
the Securities and Exchange Commission (the ""SEC''). Please see ""Definition of OIBA'' and
""Reconciliation of OIBA to Operating Income and Net Income'' on pages 39-40 of this Annual
Report.
(3) ""Free Cash Flow'' is a Non-GAAP financial measure as defined by the SEC. Free Cash Flow is
defined as net cash flow provided by operating activities less capital expenditures. We believe Free
Cash Flow is useful to investors because it represents the operating cash flow that our operating
businesses generate, less capital expenditures but before taking into account other cash movements
that are not directly tied to the core operations of our businesses, such as financing activities or
certain investing activities. Free Cash Flow has certain limitations in that it does not represent the
total increase or decrease in the cash balance for the period, nor does it represent the residual cash
flow for discretionary expenditures. Therefore, it is important to evaluate Free Cash Flow along with
the consolidated statements of cash flows.
Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$849,895
(52,315)
2005
2003
Year Ended December 31,
2004
(In thousands)
$802,853
(53,407)
$644,023
(46,183)
Free cash flow ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$797,580
$749,446
$597,840
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission file number: 000-51447
EXPEDIA, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
20-2705720
(I.R.S. Employer Identification No.)
3150 139th Avenue SE
Bellevue, WA 98005
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code:
(425) 679-7200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.001 par value
Warrants to acquire one-half of one share of common stock, $0.001 par value
Warrants to acquire 0.969375 shares of common stock, $0.001 par value
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes n
No ¥
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes n
No ¥
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ¥
No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 405 of
Regulation S-K (Û229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes n
No ¥
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of ""accelerated filer and large accelerated filer'' in Rule 12b-2 of the Exchange
Act. Large accelerated filer n
Non-accelerated filer ¥
Accelerated filer n
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934). Yes n
No ¥
As of June 30, 2005, there was no established public market for the registrant's common stock. Shares
began trading August 9, 2005 after completion of the Spin-Off from IAC/InterActiveCorp (""IAC'').
Class
Outstanding Shares at February 28, 2006 were approximately,
Common stock, $0.001 par value per shareÏÏÏÏÏÏÏ
Class B common stock, $0.001 par value per share
323,069,100 shares
25,599,998 shares
Documents Incorporated by Reference
Document
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held
May 23, 2006 (Proxy Statement)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Part III
Expedia, Inc.
Form 10-K
For the Year Ended December 31, 2005
Contents
Part I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unresolved Staff Comments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Part II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Management's Discussion and Analysis of Financial Condition and Results of
Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Quantitative and Qualitative Disclosures About Market RiskÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Part III
Directors and Executive Officers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Principal Accountant Fees and Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 15
Consolidated Financial Statements and Exhibits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SignaturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Part IV
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1
Expedia, Inc.
Form 10-K
For the Year Ended December 31, 2005
Part I. Item 1. Business
Forward-Looking Statements
This Annual Report on Form 10-K contains ""forward-looking statements'' within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the views of
our management regarding current expectations and projections about future events and are based on
currently available information. Actual results could differ materially from those contained in these
forward-looking statements for a variety of reasons, including, but not limited to, those discussed in the
section entitled ""Risk Factors'' as well as those discussed elsewhere in this report. Other unknown or
unpredictable factors also could have a material adverse effect on our business, financial condition and
results of operations. Accordingly, readers should not place undue reliance on these forward-looking
statements. The use of words such as ""anticipates,'' ""estimates,'' ""expects,'' ""intends,'' ""plans'' and
""believes,'' among others, generally identify forward-looking statements; however, these words are not the
exclusive means of identifying such statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements are inherently subject to uncertainties, risks and changes in
circumstances that are difficult to predict. We are not under any obligation and do not intend to publicly
update or review any of these forward-looking statements, whether as a result of new information, future
events or otherwise, even if experience or future events make it clear that any expected results expressed
or implied by those forward-looking statements will not be realized. Please carefully review and consider
the various disclosures made in this report and in our other reports filed with the Securities and Exchange
Commission (""SEC'') that attempt to advise interested parties of the risks and factors that may affect our
business, prospects and results of operations.
Management Overview
General Description of our Business
Expedia, Inc. is an online travel company, empowering business and leisure travelers with the tools
and information they need to efficiently research, plan, book and experience travel. We have created a
global travel marketplace used by a broad range of leisure and corporate travelers and offline retail travel
agents. We make available, on a stand-alone and package basis, travel products and services provided by
numerous airlines, lodging properties, car rental companies, destination service providers, cruise lines and
other travel products and services.
Our portfolio of brands, which are described below, include: Expedia-branded websites, Hotels.com,
Hotwire.com, Worldwide Travel Exchange (""WWTE'') and Interactive Affiliate Network (""IAN''),
Classic Vacations, Expedia Corporate Travel, eLong and TripAdvisor.
Summary of the Spin-Off from IAC/InterActiveCorp
On December 21, 2004, IAC/InterActiveCorp (""IAC'') announced its plan to separate into two
independent public companies to allow each company to focus on its individual strategic objectives. We
refer to this transaction as the ""Spin-Off.'' A new company, Expedia, Inc., was incorporated under
Delaware law in April 2005, to hold substantially all of IAC's travel and travel-related businesses.
On August 9, 2005, the Spin-Off was completed and Expedia, Inc. shares began trading on The
Nasdaq Stock Market, Inc. under the symbol ""EXPE.'' In conjunction with the Spin-Off, we completed
the following transactions: (1) transferred to IAC all cash in excess of $100 million, excluding the cash
and cash equivalents held by eLong, (2) extinguished all intercompany receivable balances from IAC,
which totaled $2.5 billion by recording a non-cash distribution to IAC, (3) recorded a non-cash
2
contribution from IAC of a joint ownership interest in an airplane, with a value of $17.4 million,
(4) recorded a non-cash contribution of media time, with a value of $17.1 million, (5) recorded derivative
liabilities for the stock warrants and Ask Jeeves Convertible Subordinated Notes (""Ask Jeeves Notes'')
with a fair value of $101.6 million, (6) recorded a modification of stock-based compensation awards of
$5.4 million, and (7) recapitalized the invested equity balance with common stock, Class B common stock
and preferred stock, whereby holders of IAC stock received shares of Expedia stock based on a formula.
For additional information about the Spin-Off, see Note 1, Organization and Basis of Presentation, in the
notes to consolidated financial statements.
Equity Ownership and Voting Control
As of February 28, 2006, there were approximately 323,069,100 shares of Expedia common stock,
25,599,998 shares of Expedia Class B common stock and 846 shares of Expedia preferred stock
outstanding. Liberty Media Corporation (""Liberty'') through companies owned by Liberty and companies
owned jointly by Liberty and Barry Diller, Chairman and Senior Executive of Expedia, beneficially owned
approximately 18% of Expedia's outstanding common stock and 100% of Expedia's outstanding Class B
common stock. As of such date, Mr. Diller (through companies owned jointly by Liberty and Mr. Diller,
his own holdings and holdings of Liberty, over which Mr. Diller generally has voting control pursuant to an
irrevocable proxy granted by Liberty under the Stockholders Agreement described below) controlled
approximately 53% of the outstanding total voting power of Expedia.
Subject to the Stockholders Agreement, dated as of August 9, 2005, between Liberty and Mr. Diller,
Mr. Diller is effectively able to control the outcome of nearly all matters submitted to a vote or for the
consent of Expedia's stockholders (other than with respect to the election by the Expedia common
stockholders of 25% of the members of Expedia's Board of Directors and certain matters as to which a
separate class vote of the holders of Expedia common stock or Expedia preferred stock is required under
Delaware law). In addition, pursuant to the Governance Agreement, dated as of August 9, 2005, among
Expedia, Liberty and Mr. Diller, each of Mr. Diller and Liberty generally has the right to consent to
certain significant corporate actions in the event that Expedia's ratio of total debt to EBITDA, as defined
therein, equals or exceeds four to one over a continuous 12-month period.
Portfolio of Brands
We leverage our portfolio of brands to target the broadest range of travelers looking for different
travel options. Our brands provide a wide selection of travel products and services, from simple, discounted
travel to more complex, luxury travel. Our products primarily consist of air, hotel, car rental, destination
services and cruise.
Expedia. Our Expedia-branded websites make a large variety of travel products and services
available directly to travelers through our U.S.-based website, www.expedia.com, as well as through
localized versions of our website in Australia, Canada, France, Germany, Italy, the Netherlands and the
United Kingdom (""U.K.''). Expedia-branded websites also serve as the travel channel on MSN.com,
Microsoft Corporation's (""Microsoft'') online services network in the United States, as well as certain
international MSN sites. Expedia-branded websites target many different types of consumers, from
families booking a summer vacation to individual travelers arranging a quick weekend getaway. Travelers
can search for, compare information about (including pricing and availability) and book travel products
and services on Expedia-branded websites, including airline tickets, lodging, car rentals, cruises and many
destination services, such as attractions and tours, from a large number of suppliers, on a stand-alone or
package basis.
Hotels.com. Our Hotels.com website makes available a large variety of lodging options to travelers,
who can plan, shop for and book lodging accommodations, from traditional hotels to vacation rentals.
Hotels.com seeks to provide travelers with premium content and service through our U.S.-based website,
www.hotels.com (as well as localized versions in the Americas, Europe, Asia Pacific and South Africa),
our vacation rentals website at www.vacationspot.com and our call centers. Through Hotels.com, we are
3
pursuing a strategy focused on differentiating our service offerings by positioning ourselves as a hotel
expert with premium content about lodging properties, while simultaneously broadening our focus to
include other travel products and services.
Hotwire.com. Our discount travel website, Hotwire.com, makes available airline tickets, hotel rooms,
rental cars, cruises and vacation packages. Hotwire.com's approach matches the price-sensitive travelers
willing to be flexible to save money with suppliers who have excess seats, rooms and cars they wish to fill
without affecting the public's perception of their brands. Hotwire.com travelers may enjoy significant
discounts by electing to book travel services ""opaquely'' or ""semi-opaquely,'' without knowing certain
itinerary details such as brand, time of departure and exact hotel location, while suppliers create value
from excess inventory without diluting their core brand-loyal traveler base. Hotwire.com works with many
domestic and international airlines, including United States full-service major network airlines, top hotels
in hundreds of cities and resort destinations in the United States, Europe, Canada, Mexico and the
Caribbean and major car rental companies in the United States.
WWTE and IAN. Our private label programs make travel products and services available to travelers
through third party company-branded websites. The products and services made available through our
websites, www.wwte.com and www.ian.com, are based on those made available on Expedia-branded and
Hotels.com-branded websites, respectively. We generally compensate participants in the WWTE and IAN
private label programs on a revenue-share basis.
Classic Vacations. We offer individually tailored vacations that we provide primarily through a
national network of third-party retail travel agents. We deliver a full line of premium vacation packages Ì
air, hotels, car rentals, activities and private transportation Ì to create customized luxury vacations in
Hawaii, the Caribbean, Mexico, Costa Rica, Europe and Tahiti. Travel agents and travelers can preview
our product offering through our websites, www.classicforagents.com and www.classicvacations.com.
Destination Services. Our network of in-destination travel desks located at hotels and resorts in
Florida, Hawaii and Mexico makes available to travelers the opportunity to obtain tours, attractions, airport
transfer services and other travel-related services. Our network expanded through our acquisition of
Activity World, a destination service provider in Hawaii in 2004, and our 2005 acquisition of Premier
Getaways, a destination service provider in Florida.
Expedia Corporate Travel (""ECT''). Our full-service travel management company makes travel
products and services available to corporate travelers in the United States, Canada and Europe. In 2004,
we established ECT Ì Europe, which includes Egencia and World Travel Management, both of which
were acquired in 2004. ECT provides, among other things, centralized booking tools for employees of our
corporate travelers, support of negotiated airfares and consolidated reporting aimed at small- and mid-sized
businesses. ECT charges corporate client companies sign-up and set-up fees, as well as transactional fees
for making or changing bookings. In addition, ECT provides on-site agents to some corporate clients in
order to fully support the account.
eLong. Our majority owned online travel service company, based in Beijing, People's Republic of
China (""China''), specializes in travel products and services in China. eLong uses web-based distribution
technologies and a 24-hour nationwide call center to provide consumers with consolidated travel
information and the ability to access hotel reservations at discounted rates at over 3,000 hotels in major
cities across China. eLong also offers air ticketing and other travel related services, such as rental cars and
vacation packages. Travelers can access travel products and services through the websites, www.elong.com
and www.elong.net.
TripAdvisor. Our comprehensive online travel search engine and directory aggregates unbiased
articles, guidebook reviews and user opinions on cities, hotels and activities in a variety of given
destinations from a number of online sources through our website, www.tripadvisor.com. In addition to
travel-related information, TripAdvisor's destination-specific search results provide links to the websites of
TripAdvisor's travel partners (travel service providers and marketers) through which travelers can make
related travel arrangements.
4
Business Strategy
We are in the early stages of leveraging our historic strength as an efficient transaction processor to
become a retailer and merchandiser of travel experiences. Our goal is to help travelers enjoy their trips;
from before the reservation is made, to after the trip has been taken.
Our business strategy is as follows:
‚ Leverage our portfolio of travel brands;
‚ Innovate on behalf of travelers and supplier partners;
‚ Expand our international and corporate travel businesses;
‚ Expand our product and service offerings worldwide; and
‚ Leverage our scale in technology and operations.
Leverage Our Portfolio of Travel Brands. We seek to appeal to the broadest possible range of
travelers and suppliers through our collection of industry-leading brands. We target several different
demographics, from the value-conscious traveler through our Hotwire brand to luxury travelers seeking a
high-touch, customized vacation package through our Classic Vacations brand. We believe our flagship
Expedia brand appeals to the broadest range of travelers, with our extensive product offering and
facilitation of single item purchases of discounted product to complex bundling of higher-end travel
packages. Our Hotels.com site and its international versions target travelers with premium content about
lodging properties, and generally appeal to travelers with shorter booking windows who prefer to drive to
their destination.
We believe our appeal to suppliers is enhanced by our brand portfolio and our international points of
presence, by allowing suppliers to access the broadest possible range of travelers with their product and
service offerings. We intend to continue supporting and investing in our brand portfolio for the benefit of
travelers and suppliers.
Innovate on Behalf of Travelers and Supplier Partners. We have a long tradition of innovation, from
Expedia.com's inception as a division of Microsoft, to our introduction of Best Fare Search and dynamic
packaging technologies to more recent innovations such as traveler reviews, Personal Trip Guides, Expedia
Corporate Travel's TripController software and our AirShopper e-mail campaign.
A recent innovation of note was Expedia.com's introduction of its Best Price Guarantee in early 2006.
We increase our travelers' confidence and their likelihood of purchase by assuring them that our pricing is
competitive. If travelers find a better price online for the same trip within 24 hours, we refund the
difference and we give them a $50 travel coupon towards their next qualifying trip, subject to certain
restrictions.
We intend to continue innovating on behalf of our travelers. We are currently investing in and
building a scaleable, extensible, service-oriented technology platform, which will extend across our portfolio
of brands. This will result in improved flexibility and faster go-forward innovation. This transition will
allow us to improve our site merchandising, browse and search functionality and add significant
personalization features. We expect this transition to occur in a phased approach, with worldwide points of
sale migrating to the new platform by early 2008.
We also intend to continue innovating on behalf of our suppliers. As an example, we have developed
proprietary, supplier-oriented technology that streamlines the interaction between some of our websites and
hotel central reservation systems, making it easier and more cost-effective for hotels to manage
reservations made through our brands. Through this ""direct connect'' technology, hotels can upload
information about available products and services and rates directly from their central reservation systems
into our websites, as well as automatically confirm hotel reservations made by our travelers. In the absence
of direct connect technology, both of these processes are generally completed manually via a proprietary
5
extranet. Our travelers can book reservations with over 25,000 worldwide merchant hotel properties, of
which over 30% are now fully direct-connected. We expect that this number will increase in the future.
We are also adding a significant upgrade to our data aggregation and mining capabilities across
Expedia with the installation of an enterprise data warehouse, which will allow enhanced personalization
on both our websites and e-mail communications with our travelers. This investment will also yield phased
benefits, with the full project scheduled for completion in 2008.
Expand our International and Corporate Travel Businesses. We currently operate Expedia-branded
sites in the U.S., Canada, U.K., Germany, France, Italy, the Netherlands and Australia. Through our
controlling ownership in eLong, we maintain a point of sale for Chinese travelers, and through Hotels.com,
Hotwire.com and TripAdvisor brands we maintain additional points of presence beyond the U.S. In 2005,
our international gross bookings accounted for approximately 22% of worldwide gross bookings.
We intend to continue investing in and growing our existing international points of sale. In addition,
we anticipate launching point of sales in additional countries in the future where we find large travel
markets and rapid growth of online commerce. As an example, we plan to enter the Japanese travel sector
by the end of 2006. Future launches may occur under our flagship Expedia brand or our other brands, or
through acquisition of third party brands, as in the case of eLong.
ECT currently conducts operations in the U.S., Canada, U.K., France, Belgium, the Netherlands and
Luxembourg. We believe the corporate travel sector represents a large opportunity for Expedia, and we
believe we offer a compelling technology solution to small and medium-sized businesses seeking to control
travel costs and improve their employees' travel experiences. Expanding our corporate travel business also
increases our appeal to travel product and service suppliers, as the average corporate traveler has a higher
incidence of first class and international travel than the average leisure traveler.
We intend to continue investing in and expanding the geographic footprint of our ECT business. ECT
currently accounts for less than 5% of our worldwide gross bookings, but we anticipate growth over the
next few years.
Expand our Product and Service Offerings Worldwide.
In general, our Expedia.com site has offered
the most comprehensive array of innovation and selection of travel products and services to travelers. We
plan to continue improving and growing these offerings at Expedia.com, as well as expand them to our
worldwide points of sale.
The majority of our revenue comes from transactions involving the sale of airline tickets and the
booking of hotel reservations, either as stand-alone products or as part of package transactions. We are
working to grow our package business as it results in higher revenue per transaction, and we also seek to
continue diversifying our revenue mix beyond core air and hotel products to car rental, destination services,
cruise and other offerings.
Leverage our Scale in Technology and Operations. The travel brands comprising Expedia, Inc. have
invested over $3 billion dollars in technology, operations, brand building, supplier integration and
relationships and other areas since the launch of Expedia.com in 1996.
It is our intention to continue leveraging this substantial investment by launching new countries,
introducing site features, adding supplier products and services or adding value-added content for travelers.
We have been able to launch the Italy and Australia websites relatively quickly and inexpensively by
leveraging Expedia's existing technology and product supply.
Our scale of operations also enhances the value of technology innovations we introduce on behalf of
our travelers and suppliers. As an example, our traveler review feature Ì whereby Expedia travelers have
created over 100,000 qualified reviews of hotel properties Ì is able to accumulate a larger base of reviews
due to the higher base of online traffic that frequents our various sites.
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Merchant and Agency Business Models
We make travel products and services available on a stand-alone and package basis, primarily through
two business models: the merchant model and the agency model. Under the merchant model, we facilitate
the booking of hotel rooms, airline seats, car rentals and destination services from our travel suppliers and
for such bookings, we are the merchant of record. Under the agency model, we act as an agent in the
transaction, passing reservations booked by our travelers to the relevant airline, hotel, car rental company
or cruise line.
As merchant of record, we generally have certain latitude to establish prices charged to travelers (as
compared to agency transactions). Also, we negotiate inventory allocation and pricing with our suppliers
which enables us to achieve a higher level of net revenue per transaction as compared to those provided
through the agency model.
Through our Expedia-branded websites, travelers can dynamically assemble multiple component travel
packages in a single transaction at a lower price as compared to booking each component separately.
Packages assembled by travelers through the packaging model on these websites include a merchant hotel
component and an air or car component. Travelers select packages based on the total package price,
without being provided component pricing. The use of the merchant travel components in packages
enables us to make certain travel products available at prices lower than those charged on an individual
component basis by travel suppliers without impacting their established pricing and position models.
Our agency business is comprised of the sale of airline tickets, hotel, cruise and car rental
reservations. Airline ticket transactions make up the majority of this business. Although net revenue per
transaction is lower (as compared to the merchant model), due to the high volume of airline tickets sold,
our agency gross bookings accounted for 59% of total gross bookings for the year ended December 31,
2005.
Relationships with Travel Suppliers, Distribution and Fulfillment Partners
Overview. We make travel products and services available from a variety of large and small
commercial and charter airlines, lodging properties, car rental companies, cruise lines and destination
service providers. We seek to build and maintain long-term, strategic relationships with travel suppliers and
global distribution system (""GDS'') partners. An important component of the success of our business
depends on our ability to maintain our existing, as well as build new, relationships with travel suppliers and
GDS partners.
Travel Suppliers. We strive to deliver value to our travel suppliers through a wide range of
innovative, targeted merchandising and promotional strategies designed to increase their revenue, while
simultaneously reducing their marketing transaction and customer service costs. We maintain a Partner
Services Group, which consists mainly of strategic account managers and local market managers who work
directly with travel suppliers to increase the marketing of their travel products through our brands.
In addition, we have developed proprietary, supplier-oriented technology that streamlines the
interaction between some of our websites and hotel central reservation systems, making it easier and more
cost-effective for hotels to manage reservations made through our brands. Through this ""direct connect''
technology, hotels can upload information about available products and services and rates directly from
their central reservation systems into our websites, as well as automatically confirm hotel reservations
made by our travelers. In the absence of direct connect technology, both of these processes are generally
completed manually. Our travelers can book reservations with over 25,000 merchant hotel properties
worldwide, of which over 30% are now fully direct-connected. We expect that this number will increase in
the future.
Distribution Partners. GDS, also referred to as computer reservation services, provide a centralized,
comprehensive repository of travel suppliers ""content'' Ì such as availability and pricing of seats on
various airline point-to-point flights, or ""segments.'' The GDSs act as intermediaries between the travel
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suppliers and online and offline travel agencies, allowing agents to reserve and book flights, rooms or other
travel products.
While we have historically used Worldspan as our primary GDS, in light of the deregulated GDS
environment and our desire to ensure the widest possible supply of air content for our travelers, we also
have distribution agreements with both Amadeus and Sabre.
Fulfillment Partners. We outsource our airline ticket fulfillment function to third-party suppliers.
This function includes the issuance of airline tickets and related customer services.
Marketing and Promotions
Our marketing programs are intended to build and maintain the value of our various brands, drive
traffic and conversion through our various brands and businesses, lower ongoing traveler acquisition costs
and strategically position our brands in relation to one another. Our long-term success depends on our
continued ability to increase the overall number of traveler transactions in a cost-effective manner.
Our marketing channels primarily include direct and/or personalized traveler communications, search
engine marketing and online and offline advertising. In addition, our Expedia-branded websites provide
content and services to the travel channel on the MSN.com website in the U.S. and MSN websites in
Canada, the United Kingdom, Italy, France and Germany. Our marketing programs and initiatives include
promotional offers such as coupons and gift cards. In addition, we anticipate launching a significant loyalty
effort for our travelers.
We also make use of affiliate marketing. The Expedia.com and Hotels.com-branded websites receive
bookings from consumers who have clicked-through to the respective websites through links posted on
affiliate partner websites, including the IAN, or www.IAN.com, and WWTE, or www.wwte.com. We have
agreements with thousands of third party affiliate partners, including a number of leading travel companies,
pursuant to which we pay a commission for bookings originated from their websites. Affiliate partners can
make travel products and services available through an Expedia-branded website, a co-branded website or
their own private label website. We also provide our affiliates with technology and access to a wide range
of products and services.
Operations and Technology
We provide 24-hour-a-day, seven-day-a-week traveler support by telephone or via e-mail. For
purposes of operational flexibility, we provide this support infrastructure with a combination of in-house
and outsourced call centers which are located in various locations throughout the world.
Our systems infrastructure and web and database servers are hosted by third-party web hosting
suppliers in various locations, mainly in the United States, which provide communication links, as well as
24-hour monitoring and engineering support. The web hosting facilities have their own generators and
multiple back-up systems. Significant amounts of our computer hardware for operating the websites are
also located at these facilities.
We have developed innovative technology to power our global travel marketplace. For example, our
Expert Searching and Pricing Platform (""ESP Platform''), which our Expedia-branded websites use, is an
industry leading platform that includes two components: (1) a fare-searching engine that enables broad
and deep airline fare and schedule searches and (2) a common database platform that allows our Expedia-
branded websites and our travelers to bundle diverse types of travel services together dynamically, which
further enables our Expedia-branded websites to cross-market and package travel inventory. The ESP
Platform has been historically an important contributor to our growth in the online travel industry.
Another core technology advantage is our best fare search technology. This technology essentially
deconstructs the segment feeds from GDS partners for air flight searches and recommends the best way to
re-assemble multi-leg itineraries so that they are less expensive and more flexible for the traveler.
8
We plan to significantly invest in our technology platform over the next two years. We are investing in
and building a scaleable, extensible, service-oriented technology platform which will extend across our
portfolio of brands. This will result in long-term cost savings, improved flexibility and faster go-forward
innovation. This transition will allow us to improve our site merchandising, browse and search
functionality, add significant personalization features, and ultimately improve our ability to drive higher
return-on-investment in our online and offline advertising. We expect this transition to occur in a phased
approach, with worldwide points of sale migrating to the new platform over the next two years.
We are also adding a significant upgrade to our data aggregation and mining capabilities across
Expedia with the installation of an enterprise data warehouse over the next two years.
Competition
Our brands compete in rapidly evolving and intensely competitive markets. We believe the relatively
low percentage of total travel sales transacted online in the global travel industry indicates that these
markets represent especially large opportunities for Expedia and those of its competitors that wish to
expand their brands and businesses abroad.
Our competition, which is strong and increasing, includes online and offline travel companies that
target leisure and corporate travelers including travel agencies, tour operators, travel supplier direct
websites and their call centers, consolidators and wholesalers of travel products and services and other
companies offering travel search engines including meta-search engines in each case, on a local, regional,
national and/or international basis.
We believe that maintaining and enhancing our brands is a critical component of our effort to
compete. We differentiate our brands from our competitors primarily based on quality and breadth of
travel products, channel features and usability, price, traveler service and quality of travel planning content
and advice. The emphasis on one or more of these factors varies, depending on the brand or business and
the related target demographic.
Our brands face increasing competition from travel supplier direct websites. In some cases, supplier
direct channels offer advantages to travelers, such as loyalty programs or lower transaction fees. Our
websites feature travel products and services from numerous travel suppliers (as opposed to a single
supplier). We face competition from airlines, hotels, rental car companies, cruise operators and other travel
service providers, whether working individually or collectively, some of which are suppliers to our websites.
Our business is generally sensitive to changes in the competitive landscape, including the emergence of
new competitors.
Intellectual Property Rights
We regard our intellectual property rights, including our patents, service marks, trademarks, domain
names, copyrights, trade secrets and other intellectual property, as critical to our success. For example, we
rely heavily upon the software code, informational databases and other components that make up our
travel planning service.
We rely on a combination of laws and contractual obligations with employees, travelers, suppliers,
affiliates and others to establish and protect our trade secrets. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our trade secrets or our intellectual property without
authorization which, if discovered, might require the uncertainty of legal action to correct. In addition,
there can be no assurance that others will not independently and lawfully develop substantially similar
properties.
We have registered and continue to apply to register, or secure by contract when appropriate, our
trademarks as they are developed and used. We also register domain names as we deem appropriate.
While we seek to protect our trademarks and domain names, effective trademark protection may not be
available or may not be sought by us for every trademark used in every country, and contractual disputes
may affect the use of trademarks governed by private contract. Similarly, not every variation of a domain
9
name may be available, or may be registered by us, even if available. The failure to protect our intellectual
property in a meaningful manner or challenges to our intellectual property rights, could materially
adversely affect our business, result in erosion of our brand names and/or limit our ability to control
marketing on or through the internet using our various domain names.
We have considered, and will continue to consider, the appropriateness of filing for patents to protect
future inventions, as circumstances may warrant. However, many patents protect only specific inventions
and there can be no assurance that others may not create new products or methods that achieve similar
results without infringing upon patents owned by us.
From time to time, we may be subject to legal proceedings and claims in the ordinary course of our
business, including claims of alleged infringement by us of the trademarks, copyrights, patents and other
intellectual property rights of third parties. In addition, litigation may be necessary in the future to enforce
our intellectual property rights, protect our trade secrets or to determine the validity and scope of
proprietary rights claimed by others. Any such litigation, regardless of outcome or merit, could result in
substantial costs and diversion of management and technical resources, any of which could materially harm
our business.
Regulation
We must comply with laws and regulations relating to the travel industry and the provision of travel
services, including registration in various states as ""sellers of travel'' and compliance with certain disclosure
requirements and participation in state restitution funds. In addition, our businesses are subject to
regulation by the U.S. Department of Transportation and must comply with various rules and regulations
governing the provision of air transportation, including those relating to advertising and accessibility.
As we continue to expand the reach of our brands into the European, Asia-Pacific and other
international markets, we may increasingly be subject to laws and regulations applicable to travel agents in
those markets, including laws regulating the provision of travel packages and industry specific value-added
tax regimes. For example, the EEC Council Directive on Package Travel Package Holidays and Package
Tours imposes various obligations upon marketers of travel packages, such as disclosure obligations to
consumers and liability to consumers for improper performance of the package, including supplier failure.
Financial Information about Segments and Geographic Areas
We operate as one reportable segment. We generate our revenue through a diverse customer base,
and there is no reliance on a single customer or small group of customers; no customer represented 10% or
more of our total revenue in the periods presented in this Annual Report on Form 10-K.
The geographic information required herein is contained in Note 18, Segment Information, in the
notes to our consolidated financial statements.
Additional Information
Company Website and Public Filings. We maintain a corporate website at www.expediainc.com. The
information on our website, as well as the websites of our various brands and businesses, is not
incorporated by reference in this Annual Report on Form 10-K, or in any other filings with, or in any
information furnished or submitted to, the Securities and Exchange Commission (""SEC'').
We make available, free of charge through our website, our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K filed or furnished pursuant to Sections 13(a) or
Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after
they have been electronically filed with, or furnished to, the SEC.
Code of Ethics. We posted our code of business conduct and ethics, which applies to all employees,
including all executive officers and senior financial officers and directors, on our corporate website at
www.expediainc.com. Our code of business conduct and ethics complies with Item 406 of SEC
10
Regulation S-K and the rules of the Nasdaq Stock Market, Inc. We intend to disclose any changes to the
code that affect the provisions required by Item 406 of Regulation S-K, and any waivers of the code of
ethics for our executive officers, directors or senior financial officers, on our corporate website.
Employees
As of February 28, 2006, we employed approximately 6,500 full-time and part-time employees of
whom approximately 1,800 are based at eLong. In addition, we contract for the services of approximately
350 employees of temporary staffing firms. Our employees are not represented by any collective bargaining
unit. We believe we generally have good relations with our employees.
Part I. Item 1A. Risk Factors
You should carefully consider each of the following risks and uncertainties associated with our
company and the ownership of our securities. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business operations.
We operate in a very competitive environment and face increasing competition from a variety of
companies with respect to products and services we offer.
The market for the services we offer is intensely competitive. We compete with both established and
emerging online and traditional sellers of travel services with respect to each of the services we offer. Some
of our competitors, including travel suppliers such as airlines and hotels, may offer services and products
on more favorable terms such as no fees and with unique access to loyalty programs, such as points and
miles. Many of these competitors, such as airlines, hotel and rental car companies, are also focusing on
driving online demand to their own websites in lieu of third-party distributors like us. For instance, many
low cost airlines, which are having increasing success in the marketplace, distribute their inventory
exclusively through their own websites. Suppliers who sell on their own websites typically do not charge a
processing fee, and, in some instances, offer advantages such as bonus miles or loyalty points, which could
make their offerings more attractive to consumers than models like ours. The introduction of new
technologies and the expansion of existing technologies, such as metasearch products, may increase
competitive pressures. Increased competition may result in reduced operating margins, as well as loss of
travelers, transactions and brand recognition. We cannot assure you that we will be able to compete
successfully against current, emerging and future competitors or provide differentiated products and
services to our traveler base. Increased competition could result in reduced operating margins, loss of
segment share and damage to our brand. There can be no assurance that we will be able to compete
successfully against current and future competitors or that competition will not have a material adverse
effect on our business, results of operations and financial condition.
Over the last several years, travel suppliers have generally reduced or eliminated commissions and
payments to travel agents and other travel intermediaries; these reductions could adversely affect our
business, financial condition and results of operations.
A portion of our agency revenue is derived from compensation paid by travel suppliers and GDS
partners for bookings made through our websites. We generally negotiate these commissions and fees with
our travel suppliers and GDS partners. Over the last several years, travel suppliers have generally reduced
or eliminated commissions and payments to travel agents and other travel intermediaries. No assurances
can be given that GDS partners or travel suppliers will not reduce current industry compensation or our
compensation, either of which could reduce our agency revenue and margins thereby adversely affecting
our business, financial condition and results of operations. GDS partners in particular face renegotiations of
their long-term contracts with airlines in 2006 that could result in decreased compensation to them and to
us.
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Declines or disruptions in the travel industry, such as those caused by terrorism, war, inclement
weather, health concerns, bankruptcies and/or general economic downturns, could adversely affect our
business, financial condition and results of operations.
Our business, financial condition and results of operations are affected by the health of the worldwide
travel industry. Accordingly, downturns or weaknesses in the travel industry could adversely affect our
business. Travel expenditures are sensitive to business and personal discretionary spending levels and tend
to decline during general economic downturns. Events or weakness in the travel industry that could
negatively affect our business include price escalation in the airline industry or other travel-related
industries, airline or other travel related strikes, airline bankruptcies or liquidations and fuel price
escalation. Additionally, our business is sensitive to safety concerns, and thus may decline after incidents of
terrorism, during periods of political instability or geopolitical conflict in which travelers become concerned
about safety issues, as a result of inclement weather such as the hurricanes that affected the markets
around the Gulf of Mexico in 2005 or when travel might involve health-related risks, such as avian flu.
Such concerns could result in a protracted decrease in demand for our travel services. This decrease in
demand, depending on its scope and duration, together with any future issues affecting travel safety, could
significantly and adversely affect our business, financial condition and results of operations over the short
and long-term. In addition, the disruption of the existing travel plans of a significant number of travelers
upon the occurrence of certain events, such as terrorist activity or war, could result in the incurrence of
significant additional costs if we provide relief to affected travelers by not charging cancellation fees or by
refunding the price of airline tickets, hotel reservations and other travel products and services.
We depend on our relationships with travel suppliers and any adverse changes in these relationships
could adversely affect our business, financial condition and results of operations.
An important component of our business success depends on our ability to maintain our existing, as
well as build new, relationships with travel suppliers and global distribution system (""GDS'') partners.
Adverse changes in existing relationships, or our inability to enter into new arrangements with these parties
on favorable terms, if at all, could reduce the amount, quality and breadth of attractively priced travel
products and services that we are able to offer, which could adversely affect our business, financial
condition and results of operations.
Travel suppliers are increasingly seeking to lower their travel distribution costs by promoting direct
online bookings through their own websites. In some cases, supplier direct channels offer advantages to
consumers, such as loyalty programs or lower transaction fees. In addition, travel suppliers may choose not
to make their travel products and services available through our distribution channels. To the extent that
consumers continue to increase the percentage of their travel purchases through supplier direct websites
and/or if travel suppliers choose not to make their products and services available to us, our business may
suffer.
Our failure to attract and retain travelers in a cost-effective manner could adversely affect our
business, financial condition and results of operations.
Our long-term success depends on our continued ability to increase the overall number of traveler
transactions in a cost-effective manner. In order to increase the number of traveler transactions, we must
capture repeat business from existing travelers and also attract new visitors to our websites and other
distribution channels and convert these visitors into paying travelers. Similarly, our corporate travel
business is dependent on enlisting new corporate travelers and attracting their travel booking activity online
to our corporate travel websites as well as retaining existing travelers. One manner in which we cost-
effectively attract travelers to our websites is through affiliate programs. If the number of travelers being
driven to our websites through affiliates participating in these programs were to decrease significantly, costs
relating to our sales and marketing commitments could increase. In addition, we believe that rates for
desirable offline and online advertising and marketing placements are likely to increase in the foreseeable
future. No assurances can be provided that we will be successful in acquiring new travelers in a cost-
effective manner.
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We rely on the performance of highly skilled personnel and, if we are unable to retain or motivate
key personnel or hire, retain and motivate qualified personnel, our business would be harmed.
Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our
future success depends on our continuing ability to identify, hire, develop, motivate and retain highly
skilled personnel for all areas of our organization. In particular the contributions of Barry Diller, our
Chairman and Senior Executive, and Dara Khosrowshahi, our Chief Executive Officer, are critical to the
overall management of the company.
In addition, our future success will depend on the performance of our senior management and key
employees, many of whom joined Expedia recently. Expedia cannot ensure that it will be able to retain the
services of Mr. Diller, Mr. Khosrowshahi or any other member of our senior management or key
employees, the loss of whom could seriously harm our business. In addition, competition for well-qualified
employees in all aspects of our business, including software engineers and other technology professionals, is
intense. Our continued ability to compete effectively depends on our ability to attract new employees and
to retain and motivate our existing employees. If we do not succeed in attracting well-qualified employees
or retaining or motivating existing employees, our business would be adversely affected.
Many of our business units use separate operational and financial systems that have not been
integrated and that rely heavily on manual procedures.
Expedia is composed of multiple business units that were unaffiliated companies prior to being
acquired by IAC. These multiple business units use disparate systems, processes and personnel to support
operations, including bookings and fulfillment, accounting and budgeting, tax filings, vendor payments and
back office support. In addition, certain of the business units rely on manual procedures for critical
business systems and financial reporting processes. We expect to incur significant costs in our ongoing
efforts to integrate and automate these disparate systems into an efficient, effective and unified operation.
The continued lack of automation, and the ongoing reliance on manual procedures in critical business
processes and financial reporting functions increases the risk of errors. If we are not able to successfully
implement the changes necessary to operate a unified system, or automate critical financial reporting
processes then:
‚ We may not be able to take advantage of efficiencies of scale,
‚ We may incur excess costs that could affect our margins
‚ We may lose partners due to inefficiencies with our current systems
‚ We may negatively affect our ability to report our financial results accurately and on a timely basis.
If any of these events were to occur, it could have a material adverse effect on our reputation or
results of operations.
If we fail to establish and maintain an effective system of internal controls over financial reporting,
we may not be able to accurately report our financial results or prevent fraud. This could adversely affect
our operating results and our brand.
We may not be able to establish or maintain adequate internal controls over financial reporting. Many
of our internal controls and reporting systems were designed and originally implemented in smaller,
separate business units while they were part of IAC and may not function as intended in an entity separate
from IAC. In addition, we have a new senior financial management team, with only limited experience
evaluating and managing these controls and processes. Additionally, certain functions, including equity
transactions, income taxes, derivatives, treasury functions, and periodic reporting in accordance with SEC
rules and regulations were previously handled by IAC and have only recently been established at the
Company.
Although we are taking steps to strengthen our internal controls, we cannot be certain that these
measures will ensure that we implement and maintain adequate controls over our financial processes and
13
reporting in the future. We also cannot be certain that the interim steps we have taken, pending full
implementation of these measures, to preserve our ability to accurately record, process, and summarize
financial data and prepare our financial statements and reporting, will be effective. Many of these interim
steps are time and labor intensive and rely on manual procedures, which makes them difficult to maintain
for an extended period and increases the risk of errors.
Any failure to implement required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
Our internal control over financial reporting may not be considered effective which could result in a
loss of investor confidence in our financial reports, and in turn have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on
Form 10-K for the fiscal year ending December 31, 2006, we will be required to furnish a report by our
management on our internal control over financial reporting. Such report will contain, among other
matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of
our fiscal year, including a statement as to whether our internal control over financial reporting is effective.
This assessment must include disclosure of any material weaknesses in our internal control over financial
reporting identified by management. Such report will also contain a statement that our auditors have
issued an attestation report on management's assessment of such internal controls.
We are currently performing the system and process documentation and evaluation needed to comply
with Section 404, which is both costly and challenging. Although we have not identified any material
weaknesses as of the date of this filing, management may, during this process, identify one or more
material weaknesses in our internal control over financial reporting; if such occurs, we will be unable to
assert such internal control is effective. If we are unable to assert that our internal control over financial
reporting is effective as of December 31, 2006 (or if our auditors are unable to attest that our
management's report is fairly stated or they are unable to express an opinion on our management's
evaluation or on the effectiveness of the internal controls), we could lose investor confidence in the
accuracy and completeness of our financial reports, which in turn could have an adverse effect on our
stock price.
Our success depends on maintaining the integrity of our systems and infrastructure. System
interruption and the lack of integration and redundancy in our information systems may affect our
businesses.
A fundamental requirement for online commerce and communications is the secure transmission of
confidential information, such as credit card numbers or other personal information, over public networks.
Our security measures may be inadequate and, if any compromise of security were to occur, it could have
a detrimental effect on our reputation and adversely affect our ability to maintain our existing travelers
and/or attract new travelers.
We may experience occasional system interruptions that make some or all systems unavailable or
prevent us from efficiently fulfilling orders or providing services to third parties. We rely on our affiliates'
and third party computer systems and service providers to facilitate and process a portion of our
transactions. Any interruptions, outages or delays in our systems or third party providers' systems, or
deterioration in their performance, could impair each company's ability to process transactions for its
travelers and the quality of service that we can offer to our travelers. We do not have backup systems for
certain critical aspects of our operations, many other systems are not fully redundant and our disaster
recovery planning may not be sufficient. Fire, flood, power loss, telecommunications failure, break-ins,
earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins and
similar events or disruptions may damage or interrupt computer or communications systems at any time.
Any of these events could cause system interruption, delays and loss of critical data, and could prevent us
from providing services to our travelers and/or third parties for a significant period of time. In addition, we
may have inadequate insurance coverage or insurance limits to compensate for losses from a major
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interruption, remediation may be costly and have a material adverse effect on our operating results and
financial condition.
Our expansion places a significant strain on our management, technical, operational and financial
resources.
We have rapidly and significantly expanded our operations both domestically and internationally and
anticipate expanding further to pursue growth of our product and service offerings and customer base.
Such expansion increases the complexity of our business and places a significant strain on our
management, operations, technical performance, financial resources, and internal financial control and
reporting functions.
There can be no assurance that we will be able to manage our expansion effectively. Our current and
planned personnel, systems, procedures and controls may not be adequate to support and effectively
manage our future operations, especially as we employ personnel in multiple geographic locations. We may
not be able to hire, train, retain, motivate and manage required personnel, which may limit our growth. If
any of this were to occur, it could damage our reputation, limit our growth, negatively affect our operating
results, and hard our business.
We may experience operational and financial risks in connection with any acquisitions. In addition,
some of the businesses acquired by us may incur significant losses from operations or experience
impairment of carrying value.
Our future growth may depend, in part, on acquisitions. To the extent that we continue to grow
through acquisitions, we may face the operational and financial risks that commonly accompany that
strategy. We would also face operational risks, such as failing to assimilate the operations and personnel of
the acquired businesses, disrupting their ongoing businesses, impairing management resources and their
relationships with employees and travelers as a result of changes in their ownership and management
Further, the evaluation and negotiation of potential acquisitions, as well as the integration of an acquired
business, will divert management time and other resources. Some acquisitions may not be successful and
their performances may result in the impairment of their carrying value.
Certain financial and operational risks related to acquisitions that may have a material impact on our
business are:
‚ Use of cash resources and incurrence of debt and contingent liabilities in funding acquisitions,
‚ Stockholder dilution if an acquisition is consummated through an issuance of our securities,
‚ Amortization expenses related to acquired intangible assets and other adverse accounting
consequences,
‚ Costs incurred in identifying and performing due diligence on potential acquisition targets that may
or may not be successful,
‚ Difficulties and expenses in assimilating the operations, products, technology, information systems
or personnel of the acquired company,
‚ Impairment of relationships with employees, retailers and affiliates of our business and the acquired
business,
‚ The assumption of known and unknown liabilities of the acquired company,
‚ Entrance into markets in which we have no direct prior experience, and
‚ Impairment of goodwill arising from our acquisitions.
15
Our results of operations are difficult to predict and may fluctuate substantially from the estimates
of securities analysts or expectations of our investors.
In the event that our operating results fall below the expectations of securities analysts or investors,
the trading price of our securities may decline significantly. In addition to the risks identified herein, our
business is sensitive to general economic conditions, the health of the worldwide travel industry, consumer
confidence, consumer retail spending, trends in technology, competition, levels of personal discretionary
income, weather, acts of war or terrorism, safety concerns and acts of God. Our business is also subject to
the effects of seasonality with revenue typically lowest in the first quarter of the year and highest in the
third quarter.
We have a limited operating history and our stock price is highly volatile.
We have a relatively short operating history as a separate company and a rapidly evolving and
unpredictable business model. The trading price of our common stock fluctuates significantly. Trading
prices of our common stock may fluctuate in response to a number of events and factors, such as:
‚ quarterly variations in operating results;
‚ changes in interest rates;
‚ conditions or trends in the online travel and e-commerce industries;
‚ fluctuations in the stock market in general and market prices for internet-related companies in
particular;
‚ general economic conditions;
‚ new services, innovations, and strategic developments by our competitors or us, or business
combinations and investments by our competitors or us;
‚ changes in financial estimates by us or securities analysts and recommendations by securities
analysts;
‚ changes in internet regulation;
‚ additions or departures of key personnel;
‚ corporate restructurings, including layoffs or closures of facilities;
‚ changes in the valuation methodology of, or performance by, other companies in the travel or
e-commerce industries; and
‚ transactions in our common stock by major investors and certain analyst reports, news, and
speculation.
Any of these events may cause our stock price to rise or fall and may adversely affect our business
and financing opportunities. A a result, we may experience extreme price and volume fluctuations that are
unrelated or disproportionate to changes in our operating performance. In the past, following periods of
volatility in the general market, or a particular companies securities, securities class actions have been
brought against affected companies. This litigation, if instituted against us, could result in substantial costs
and diversion of our management's attention and resources.
Future volatility in our stock price could force us to increase our cash compensation to employees or
grant larger stock awards than we have historically, which could hurt our operating results or reduce the
percentage ownership of our existing stockholders, or both.
We may not be able to engage in desirable strategic transactions and equity issuances due to our
tax-sharing arrangements.
Our ability to engage in significant stock transactions could be limited or restricted to preserve the tax
free nature of our Spin-Off from IAC. Current federal income tax law creates a presumption that the
16
Spin-Off would be taxable to IAC, but not to its stockholders, if either IAC or we enter into a transaction
that would result in a 50% or greater change, by vote or value, in IAC's or our stock ownership during the
four-year period that begins two years before the date of the Spin-Off, unless it is established that the
transaction is not pursuant to a plan or series of transactions related to the Spin-Off. Treasury regulations
currently in effect generally provide that whether an acquisition transaction and a Spin-Off are part of a
plan is determined based on all of the facts and circumstances, including, but not limited to, specific
factors described in the regulations. In addition, the regulations provide several ""safe harbors'' for
acquisition transactions that are not considered to be part of a plan. These restrictions may prevent us
from entering into transactions which might be advantageous to our stockholders, such as selling the
company or substantially all of the assets of the company, issuing equity securities to satisfy financing
needs, acquiring businesses or assets with equity securities.
Under the tax sharing agreement with IAC, there are restrictions on our ability to take actions that
could cause the Spin-Off to fail to qualify as a tax free transaction, including redeeming substantial
amounts of our equity securities and selling or otherwise disposing of a substantial portion of our assets, in
each case, for a period of 25 months following the Spin-Off. We would be required to indemnify IAC
against the taxes described in the preceding sentence if such tax is incurred by a breach of our covenants
under the tax sharing agreement.
Mr. Diller currently controls Expedia. If Mr. Diller ceases to control the company, Liberty Media
Corporation may effectively control the company.
Subject to the terms of the Stockholders Agreement, Mr. Diller holds an irrevocable proxy to vote
shares of Expedia stock held by Liberty Media Corporation (""Liberty''). Accordingly, Mr. Diller
effectively controls the outcome of all matters submitted to a vote or for the consent of our stockholders
(other than with respect to the election by the holders of common stock of 25% of the members of the
Board of Directors and matters as to which Delaware law requires a separate class vote). Upon
Mr. Diller's permanent departure from Expedia, the irrevocable proxy terminates and depending on the
capitalization of Expedia at such time, Liberty may effectively control the voting power of our capital
stock. Mr. Diller, through shares he owns beneficially as well as those subject to the irrevocable proxy,
controls approximately 53% of the combined voting power of the outstanding Expedia capital stock.
In addition, under the Governance Agreement, each of Mr. Diller and Liberty generally has the right
to consent to limited matters in the event that our ratio of total debt to EBITDA, as defined in the
Governance Agreement, equals or exceeds 4:1 over a continuous 12-month period. We cannot assure you
that Mr. Diller and Liberty will consent to any such matter at a time when we are highly leveraged, in
which case we would not be able to engage in such transactions or take such actions.
As a result of Mr. Diller's ownership interests and voting power, and Liberty's ownership interests and
voting power upon Mr. Diller's permanent departure from us, Mr. Diller is currently, and in the future
Liberty may be in a position to control or influence significant corporate actions, including, corporate
transactions such as mergers, business combinations or dispositions of assets and determinations with
respect to our significant business direction and policies. This concentrated control could discourage others
from initiating any potential merger, takeover or other change of control transaction that may otherwise be
beneficial to us. As a result, the market price of our securities could be adversely affected.
Actual or potential conflicts of interest may develop between Expedia management and directors, on
the one hand, and the management and directors of IAC, on the other.
Mr. Diller serves as our Chairman of the Board of Directors and Senior Executive, while retaining his
role as Chairman and Chief Executive Officer of IAC, and Mr. Kaufman serves as Vice Chairman of both
Expedia and IAC. The fact that Messrs. Diller and Kaufman hold positions with both companies and own
both IAC and Expedia stock could create, or appear to create, potential conflicts of interest for each of
Messrs. Diller and Kaufman when he faces decisions that may affect both IAC and Expedia. Both
Messrs. Diller and Kaufman may also face conflicts of interest with regard to the allocation of their time
between IAC and Expedia.
17
Our certificate of incorporation provides that no officer or director of Expedia who is also an officer or
director of IAC will be liable to Expedia or its stockholders for breach of any fiduciary duty by reason of
the fact that any such individual directs a corporate opportunity to IAC instead of Expedia, or does not
communicate information regarding a corporate opportunity to Expedia because the officer or director has
directed the corporate opportunity to IAC. This corporate opportunity provision may have the effect of
exacerbating the risk of conflicts of interest between IAC and Expedia because the provision effectively
shields an overlapping director/executive officer from liability for breach of fiduciary duty in the event that
such director or officer chooses to direct a corporate opportunity to IAC instead of Expedia.
Changing laws, rules and regulations and legal uncertainties may adversely affect our business,
financial condition and results of operations.
Our business, financial condition and results of operations could be adversely affected by unfavorable
changes in or interpretations of existing, or the promulgation of new laws, rules and regulations applicable
to us and our businesses, including those relating to the internet and online commerce, consumer
protection and privacy, escheat and sales, use, occupancy, value-added and other taxes, could decrease
demand for products and services, increase costs and/or subject us to additional liabilities. For example,
there is, and will likely continue to be, an increasing number of laws and regulations pertaining to the
internet and online commerce, which may relate to liability for information retrieved from or transmitted
over the internet, user privacy, taxation and the quality of products and services. Furthermore, the growth
and development of online commerce may prompt calls for more stringent consumer protection laws that
may impose additional burdens on online businesses generally.
In addition, the application of various domestic and international sales, use, occupancy, value-added
and other tax laws, rules and regulations to our historical and new products and services is subject to
interpretation by the applicable taxing authorities. While we believe that we are compliant with these tax
provisions, there can be no assurances that taxing authorities will not take a contrary position, or that such
positions will not have an adverse effect on our businesses, financial condition and results of operations. If
the tax laws, rules and regulations were amended or if current interpretations of the laws were to change
adversely to us, particularly with respect to occupancy or value-added taxes, the results could have an
adverse affect on our businesses, financial condition and results of operations.
Our international opportunities and investments involve risks relating to travel patterns, practices,
Internet-based commerce, regulations and exchange rate fluctuations.
We operate in a number of jurisdictions abroad and intend to continue to expand our international
presence. In order to achieve widespread acceptance in the countries and markets we enter, we must
continue to tailor our services to the unique customs and cultures of such countries and markets. Learning
the customs and cultures of various countries, particularly with respect to travel patterns and practices, can
be difficult, costly and divert management and personnel resources. Our failure to learn such customs and
cultures successfully could slow our international growth.
We expect to continue to face additional risks in international operations. These risks include political
instability, acts of terrorism, unexpected changes in regulatory requirements, our ability to comply with
local laws and regulations, increased risk and limits on our ability to enforce intellectual property rights,
slower adoption of the internet as an advertising and commerce medium in those markets as compared to
the United States and difficulties in managing operations due to distance, language and cultural
differences, including issues associated with establishing management systems and infrastructures and
staffing and managing foreign operations.
Through our international operations, we also have exposure to different economic climates, political
arenas, tax systems and regulations that could negatively affect foreign exchange rates. Because we
transact in foreign currency and record the activity in U.S. dollars, changes in exchange rates between the
U.S. dollar and these other currencies could have a negative effect on our results of operations. Our
exchange rate risk will increase as we increase our operations in international markets.
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Our investment in eLong creates risks and uncertainties relating to the laws of the People's Republic
of China.
The success of our investment in eLong, a Cayman Island company, whose principal business is the
operation of an internet-based travel business in China, is subject to risks and uncertainties regarding the
interpretation of China's laws and regulations. The China legal system is a civil law system based on
written statutes. Unlike common law systems, it is a system in which decided legal cases have limited
value as precedent. The lack of precedent causes the interpretation and enforcement of China law to
involve uncertainties that could limit the available legal protections. In addition, we cannot predict the
effect of future developments in the China's legal system, particularly with respect to the travel industry or
the internet, including the introduction of new laws, changes to existing laws or the interpretation or
enforcement of current or future laws and regulations, or the preemption of local regulations by national
laws. In addition, the laws and regulations of China restrict foreign investment in the air-ticketing, travel
agency, internet content provision and advertising businesses. Such laws and regulations require that we
establish effective control through a series of agreements with eLong's affiliated Chinese entities and could
restrict our ability to engage in desirable strategic transactions. Finally, China does not have treaties with
the United States or most other western countries providing for the reciprocal recognition and enforcement
of judgment of courts. As a result, court judgments obtained in jurisdictions with which China does not
have treaties on reciprocal recognition of judgment and in relation to any matter not subject to a binding
arbitration provision may be difficult or impossible to be enforced in China.
Our processing, storage, use and disclosure of personal data could give rise to liabilities as a result
of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.
In the processing of our traveler transactions, we receive and store a large volume of personally
identifiable information. This information is increasingly subject to legislation and regulations in numerous
jurisdictions around the world. This government action is typically intended to protect the privacy of
personal information that is collected, processed and transmitted in or from the governing jurisdiction. We
could be adversely affected if legislation or regulations are expanded to require changes in our business
practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that
negatively affect our business, financial condition and results of operations. As privacy and data protection
have become more sensitive issues, we may also become exposed to potential liabilities as a result of
differing views on the privacy of travel data. These and other privacy developments that are difficult to
anticipate could adversely affect our business, financial condition and results of operations.
We rely on the Internet infrastructure which may be unable to support increased levels of demand.
The internet infrastructure may not expand fast enough to meet the increased levels of demand. In
particular, the expected benefits from our international operations may be reduced if internet usage does
not continue to grow in our overseas markets or grows at significantly lower rates compared to expected
trends. In addition, activities that diminish the experience for internet users, such as spyware, spoof
e-mails, viruses and spam directed at internet users, as well as viruses and ""denial of service'' attacks
directed at internet companies and service providers, may discourage people from using the internet,
including for commerce. If consumer use diminishes or grows at a slower rate, then our business and
results of operations could be adversely affected.
We may be found to have infringed on intellectual property rights of others that could expose us to
substantial damages and restrict our operations.
We could face claims that we have infringed the patents, copyrights or other intellectual property
rights of others. In addition, we may be required to indemnify travel suppliers for claims made against
them. Any claims against us could require us to spend significant time and money in litigation, delay the
release of new products or services, pay damages, develop new intellectual property or acquire licenses to
intellectual property that is the subject of the infringement claims. These licenses, if required, may not be
available on acceptable terms or at all. As a result, intellectual property claims against us could have a
material adverse effect on our business, operating results and financial condition.
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Our websites rely on intellectual property, and we cannot be sure that this intellectual property is
protected from copying or use by others, including potential competitors.
We regard much of our content and technology as proprietary and try to protect our proprietary
technology by relying on trademarks, copyrights, trade secret laws and confidentiality agreements. In
connection with our license agreements with third parties, we seek to control access to and distribution of
our technology, documentation and other proprietary information. Even with all of these precautions, it is
possible for someone else to copy or otherwise obtain and use our proprietary technology without our
authorization or to develop similar technology independently. Effective trademark, copyright and trade
secret protection may not be available in every country in which our services are made available through
the internet, and policing unauthorized use of our proprietary information is difficult and expensive. We
cannot be sure that the steps we have taken will prevent misappropriation of our proprietary information.
This misappropriation could have a material adverse effect on our business. In the future, we may need to
go to court to enforce our intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This litigation might result in substantial costs and
diversion of resources and management attention.
We currently license from third parties some of the technologies incorporated into our websites. As
we continue to introduce new services that incorporate new technologies, we may be required to license
additional technology. We cannot be sure that such technology licenses will be available on commercially
reasonable terms, if at all.
Part I. Item 1B. Unresolved Staff Comments
We did not have any unresolved staff comments through February 28, 2006.
Part I. Item 2. Properties
We lease approximately 1.0 million square feet of office space worldwide, pursuant to leases with
expiration dates through May 2014.
We lease approximately 340,000 square feet for our headquarters in Bellevue, Washington, pursuant to
leases with expiration dates through February 2010. In addition, we lease approximately 380,000 square
feet of office space for our domestic operations in various cities and locations in California, Florida,
Hawaii, Idaho, Illinois, Massachusetts, Michigan, Missouri, Nevada, New York, Texas and Washington,
pursuant to leases with expiration dates through December 2010.
We also lease approximately 280,000 square feet of office space for our international operations in
various cities and locations in Australia, Belgium, Canada, China, France, Germany, Italy, Japan, Mexico,
the Netherlands, Spain and the United Kingdom, pursuant to leases with expiration dates through May
2014.
Part I. Item 3. Legal Proceedings
In the ordinary course of business, Expedia and its subsidiaries are parties to legal proceedings and
claims involving property, personal injury, contract, alleged infringement of third party intellectual property
rights and other claims. The amounts that may be recovered in such matters may be subject to insurance
coverage.
Rules of the Securities and Exchange Commission require the description of material pending legal
proceedings, other than ordinary, routine litigation incident to the registrant's business, and advise that
proceedings ordinarily need not be described if they primarily involve damages claims for amounts
(exclusive of interest and costs) not individually exceeding 10% of the current assets of the registrant and
its subsidiaries on a consolidated basis. In the judgment of management, none of the pending litigation
matters which the Company and its subsidiaries are defending, including those described below, involves or
is likely to involve amounts of that magnitude. The litigation matters described below are as of March 1,
2006, and involve issues or claims that may be of particular interest to our stockholders, regardless of
20
whether any of these matters may be material to our financial position or operations based upon the
standard set forth in the SEC's rules.
Securities Class Action Litigation against IAC.
Beginning on September 20, 2004, twelve purported shareholder class actions were commenced in the
United States District Court for the Southern District of New York against IAC and certain of its officers
and directors, alleging violations of the federal securities laws. These cases arose out of IAC's August 4,
2004 announcement of its earnings for the second quarter of 2004 and generally alleged that the value of
the Company's stock was artificially inflated by pre-announcement statements about its financial results
and forecasts that were false and misleading due to the defendants' alleged failure to disclose various
problems faced by IAC's travel businesses. On December 20, 2004, the district court consolidated the
twelve lawsuits, appointed co-lead plaintiffs, and designated co-lead plaintiffs' counsel. See In re IAC/
InterActiveCorp Securities Litigation, No. 04-CV-7447 (S.D.N.Y.). Expedia is not a party to this
litigation, however, under the terms of its Separation Agreement with IAC, Expedia has generally agreed
to bear a portion of the costs and liabilities, if any, associated with any securities law litigation relating to
conduct prior to the Spin-Off of the businesses or entities that comprise Expedia following the Spin-Off.
On October 18, 2004, a related shareholder derivative action, Stuart Garber, Derivatively on Behalf of
IAC/InterActiveCorp v. Barry Diller et al., No. 04-603416, was commenced in the Supreme Court of the
State of New York (New York County) against certain of IAC's officers and directors. On November 15,
2004, another related shareholder derivative action, Lisa Butler, Derivatively on Behalf of IAC/
InterActiveCorp v. Barry Diller et al., No. 04-CV-9067, was filed in the United States District Court for
the Southern District of New York against certain of IAC's current and former directors. On January 24,
2005, the federal district court consolidated the Butler case with the securities class action for pre-trial
purposes only. On April 11, 2005, the district court issued a similar consolidation order in respect of the
Garber case.
On July 5, 2005, the plaintiffs in the related shareholder suits filed a consolidated shareholder
derivative complaint against IAC (as a nominal defendant) and sixteen current or former officers or
directors of IAC or its former travel business. The complaint, which is based upon factual allegations
similar to those in the securities class action, purports to assert claims for breach of fiduciary duty, abuse
of control, gross mismanagement, waste of corporate assets, unjust enrichment, violation of Section 14(a)
of the Exchange Act, and contribution and indemnification. The complaint seeks an order voiding the
election of the IAC's current Board of Directors, as well as damages in an unspecified amount, various
forms of equitable relief, restitution, and disgorgement of remuneration received by the individual
defendants from IAC.
On September 15, 2005, IAC and the other defendants filed motions to dismiss both the securities
class action and the shareholder derivative suits. On November 30, 2005, the plaintiffs filed their
opposition to the motions. On January 6, 2006, the defendants filed reply papers in further support of the
motions. Both motions to dismiss remain pending.
Expedia believes that the claims in the class action and derivative suits lack merit and that the claims
will be vigorously defended.
Litigation Relating to the IAC/Hotels.com Merger Agreement
A putative class action on behalf of Hotels.com stockholders was filed in the Delaware Chancery
Court against Hotels.com, IAC, and members of the board of directors of Hotels.com on April 10, 2003,
the day of the announcement of the IAC/Hotels.com merger agreement. See Michael Garvey, on Behalf
of Himself and All Others Similarly Situated v. Jonathan F. Miller et al., No. 20248-NC (New Castle
County). Also on April 10, 2003, the plaintiff in a purported shareholder derivative action on behalf of
Hotels.com filed an amended complaint to include class allegations regarding the merger transaction. See
Alex Solodovnikov, Derivatively on Behalf of Hotels.com v. Robert Diener et al., No. 03-02663 (District
Court, 160th Judicial District, Dallas County). In addition, on April 17, 2003, the plaintiffs in a
21
consolidated action pending in the Delaware Chancery Court, which had consolidated a number of
putative class actions filed against Hotels.com, IAC and members of the board of directors of Hotels.com
as a result of IAC's announcement in June 2002 of its intention to enter into a Hotels.com acquisition
transaction, filed a consolidated and amended class-action complaint. See In re Hotels.com Shareholders
Litigation, No. 16662-NC (New Castle County). Pursuant to an agreement among the parties, the
defendants' time to respond to this complaint and to the complaint in the Garvey case has been adjourned
indefinitely. The complaints in these three actions allege, in essence, that the defendants breached their
fiduciary duties to Hotels.com's public shareholders by entering into and/or approving the merger
agreement, which allegedly did not reflect the true value of Hotels.com. Expedia believes that the
allegations in these lawsuits are without merit and will continue to defend vigorously against them.
Litigation Relating to Hotels.com's Guidance for the Fourth Quarter of 2002
Securities Class Action. On January 10, 2003, a putative class action, Daniel Taubenfeld et al., on
Behalf of Themselves and All Others Similarly Situated v. Hotels.com et al., No. 3:03-CV-0069-N, was
filed in the United States District Court for the Northern District of Texas, arising out of Hotels.com's
downward revision of its guidance for the fourth quarter of 2002. Three other substantially similar
securities class actions were filed in the same court shortly thereafter and were later consolidated with the
Taubenfeld action. The lead plaintiffs in this action filed a consolidated class-action complaint on
August 18, 2003 alleging violations of federal securities laws against Hotels.com and three of its former
executives. On September 27, 2004, the district court dismissed all of the plaintiffs' claims with prejudice,
with the exception of two claims involving statements by analysts. On August 10, 2005 the United States
Court of Appeals for the Fifth Circuit entered an order dismissing the plaintiffs' appeal of the district
court's ruling with prejudice.
Shareholder Derivative Suit. The action In re Hotels.com Derivative Litigation, No. 3:03-CV-501-K,
pending in United States District Court for the Northern District of Texas arises out of the same events as
the Taubenfeld action and consolidated two shareholder derivative actions, Anita Pomilo Wilson,
Derivatively on Behalf of Nominal Defendant Hotels.com v. Elan J. Blutinger et al., No. 3:03-CV-0501-K,
and Alex Solodovnikov, Derivatively on Behalf of Hotels.com v. Robert Diener et al., No. 3:03-CV-0812-K
originally filed in Texas state court on January 14, 2003 and March 14, 2003, respectively. On April 26,
2004, the lead plaintiff filed a consolidated amended complaint against Hotels.com (as a nominal
defendant only) and sixteen current or former directors of Hotels.com. The amended complaint alleges
breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust
enrichment. The lawsuit seeks damages, restitution and disgorgement of profits in an unspecified amount
and imposition of a constructive trust in favor of Hotels.com on the profits obtained by the selling
defendants on their sales of Hotels.com stock during a specified period. On March 7, 2005, the district
court issued orders staying the case until further notice and directing that the case be administratively
closed pending a decision in the appeal of the Taubenfeld action. On August 17, 2005, after the
Taubenfeld appeal was dismissed, the defendants filed a motion for a pretrial conference with the Court
giving notice of the Taubenfeld dismissal. The lead plaintiffs responded to the motion on September 7,
2005 and the defendants filed their reply on September 15, 2005. The Court has not ruled on this motion
and the case remains administratively closed.
Litigation Relating to Hotel Occupancy Taxes
Hotels.com. On June 20, 2003, a purported class action was filed in Texas state court against certain
Hotels.com-affiliated entities (""Hotels.com''). See Nora J. Olvera, Individually and on Behalf of All
Others Similarly Situated v. Hotels.com, Inc., No. DC-03-259 (District Court, 229th Judicial District,
Duval County). The complaint and subsequent amended complaints filed August 12, 2003 and May 6,
2004, allege that Hotels.com collects ""excess'' hotel occupancy taxes from consumers (i.e., allegedly
charges consumers more for occupancy taxes than it pays to the hotels for the hotels' use in satisfying
their obligations to the taxing authorities). The complaint sought certification of a nationwide class of all
persons who have purchased hotel accommodations from Hotels.com since June 20, 1999, as well as
22
restitution of, disgorgement of, and the imposition of a constructive trust upon all ""excess'' occupancy
taxes allegedly collected by Hotels.com. On September 25, 2003, the plaintiff filed a demand for
arbitration containing substantially the same factual allegations as the Olvera lawsuit. On September 2,
2004, the arbitrator issued a final award granting Hotels.com's motion to dismiss the arbitration claim.
On May 6, 2003, a purported class action was filed in Texas state court against Hotels.com, L.P.
(""Hotels.com''), Mary Canales, Individually and on Behalf of All Others Similarly Situated v. Hotels.com,
L.P., No. DC-03-162 (District Court, 229th Judicial District, Duval County). The complaint, as amended,
alleges that Hotels.com charges customers ""taxes'' that exceed the amount required by or paid to the
applicable taxing authorities and that Hotels.com charges customers ""fees'' that do not correspond to any
specific services provided. The complaint seeks restitution of, disgorgement of, and the imposition of a
constructive trust upon all ""excess'' occupancy taxes allegedly collected by Hotels.com. On April 29, 2005,
the court issued an order granting the plaintiff's motion for class certification. On February 1, 2006, the
court of appeals reversed the holding certifying the class and remanded the case to the trial court.
Expedia. On February 18, 2005, three actions filed against Expedia, Inc. (""Expedia'') Ì C. Michael
Nielsen et al. v. Expedia, Inc. et al., No. 05-2-02060-1 (Superior Court, King County), Bruce Deaton
et al., v. Expedia, Inc. et al., No. 05-2-02062-8 (Superior Court, King County), each of which was filed
January 10, 2005 and Jose Alba, on Behalf of Himself and All Others Similarly Situated v. IAC/
InterActiveCorp et al., No. 05-2-04533-7 (Superior Court, King County) filed February 3, 2005 Ì were
consolidated under the caption In re Expedia Hotel Taxes and Fees Litigation, No. 05-2-02060-1, pending
in King County Superior Court. The consolidated complaint alleges that Expedia is improperly charging
and/or failing to pay hotel occupancy taxes and engaging in other deceptive practices in charging
customers for taxes and fees. The complaint seeks certification of a nationwide class of all persons who
were assessed a charge for ""taxes/fees'' when booking rooms through Expedia. The complaint alleges
violation of the Washington Consumer Protection Act and common-law conversion and seeks imposition of
a constructive trust on monies received from the plaintiff class, as well as damages in an unspecified
amount, disgorgement, restitution, interest and penalties.
Hotwire. On April 19, 2005, three actions filed against Hotwire, Inc. (""Hotwire'') Ì Bruce Deaton,
on Behalf of Himself and All Others Similarly Situated v. Hotwire, Inc. et al., No. 05-437631 filed
January 10, 2005, Jana Sneddon, on Behalf of Herself and All Others Similarly Situated v. Hotwire, Inc.
et al., No. 05-437701 filed January 13, 2005 and Ashley Salisbury, on Behalf of Herself and All Others
Similarly Situated and the General Public v. Hotwire, Inc. et al., No. 05-438781 filed February 17, 2005
against Hotwire and IAC Ì were consolidated and now are pending under the caption Bruce Deaton v.
Hotwire, Inc. et al., Case No. CGC-05-437631, pending in the Superior Court of the State of California,
County of San Francisco. The consolidated complaint, which was amended on February 17, 2006, alleges
that Hotwire is improperly charging and/or failing to pay hotel occupancy taxes and engaging in other
deceptive practices in charging customers for taxes and fees. The complaint seeks certification of a
nationwide class of all persons who were assessed a charge for ""taxes/fees'' when booking rooms through
Hotwire. The amended complaint alleges violation of Section 17200 of the California Business and
Professions Code, violation of the California Consumer Legal Remedies Act, and breach of contract, and
seeks imposition of a constructive trust on monies received from the plaintiff class, as well as damages in
an unspecified amount, disgorgement, restitution, interest and penalties.
Consumer Case against Various Internet Travel Companies. On February 17, 2005, a purported class
action was filed in California state court against a number of internet travel companies, including Expedia,
Hotels.com, Priceline.com and Orbitz. See Ronald Bush et al. v. CheapTickets, Inc. et al., No. BC329021
(Superior Court, Los Angeles County). The complaint alleges that the defendants are improperly charging
and/or failing to pay hotel occupancy taxes and engaging in other deceptive practices in charging
customers for taxes and fees. The complaint seeks certification of a statewide class of all California
residents who were assessed a charge for ""taxes/fees'' when booking rooms through the defendants and
alleges violation of Section 17200 of the California Business and Professions Code and common-law
conversion. The complaint seeks the imposition of a constructive trust on monies received from the
plaintiff class, as well as damages in an unspecified amount, disgorgement, restitution and injunctive relief.
23
On July 1, 2005, plaintiffs filed an amended complaint, adding claims pursuant to California's Consumer
Legal Remedies Act, Civil Code Section 1750 et seq., and claims for breach of contract and the implied
duty of good faith and fair dealing. On December 2, 2005, the court ordered limited discovery and ordered
that motions challenging the amended complaint would be coordinated with any similar motions filed in
the City of Los Angeles action.
City of Los Angeles Litigation. On December 30, 2004, the city of Los Angeles filed a purported
class action in California state court against a number of internet travel companies, including Hotels.com,
Expedia and Hotwire. City of Los Angeles, California, on Behalf of Itself and All Others Similarly
Situated v. Hotels.com, L.P. et al., No. BC326693 (Superior Court, Los Angeles County). The complaint
alleges that the defendants are improperly charging and/or failing to pay hotel occupancy taxes. The
complaint seeks certification of a statewide class of all California cities and counties that have enacted
uniform transient occupancy-tax ordinances effective on or after December 30, 1990. The complaint
alleges violation of those ordinances, violation of section 17200 of the California Business and Professions
Code, and common-law conversion. The complaint seeks a declaratory judgment that the defendants are
subject to hotel occupancy taxes on the hotel rate charged to consumers and imposition of a constructive
trust on all monies owed by the defendants to the government, as well as disgorgement, restitution, interest
and penalties. On September 26, 2005, the court sustained a demurrer on the basis of misjoinder and
granted plaintiff leave to amend its complaint. On February 8, 2006, the city of Los Angeles filed a second
amended complaint.
City of Philadelphia, Pennsylvania Litigation. On July 12, 2005, the city of Philadelphia filed an
action in Pennsylvania state court against a number of internet travel companies, including Hotels.com,
Hotwire and Expedia. City of Philadelphia v. Hotels.com, et al., No. 000860 (Court of Common Pleas,
Philadelphia County, Pennsylvania). The complaint alleges that the defendants have failed to pay to the
city hotel occupancy taxes as required by municipal ordinance. The complaint purports to assert claims for
violation of that ordinance, common-law conversion, imposition of a constructive trust, and an accounting.
The complaint seeks damages in an unspecified amount, restitution and disgorgement. On November 18,
2005, the city of Philadelphia filed an amended complaint. The case has been assigned a trial date of
January 7, 2008.
City of Bellingham, Washington Litigation. On September 20, 2005, the city of Bellingham,
Washington filed a purported state wide class action in state court against a number of internet travel
companies, including Hotels.com, Hotwire and Expedia. See City of Bellingham, individually and on
behalf of other entities similarly situated v. Hotels.com LP., et al., No. 05-2-02183 (Superior Court of
Washington for Whatcom County.) The complaint alleges that the defendants have failed to pay to the
city hotel occupancy taxes as required by municipal ordinance. The complaint purports to assert claims for
violation of that ordinance, violation of the consumer protection act, conversion and unjust enrichment.
The complaint seeks damages and other relief in an unspecified amount. On November 3, 2005,
defendants removed the case to the United States District Court of the Western District of Washington.
On January 10, 2006, defendants moved to dismiss the complaint. On February 16, 2006, the city of
Bellingham, with the agreement of the defendants, voluntarily moved to dismiss the case. On February 17,
2006, the court granted the motion and dismissed the action.
City of Fairview Heights, Illinois Litigation. On October 5, 2005, the city of Fairview Heights,
Illinois filed a purported state wide class action in state court against a number of internet travel
companies, including Hotels.com, Hotwire and Expedia. City of Fairview Heights, individually and on
behalf of all others similarly situated v. Orbitz, Inc., et al., No. 05L0576 (Circuit Court for the Twentieth
Judicial Circuit, St. Clair County). The complaint alleges that the defendants have failed to pay to the
city hotel occupancy taxes as required by municipal ordinance. The complaint purports to assert claims for
violation of that ordinance, violation of the consumer protection act, conversion and unjust enrichment.
The complaint seeks damages and other relief in an unspecified amount. On November 28, 2005,
defendants removed this action to the United States District Court for the Southern District of Illinois. On
January 17, 2006, the defendants moved to dismiss the complaint.
24
City of Findlay, Ohio Litigation. On October 25, 2005, the city of Findlay, OH filed a purported
state wide class action in state court against a number of internet travel companies, including Hotels.com,
Hotwire and Expedia. City of Findlay v. Hotels.com, L.P., et al., No. 2005-CV-673 (Court of Common
Pleas of Hancock County, Ohio). The complaint alleges that the defendants have failed to pay to the city
hotel occupancy taxes as required by municipal ordinance. The complaint purports to assert claims for
violation of that ordinance, violation of the consumer protection act, conversion imposition of a
constructive trust and declaratory relief. The complaint seeks damages and other relief in an unspecified
amount. On November 22, 2005, defendants removed the case to the United States District Court for the
Northern District of Ohio. On January 30, 2006, the defendants moved to dismiss the case.
City of Chicago Litigation. On November 1, 2005, the city of Chicago, Illinois filed an action in
state court against a number of internet travel companies, including Hotels.com, Hotwire and Expedia.
City of Chicago, Illinois v. Hotels.com, L.P., et al., No. 2005 L051003 (Circuit Court of Cook County).
The complaint alleges that the defendants have failed to pay to the city the hotel accommodations taxes as
required by municipal ordinance. The complaint purports to assert claims for violation of that ordinance,
conversion, imposition of a constructive trust and demand for a legal accounting. The complaint seeks
damages, restitution, disgorgement, fines, penalties and other relief in an unspecified amount. On
January 31, 2006, the defendants moved to dismiss the complaint.
City of Rome, Georgia Litigation. On November 18, 2005, the city of Rome, Georgia, Hart County,
Georgia, and the city of Cartersville, Georgia filed a purported state wide class action in the United States
District Court for the Northern District of Georgia against a number of internet travel companies,
including Hotels.com, Hotwire and Expedia. City of Rome, Georgia, et al. v. Hotels.com, L.P., et al.,
No. 4:05-CV-249 (U.S. District Court, Northern District of Georgia, Rome Division). The complaint
alleges that the defendants have failed to pay to the county and cities the hotel accommodations taxes as
required by municipal ordinances. The complaint purports to assert claims for violation of excise and sales
and use tax ordinances, conversion, unjust enrichment, imposition of a constructive trust, declaratory relief
and injunctive relief. The complaint seeks damages and other relief in an unspecified amount. On
February 6, 2006, the defendants moved to dismiss the complaint.
Pitt County, North Carolina Litigation. On December 1, 2005, Pitt County, North Carolina filed a
purported state wide class action in state court against a number of internet travel companies, including
Hotels.com, Hotwire and Expedia. Pitt County, et al. v. Hotels.com, L.P. et al., No. 05-CVS-3017 (State
of North Carolina, Pitt County, General Court of Justice, Superior Court Division). The complaint alleges
that the defendants have failed to pay to the city hotel accommodations taxes as required by municipal
ordinance. The complaint purports to assert claims for violation of that ordinance, violation of the
deceptive trade practices act, conversion, imposition of a constructive trust and a declaratory judgment that
defendants have engaged in unlawful business practices. The complaint seeks damages and other relief in
an unspecified amount. On February 13, 2006, the defendants removed the action to the United States
District Court for the Eastern District of North Carolina. On March 14, 2006, the defendants filed a
motion to dismiss the complaint.
City of San Diego, California Litigation. On February 9, 2006, the city of San Diego, California
filed an action in state court against a number of internet travel companies, including Hotels.com, Hotwire
and Expedia. City of San Diego v. Hotels.com, L.P. et al., (Superior Court for the County of San Diego).
The complaint alleges that the defendants have failed to pay to the city hotel accommodations taxes as
required by municipal ordinance. The complaint purports to assert claims for violation of that ordinance,
for violation of Section 17200 of the California Business and Professions Code, conversion, imposition of a
constructive trust and declaratory judgment. The complaint seeks damages and other relief in an
unspecified amount.
The Company believes that the claims in all of these litigations relating to hotel occupancy taxes lack
merit and will continue to defend vigorously against them.
25
Part I. Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of our security holders during the fourth quarter of 2005.
Part II. Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock has been quoted on The Nasdaq Stock Market, or ""NASDAQ,'' under the ticker
symbol ""EXPE'' since August 9, 2005. Prior to that time, there was no public market for our common
stock. Our Class B common stock is not listed and there is no established public trading market. As of
February 28, 2006, there were approximately 5,390 holders of record of our common stock and the closing
price of our common stock was $18.97 on NASDAQ. As of February 28, 2006, there were six holders of
record of our Class B common stock, each of which is an affiliate of Liberty Media Corporation.
EXPEDIA, INC.
Market for Registrant's Common Equity and Related Stockholder Matters
High
Low
Year ended December 31, 2005
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter (from August 9, 2005 through September 30, 2005)ÏÏÏÏÏÏÏÏÏÏ
$26.10
23.85
$18.74
19.73
Dividend Policy
We have not historically paid cash dividends on our common stock or Class B common stock.
Declaration and payment of future dividends, if any, will be at the discretion of the Board of Directors and
will depend on, among other things, our results of operations, cash requirements and surplus, financial
condition, share dilution management, legal risks, capital requirements relating to research and
development, investments and acquisitions, and challenges to our business model and other factors that the
Board of Directors may deem relevant. In addition, the Credit Agreement limits our ability to pay cash
dividends under certain circumstances.
Unregistered Sales of Equity Securities
During the quarter ended December 31, 2005, we did not issue or sell any shares of our common
stock or other equity securities pursuant to unregistered transactions in reliance upon an exemption from
the registration requirements of the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
We did not make any purchases of our common stock during the quarter ended December 31, 2005.
Part II. Item 6. Selected Financial Data
We have derived the following selected financial data presented below from the consolidated financial
statements and related notes. The selected financial data should be read in connection with the
consolidated financial statements and related notes, some of which are included herein. The information
set forth below is not necessarily indicative of future results and should be read in conjunction with
Item 7, ""Management's Discussion and Analysis of Financial Condition and Results of Operations.''
Our consolidated financial statements present our results of operations, financial position, stockholders'
equity and cash flows on a combined basis up through the Spin-Off on August 9, 2005, and on a
consolidated basis thereafter.
26
Our business acquisitions were as follows: Premier Getaways (February 2005), eLong (controlling
interest acquired in January 2005), World Travel Management (August 2004), Activity World (April
2004), Egencia (April 2004), TripAdvisor (April 2004), Hotwire.com (November 2003), Expedia.com
(controlling interest acquired in February 2002, and remaining interest acquired in August 2003), and
Hotels.com (controlling interest acquired in May 1999, and remaining interest acquired in June 2003).
Effective January 1, 2004, as a result of a change in Hotels.com business, Hotels.com started
reporting its merchant hotel business revenue net of the amount payable to the hotel property. Hotels.com
reported its merchant hotel business revenue on a gross basis prior to January 1, 2004. For additional
information about our revenue recognition policy, see Note 2, Significant Accounting Policies, in the notes
to consolidated financial statements.
For information about the shares used in computing our earning per share, see Note 15, Earnings Per
Share, in the notes to consolidated financial statements.
EXPEDIA, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Statements of Income Data:
Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net earnings per share available to
common stockholders:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares used in computing earnings per
share:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2003
2004
2002
2001(1)
$2,119,455
397,052
228,730
$1,843,013
240,473
163,473
$2,339,813
243,518
111,407
$1,499,075
193,770
76,713
$536,497
15,811
8,901
$
$
0.68
0.65
$
0.49
0.48
$
0.33
0.33
0.23
0.23
$
0.03
0.03
336,819
349,530
335,540
340,549
335,540
340,549
335,540
340,549
335,540
340,549
2005
2004
December 31,
2003
2002
2001
Balance Sheet Data:
Working capital (deficit) ÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏ
Total invested equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (847,981)
7,756,892
71,774
5,733,763
N/A
$1,263,678
9,537,187
18,435
N/A
8,152,629
$ 854,838
8,755,270
Ì
N/A
7,554,301
$ 528,630
3,203,082
592,054
N/A
2,055,756
$140,376
643,835
315,999
N/A
225,890
(1) Our reported net income in 2001 includes $29.2 million of amortization related to goodwill and other
intangible assets with indefinite lives. If Statement of Financial Accounting Standards No. 142,
""Goodwill and Other Intangible Assets,'' was effective January 1, 2001, our net income as adjusted
would have been $38.1 million.
27
Part II. Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Expedia, Inc. is an online travel company, empowering business and leisure travelers with the tools
and information they need to efficiently research, plan, book and experience travel. We have created a
global travel marketplace used by a broad range of leisure and corporate travelers and offline retail travel
agents. We make available, on a stand-alone and package basis, travel products and services provided by
numerous airlines, lodging properties, car rental companies, destination service providers, cruise lines and
other travel products and services.
We refer to Expedia, Inc. and its subsidiaries collectively as ""Expedia,'' the ""Company,'' ""us,'' ""we''
and ""our'' in this management's discussion and analysis of financial condition and results of operations. For
additional information about our portfolio of brands, see the disclosure set forth in Part I, Item 1,
Business, under the caption ""Management Overview.''
Trends
The travel industry, which includes travel agencies and travel suppliers has been characterized by
rapid and significant change. The U.S. airline sector has experienced significant turmoil in recent years,
with several of the largest airlines seeking the protection of Chapter 11 bankruptcy proceedings. The need
to rationalize high fixed cost structures to better compete with low cost carriers offering no frills flights at
discounted prices, as well as the pressure of high priced jet fuel has caused the airlines to aggressively
pursue cost reductions in every aspect of their operations. These cost reduction efforts include distribution
costs, which the airlines have pursued by seeking to reduce travel agent commissions. The airlines are also
pursuing reduced fees with the GDS intermediaries as their contracts with the GDSs come up for renewal
in 2006. In addition, the US airline industry has experienced increased load factors and ticket prices.
These trends have affected our ability to obtain inventory in our merchant air business as suppliers lower
discounting of merchant air tickets. Although these competitive forces have caused our air revenue per
ticket to decline, our worldwide air revenue has grown year over year, primarily due to increases in the
number of air tickets sold.
The hotel sector has recently been characterized by robust demand and constrained supply, resulting
in increasing occupancy rates and average daily rates. The higher occupancy rates and increasing average
daily rates have had a positive effect on our operations by contributing to growth in our merchant hotel
revenue.
Increased usage and familiarity with the internet has driven rapid growth in online penetration of
travel expenditures. According to PhoCusWright, 29% of U.S. leisure and unmanaged travel expenditures
occurred online in 2005, more than double the 14% rate in 2002. An estimated 14% of European travel
was booked online in 2005, up from just 4% in 2002. In addition to the growth of online travel agencies,
airlines, and lodging companies have aggressively pursued direct online distribution of their products and
services over the last several years, with supplier growth outpacing online growth since 2002.
Differentiation among the various website offerings have narrowed in the past several years, and the travel
landscape has grown extremely competitive, with the need for competitors to generally differentiate their
offerings on a feature other than price.
Strategy
We are in the early stages of leveraging our historic strength as an efficient transaction processor to
become a retailer and merchandiser of travel experiences. Our business strategy to accomplish this is as
follows:
Leverage our portfolio of travel brands. We seek to appeal to the broadest possible range of travelers
and suppliers through our collection of industry-leading brands. We target several different demographics,
from the value-conscious traveler through our Hotwire brand to luxury travelers seeking a high-touch,
28
customized vacation package through our Classic Vacations brand. We believe our flagship Expedia brand
appeals to the broadest range of travelers, with its extensive product offering and facilitation of single item
purchases of discounted product to complex bundling of higher-end travel packages. Our Hotels.com site
and its international versions target travelers with premium content about lodging properties, and generally
appeal to travelers with shorter booking windows who prefer to drive to their destination.
Innovate on behalf of travelers and supplier partners. We have a long tradition of innovation, from
Expedia.com's inception as a division of Microsoft, to our introduction of Best Fare Search and dynamic
packaging technologies to more recent innovations such as traveler reviews, Personal Trip Guides, Best
Price Guarantee, Expedia Corporate Travel's TripController software and our AirShopper e-mail
campaign.
We will continue to aggressively innovate on behalf of our travelers and suppliers. As an example, for
our travelers, we are currently investing in and building a scaleable, extensible, service-oriented technology
platform, which will extend across our portfolio of brands. This transition will allow us to improve our site
merchandising, browse and search functionality and add significant personalization features. We expect this
transition to occur in a phased approach, with worldwide points of sale migrating to the new platform by
early 2008. For our suppliers, we have developed proprietary, supplier-oriented technology that streamlines
the interaction between some of our websites and hotel property management systems, making it easier
and more cost-effective for hotels to manage reservations made through our brands.
Expand our international and corporate travel businesses. We currently operate Expedia-branded
sites in the U.S., Canada, U.K., Germany, France, Italy, the Netherlands and Australia. We intend to
continue investing in and growing our existing international points of sale. We anticipate launching
additional countries in the future where we find large travel markets and rapid growth of online commerce.
In addition, we operate sites in the People's Republic of China through eLong, which we acquired in
January 2005.
Expedia Corporate Travel (""ECT'') currently conducts operations in the U.S., Canada, U.K., France,
Belgium, the Netherlands and Luxembourg. We believe the corporate travel sector represents a large
opportunity for Expedia, and we believe we offer a compelling technology solution to small and medium-
sized businesses seeking to control travel costs and improve their employees' travel experiences. Expanding
our corporate travel business also increases our appeal to travel product and service suppliers, as the
average corporate traveler has a higher incidence of first class and international travel than the average
leisure traveler.
Expand our product and service offerings worldwide.
In general, through our websites, we offer the
most comprehensive array of innovation and selection of travel products and services to travelers. We plan
to continue improving and growing these offerings, as well as expanding them to our worldwide points of
sale over time.
Leverage our scale in technology and operations. The travel brands comprising Expedia, Inc. have
invested over $3 billion in technology, operations, brand building, supplier integration and relationships and
other areas since the launch of Expedia.com in 1996. We intend to continue leveraging our substantial
investment when launching new countries, introducing site features, adding supplier products and services
or adding value-added content for travelers. We have been able to launch the Italy and Australia websites
relatively quickly and inexpensively by leveraging our existing technology and product supply.
For additional information about our brands, see the disclosure set forth under the caption
""Description of Business.''
Seasonality
We generally experience seasonal fluctuations in the demand for our travel products and services. For
example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers
plan and book their spring, summer and holiday travel. The number of bookings decreases in the fourth
quarter. Because revenue in the merchant business is generally recognized when the travel takes place
29
rather than when it is booked, revenue typically lags bookings by a month or longer. As a result, revenue is
typically the lowest in the first quarter and highest in the third quarter.
Critical Accounting Policies and Estimates
To understand our financial position and results of operations, it is important to understand our
critical accounting policies and estimates and the extent to which we use judgment and estimates in
applying those policies. We prepared our consolidated financial statements and accompanying notes in
accordance with generally accepted accounting principles in the United States. Preparation of the
consolidated financial statements and accompanying notes requires that we make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the consolidated financial statements and revenue and expenses
during the periods reported. We base our estimates on historical experience, where applicable, and other
assumption that we believe are reasonable under the circumstances. Actual results may differ from our
estimates under different assumptions or conditions.
There are certain critical estimates that we believe require significant judgment in the preparation of
our consolidated financial statements. We consider an accounting estimate to be critical if:
‚ It requires us to make assumption because information was not available at the time or it included
matters that were highly uncertain at the time we were making the estimate, and
‚ Changes in the estimate or different estimates that we could have selected may have had a material
impact on our financial condition or results of operations.
For more information on each of these policies, see the notes to consolidated financial statements. We
discuss information about the nature and rationale for our critical accounting estimates below.
Accounting for Certain Merchant Revenue
We accrue the cost of certain merchant revenue based on the amount we expect from suppliers'
invoices. In certain instances when a supplier invoices us for less than the cost we accrued, we recognize
those amounts as revenue six months in arrears, net of an allowance, when we determine it is not probable
that we will be required to pay the supplier, based on historical experience. Actual revenue could be
greater or lower than the amounts estimated due to changes in hotel billing practices or changes in traveler
behavior. Historically adjustments related to this account have not been material.
Recoverability of Goodwill and Indefinite and Definite Long-Lived Intangible Assets
Goodwill.
In accordance with SFAS No. 142, ""Goodwill and Other Intangible Assets,''
(""SFAS 142''), we assess goodwill for impairment annually at the beginning of the fourth quarter, or more
frequently, if an event occurs or circumstances change that more likely than not reduce the fair values of
our reporting units below their carrying values. The impairment test requires us to estimate the fair value
of our reporting units. If the carrying value of the reporting unit exceeds the fair value, the goodwill of the
reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of
the analysis, we will record an impairment loss equal to the excess of the carrying value of the reporting
unit's goodwill over its implied fair value should such a circumstance arise.
We generally base our measurement of fair value of reporting units on a blended analysis of the
present value of future discounted cash flows and market valuation approach weighted at 75% and 25% of
the indicated fair value, respectively. The discounted cash flows model indicates the fair value of the
reporting units based on the present value of the cash flows that we expect the reporting units to generate
in the future. Our significant estimate in the discounted cash flows model include: our weighted average
cost of capital; long-term rate of growth and profitability of our business; and effective income tax rate.
The market valuation approach indicates the fair value of the business based on a comparison of the
company to comparable firms in similar lines of business that are publicly traded. Our significant estimates
in the market approach model include identifying similar companies with comparable business factors such
30
as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating
income multiples in estimating the fair value of the reporting units.
We believe the weighted use of discounted cash flows and market approach is the best method for
determining the fair value of our reporting units because:
‚ It excludes the impact of short-term volatility,
‚ It includes all information available to management, which is generally more than that is available
to the external capital markets,
‚ The weighted blended use of the two approaches was recommended by our third-party valuation
firm, including the low number of recent transactions and volatility in the capital markets,
‚ Both models are the most common valuation methodologies used within the travel industry,
‚ The blended used of both models would compensate for the inherent risks associated with each
model if used on a stand-alone basis.
The use of different estimates or assumptions in determining the fair value of our goodwill may result
in different values for these assets, which could result in an impairment.
Indefinite-Lived Intangible Assets. We base our measurement of fair value of indefinite-lived
intangible assets, which primarily consist of tradename and trademarks, using the relief-from-royalty
method. This method assumes that the tradename and trademarks have value to the extent that their
owner is relieved of the obligation to pay royalties for the benefits received from them. This method
requires us to estimate the future revenue and expenses for the related brands, the appropriate royalty rate
and the weighted average cost of capital.
The use of different estimates or assumptions in determining the fair value of our indefinite-lived
intangible assets may result in different values for these assets, which could result in an impairment.
Definite-Lived Intangible Assets.
In accordance with SFAS No. 144, ""Accounting for the
Impairment or Disposal of Long-Lived Assets,'' we review the carrying value of intangible assets with
definite lives and other long-lived assets, which we amortize over the estimated useful lives of two to ten
years, on a regular basis for the existence of facts that may indicate that the assets are impaired. If such
facts indicate a potential impairment, we estimate the fair value of the asset using appropriate valuation
methodologies, usually based on estimated future discounted cash flows. If the fair value is determined to
be less than an asset's carrying value, we then evaluate if the carrying value is deemed to be
unrecoverable. Our analysis is based on available information and on assumptions and projections that we
consider to be reasonable and supportable. This analysis requires us to estimate current and future cash
flows attributable to the group of assets, the time period for which they will be held and used as well as a
discount rate to incorporate the time value of money and the risks inherent in future cash flows.
The use of different estimates or assumptions in determining the fair value of our definite-lived
intangible assets may result in different values for these assets, which could result in an impairment.
Income Taxes
In accordance with SFAS No. 109, ""Accounting for Income Taxes,'' we record income taxes under
the liability method. Deferred tax assets and liabilities reflect our estimation of the future tax
consequences of temporary differences between the carrying amounts of assets and liabilities for book and
tax purposes. We determine deferred income taxes based on the differences in accounting methods and
timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax
asset or liability for each temporary difference based on the tax rates that we expect will be in effect when
we realize the underlying items of income and expense.
We consider many factors when assessing the likelihood of future realization of our deferred tax
assets, including our recent earnings experience by jurisdiction, expectations of future taxable income, the
31
carryforward periods available to us for tax reporting purposes, as well as other relevant factors. We may
establish a valuation allowance to reduce deferred tax assets to the amount we expect to realize. Due to
inherent complexities arising from the nature of our businesses, future changes in income tax law, tax
sharing agreements or variances between our actual and anticipated operating results, we make certain
judgments and estimates. Therefore, actual income taxes could vary from these estimates.
In conjunction with the Spin-Off we entered into a Tax Sharing Agreement with IAC. We will file a
consolidated tax return with IAC for the period from January 1, 2005, to August 8, 2005. There are two
methods that can be used for the calculation of income taxes for that period: close-the-book or pro-rata.
IAC has sole discretion to determine which method. We have made assumptions as to how IAC will
choose to characterize certain transactions and as to which method it will choose. Should these
assumptions differ materially from actions IAC takes, our balance sheet classification could be materially
affected as could our use of certain deductions and the period in which our net operating loss
carryforwards are fully utilized.
Other Long-Term Liabilities
Various Legal and Tax Contingencies. We record liabilities to address potential exposures related to
business and tax positions we have taken that have been or could be challenged by taxing authorities. In
addition, we record liabilities associated with legal proceedings and lawsuits. These liabilities are recorded
when the likelihood of payment is probable and the amounts can be reasonably estimated. The
determination for required liabilities is based upon analysis of each individual tax issue, or legal
proceeding, taking into consideration the likelihood of adverse judgments and the range of possible loss. In
addition, our analysis may be based on discussions with outside legal counsel. The ultimate resolution of
these potential tax exposures and legal proceedings may be greater or less than the liabilities recorded.
Occupancy Tax. Some states and localities impose a transient occupancy or accommodation tax, or a
form of sales tax, on the use or occupancy of hotel accommodations. Hotel operators generally collect and
remit these taxes to the various tax authorities. Consistent with this practice, when a customer books a
room through one of our travel services, the hotel charges taxes based on the room rate paid to the hotel,
we pay those taxes invoiced by the hotel and we recover an equivalent amount from the customer. We do
not collect or remit occupancy taxes, nor do we pay occupancy taxes to the hotel operator on the portion
of the customer payment we retain. Some jurisdictions have questioned our practice in this regard. While
the applicable tax provisions vary among the jurisdictions, we generally believe that we are not required to
collect and remit such occupancy taxes. We are engaged in discussions with tax authorities in various
jurisdictions to resolve this issue. Some tax authorities have brought lawsuits asserting that we are required
to collect and remit occupancy tax. The ultimate resolution in all jurisdictions cannot be determined at this
time.
We have established a reserve with respect to potential occupancy tax liability for prior and current
periods, consistent with applicable accounting principles and in light of all current facts and circumstances.
A variety of factors could affect the amount of the liability (both past and future), which factors include,
but are not limited to, the number of, and amount of revenue represented by, jurisdictions that ultimately
assert a claim and prevail in assessing such additional tax or negotiate a settlement and changes in relevant
statutes.
We note that there are more than 7,000 taxing jurisdictions in the United States, and it is not feasible
to analyze the statutes, regulations and judicial and administrative rulings in every jurisdiction. Rather, we
have obtained the advice of state and local tax experts with respect to tax laws of certain states and local
jurisdictions that represent a large portion of our hotel revenue. It is possible that some jurisdictions may
introduce new legislation regarding the imposition of occupancy taxes on businesses that arrange the
booking of hotel accommodations. We will continue to monitor the issue closely and provide additional
disclosure, as well as adjust the level of reserves, as developments warrant. Additionally, we and certain of
our businesses are involved in occupancy tax related litigation which is discussed in ""Item 3 Ì Legal
Proceedings.''
32
Stock-Based Compensation
We record stock-based compensation expense net of estimated forfeitures. In determining the
estimated forfeiture rates, we periodically conduct an assessment of the actual number of instruments that
have been forfeited to date as well as those expected to be forfeited in the future. We consider many
factors when estimating expected forfeitures, including the type of award, the employee class and historical
experience. The estimation of stock awards that will ultimately be forfeited requires significant judgment
and to the extent that actual results or updated estimates differ from our current estimates, such amounts
will be recorded as a cumulative adjustment in the period such estimates are revised. In 2005, we
recognized changes in estimates related to our forfeiture rate.
New Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 4, New Accounting Pronouncements,
in the notes to consolidated financial statements.
Operating Metrics
Our operating results are affected by certain metrics that represent the selling activities generated by
our travel products and services. As travelers have increased their use of the internet to book their travel
arrangements, we have seen our gross bookings increase, reflecting the growth in the online travel industry
and our business acquisitions. Gross bookings include the total price due from travelers, including taxes,
fees and other charges, and are generally not reduced for cancellations and traveler refunds.
Gross bookings ÏÏÏÏÏÏÏÏÏ
Revenue margin (on a
comparable net basis)
2005
Year Ended December 31,
2004
($ in thousands)
$12,773,879
2003
2005 vs 2004
2004 vs 2003
% Change
$15,551,504
$9,569,296
22%
33%
14%
14%
15%
Gross bookings increased $2.8 billion, or 22%, in 2005 compared to 2004, and $3.2 billion, or 33%, in
2004 compared to 2003. Gross bookings represent the total retail value of transactions recorded for both
agency and merchant transactions at the time of booking. In 2005, domestic gross bookings increased 15%
and international gross bookings increased 50%, compared to 2004. In 2004, domestic gross bookings
increased 24% and international gross bookings increased 103%, compared to 2003. The increases in 2005
and 2004 were primarily due to increases in transaction volumes and acquisitions.
Beginning January 1, 2004, as part of the integration of our businesses, Hotels.com conformed its
merchant hotel business practices with those of our other businesses. As a result, we commenced
prospectively reporting revenue for Hotels.com on a net basis. We have presented certain of our 2003
information in the table above on an as reported and comparable net basis.
Revenue margin, which is defined as revenue as a percentage of gross bookings, decreased 80 basis
points in 2005 compared to 2004. The decrease was primarily due to a decrease in air revenue per ticket
and hotel margins. In 2005, revenue margin decreased 90 basis points in our domestic operations and
21 basis points in our international operations. Revenue margin decreased by 20 basis points in 2004
compared to 2003 due primarily to the decline in merchant hotel raw margins and lower air revenue per
transaction. This decrease was partially offset by higher merchant hotel average daily room rates and
acquisitions.
33
Results of Operations for the Years Ended December 31, 2005, 2004 and 2003
Revenue
Beginning January 1, 2004, as part of the integration of our businesses, Hotels.com conformed its
merchant hotel business practices with those of our other businesses. As a result, we commenced
prospectively reporting revenue for Hotels.com on a net basis. This change in reporting did not affect gross
profit, operating income or net income. We have presented certain of our 2003 information in the tables
below on an as reported and comparable net basis.
Revenue (as reported) ÏÏÏÏÏ
Revenue (on a comparable
net basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,119,455
1,843,013
1,400,164
2005
Year Ended December 31,
2004
($ in thousands)
$1,843,013
$2,119,455
$2,339,813
2003
2005 vs 2004
2004 vs 2003
% Change
15%
15%
(21)%
32%
In 2005, the increase in revenue was primarily due to increases in worldwide merchant hotel business,
worldwide air revenue, growth in our car rental business and acquisitions. Worldwide merchant hotel
revenue increased 10% in 2005 compared to 2004. The increase was primarily due to a 9% increase in
room nights and a 1% increase in revenue per room night. The increase in revenue per room night was
primarily due to a 7% increase in average daily rates, offset by a contraction in hotel raw margin (defined
as hotel net revenue as a percentage of hotel gross bookings).
Worldwide air revenue increased 5% in 2005 compared to 2004. Year-over-year, the air tickets sold
increased by 17%, offset by an 11% decrease in air revenue per ticket. The increase in air tickets sold is
primarily due to the growth in domestic ticket sales while the decrease in air revenue per tickets resulted
from less inventory allocation and lower discounting of merchant air tickets, as the industry experienced
high load factors.
Other revenue, which includes car rental, destination services and cruise, increased by 57% in 2005
compared to 2004, primarily due to acquisitions and growth in the car rental business. International
revenue increased by 48% in 2005 compared to 2004, primarily due to our acquisitions and continued
growth from international websites.
In 2004, the decrease in revenue compared to 2003 revenue (as reported) was due to a change in
business practice at Hotels.com to conform its business practice to the approach used by the other Expedia
Businesses. Our 2004 revenue increased compared to 2003 revenue (on a net comparable basis) primarily
due to increases in worldwide merchant hotel business, worldwide air revenue, packages and acquisitions.
In 2003, revenue included a favorable adjustment of $22.4 million related to estimated merchant supplier
payables.
Worldwide merchant hotel revenue increased 24% in 2004 compared to 2003, primarily due to an
increase in hotel room nights stayed, combined with an increase in revenue per room night. Year-over-
year, merchant hotel room nights stayed, including rooms booked as a component of packages, increased
21%, reflecting continued growth in international demand, acquisitions and growth in our private label and
affiliate programs. Revenue per room night increased 3% primarily due to increases in average daily room
rates, partially offset by a decline in merchant hotel raw margins.
The domestic merchant hotel business in 2004 presented a more challenging environment than the
prior year, primarily due to increased third party distributor competition, promotion by hotel chains from
their own direct sites and higher overall occupancy rates. These increases resulted in decreased availability
of favorably priced travel products and services when compared with 2003.
Worldwide air revenue increased 34% in 2004 compared to 2003. Year-over-year, the number of air
tickets sold increased by 33% primarily due to the growth in domestic and international ticket sales.
Acquisitions also contributed to the increase in worldwide air revenue.
34
International revenue increased 111% in 2004 compared to 2003. This was primarily due to growth in
the hotel and air businesses from acquisitions and increased activity from international websites.
Cost of Revenue and Gross Profit
2005
Cost of revenue (as reported) ÏÏÏÏÏÏÏ
Cost of revenue (on a comparable net
basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
% of revenue (as reported) ÏÏÏÏÏÏÏÏÏ
% of revenue (on a comparable net
basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
% of revenue (as reported) ÏÏÏÏÏÏÏÏÏ
% of revenue (on a comparable net
basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year Ended December 31,
2004
(In thousands)
$ 390,318
$ 470,716
$1,233,743
2003
2005 vs 2004
2004 vs 2003
% Change
21%
21%
(68)%
33%
470,716
390,318
294,094
22%
22%
21%
21%
53%
21%
$1,648,739
$1,452,695
$1,106,070
13%
31%
78%
78%
79%
79%
47%
79%
Cost of revenue primarily consists of (1) credit card merchant fees, (2) reserves and related
payments for product and services purchased with fraudulent credit cards and other chargebacks, (3) fees
paid to our fulfillment vendors for issuing airline tickets and related traveler services, (4) costs for the
operations of our data center and call centers, including personnel-related costs, and (5) costs paid to
suppliers for destination service inventory related to the portion of our destination services that is reported
on a gross basis.
The cost of revenue increase in 2005 was primarily due to costs associated with an increase in
transaction volumes and acquisitions. In 2004, the decrease in cost of revenue compared to 2003 revenue
(as reported) was due to a change in business practice at Hotels.com to conform its business practice to
the approach used by the other Expedia Businesses. On a comparable net basis, the cost of revenue
increased in 2004 compared to 2003 primarily due to costs associated with an increase in transaction
volumes.
Gross profit increased in 2005 compared to 2004, primarily due to an increase in transaction volumes,
while gross margin decreased by 1% due to our acquisition of a destination services company, which
records its revenue on a gross basis. Gross profit increased in 2004 compared to 2003, primarily due to the
growth in our merchant hotel business, including increased revenue from international websites and
packages.
Selling and Marketing
Selling and marketing ÏÏÏÏÏÏÏÏÏÏ
% of revenue (as reported)ÏÏÏÏÏÏ
% of revenue (on a comparable
net basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
(In thousands)
$653,018
2003
$463,684
$697,503
% Change
2005 vs 2004
2004 vs 2003
7%
41%
33%
33%
35%
35%
20%
33%
Selling and marketing expense relates to direct advertising and distribution expense, including traffic
generation from internet portals, search engines, private label and affiliate programs. The remainder of the
expense relates to personnel costs, including market manager staffing in our Partner Services Group
(""PSG''), which enhances our relationships with both supplier relationships and destination services desk
personnel.
35
In 2005, the increase in selling and marketing expense was primarily due to growth in personnel costs,
including costs associated with the PSG team expansion and destination services staffing assumed in our
acquisitions, offset by a decrease in offline marketing spend for certain businesses and keyword search
efficiencies. Selling and marketing expense in 2004 includes a favorable adjustment for the reversal of
$6.4 million associated with the resolution of a contractual dispute.
In 2004, the increase in selling and marketing expense was primarily due to higher search-related
costs and increased marketing volume, offset by a favorable adjustment related to the reversal of
$6.4 million associated with the resolution of a contractual dispute. Higher costs of traffic acquisition
online and greater emphasis on international businesses also contributed to higher expenses. Our
international businesses have higher selling and marketing costs compared to revenue as they are in early
development stages compared to our U.S. businesses. Acquisitions also contributed to the increase in
selling and marketing expense.
While we remain focused on optimizing the efficiency of our various selling and marketing channels,
we expect the absolute amounts spent in selling and marketing to increase over time due to continued
expansion of our international businesses, reduced opportunities for offline spend efficiencies, inflation in
search-related and other traffic acquisition vehicles, increased marketing volumes and increased fixed costs
associated with the increase in staffing in our market management area. In 2006, we expect selling and
marketing expense to increase as a percentage of revenue as we continue to support and invest in our
brand portfolio.
General and Administrative
General and administrative ÏÏÏÏÏÏ
% of revenue (as reported)ÏÏÏÏÏÏ
% of revenue (on a comparable
net basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
($ in thousands)
$160,965
2003
$113,633
$211,515
% Change
2005 vs 2004
2004 vs 2003
31%
42%
10%
10%
9%
9%
5%
8%
General and administrative expense consists primarily of (1) personnel-related costs for support
functions that include our executive leadership, finance, legal, tax and human resources and (2) fees for
external professional services including legal, tax and accounting.
In 2005, the increase in general and administrative expense was primarily due to acquisitions, an
increase in our use of professional services and costs to build our executive teams and supporting staff
levels largely in connection with being a stand-alone public company. In addition, we incurred one-time
expenses specifically related to the Spin-Off. We expect absolute amounts spent on corporate personnel
and professional services to increase over time as we add personnel and continue incurring incremental
costs as a stand-alone public company.
In 2004, the increase in general and administrative expense was primarily due to increased personnel
in administrative functions, such as legal, tax, accounting and information technology and acquisitions. In
addition, due to the increasing complexity of our businesses, we utilized external professional services for
legal, tax and accounting to a greater extent in 2004 than in 2003.
36
Technology and Content
Technology and content ÏÏÏÏÏÏÏÏÏÏ
% of revenue (as reported)ÏÏÏÏÏÏÏÏ
% of revenue (on a comparable net
basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
($ in thousands)
$85,020
$112,280
2003
$59,743
% Change
2005 vs 2004
2004 vs 2003
32%
42%
5%
5%
5%
5%
3%
4%
Technology and content expense consists of expenses for customizing our websites, amortization of
website and internal software development costs, localization of our websites, and product development
expenses such as personnel-related costs.
The year over year increases were primarily due to an increase in the number of personnel involved in
website development and engineering teams working on increasing our level of site innovation. In 2003,
technology and content expense includes a $4.7 million write-down related to the packaging technology
used by Hotels.com as a result of adopting Expedia.com's packaging technology.
Given the increasing complexity of our business, geographic expansion, initiatives in corporate travel,
increased supplier integration, service-oriented architecture improvements and other initiatives, we expect
absolute amounts spent on technology and content expenses to increase over time.
Amortization of Intangible Assets
Amortization of intangible assets ÏÏ
% of revenue (as reported)ÏÏÏÏÏÏÏ
% of revenue (on a comparable net
basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
($ in thousands)
$125,091
$126,067
2003
$76,073
% Change
2005 vs 2004
2004 vs 2003
1%
64%
6%
6%
7%
7%
3%
5%
Amortization of intangible assets consists of amortization of intangible assets with definite lives
related to business acquisitions.
In 2005, amortization of intangibles expense was flat compared to 2004, because the amortization of
intangibles related to new business acquisitions was offset by the decrease in amortization related to
intangibles that were fully amortized.
In 2004, the increase in amortization of intangibles expense was primarily due to the addition of
intangible assets associated with IAC's acquisition of the minority interest in Expedia.com and Hotels.com
in 2003, as well as the acquisition of Hotwire.com in 2003.
For additional information about our acquisitions, see Note 5, Business Acquisitions, in the notes to
consolidated financial statements.
Stock-Based Compensation
Stock-based compensation ÏÏÏÏÏÏÏÏ
% of revenue (as reported)ÏÏÏÏÏÏÏÏ
% of revenue (on a comparable net
basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
($ in thousands)
$171,400
2003
$95,781
$91,725
% Change
2005 vs 2004
2004 vs 2003
(46)%
79%
9%
9%
4%
7%
4%
4%
37
Stock-based compensation expense consists primarily of the amortization of the fair value of equity
awards that we assumed from IAC related to the Expedia.com and Hotels.com acquisitions as well as
expense for restricted stock unit (""RSU'') grants to employees. In addition, we capitalize stock-based
compensation, net of estimated future forfeitures, related to personnel who develop our internal use
software. We record amortization expense related to these capitalized costs in stock-based compensation
expense on a straight line basis over the useful life of the internal use software.
In 2005, we recorded stock-based compensation expense of $91.7 million primarily relating to stock
options and RSU grants. Our 2005 stock-based compensation expense includes a benefit of $44.7 million
related to changes in estimated forfeiture rates for stock options, RSUs and other equity compensation and
capitalization of software development costs, partially offset by a modification charge on stock option
awards related to the Spin-Off. In 2005, we completed assessments of the estimated forfeiture rates
including analyses of the actual number of instruments that had forfeited to date compared to prior
estimates and an evaluation of future estimated forfeitures.
RSUs have been the primary form of stock-based awards granted to our employees since 2003.
Because RSUs contain no exercise price, the number of RSUs awarded is typically less than the number
of options that might have been granted in the past.
Assuming, among other things, that our stock price does not vary widely from present levels, we
anticipate the stock-based compensation expense will decrease from $136.4 million (before the benefit of
$44.7 million discussed above) as stock options granted in 2003 and prior are fully amortized and replaced
with amortization expense from RSU.
In 2004, the increase in stock-based compensation expense was due to acquisitions of Expedia.com
and Hotels.com in 2003, which resulted in the conversion of all Expedia.com and Hotels.com stock
options, warrants and RSU grants into IAC equity grants and valued at the time of conversion.
Amortization of Non-Cash Distribution and Marketing
2005
Year Ended December 31,
2004
($ in thousands)
2003
% Change
2005 vs 2004
2004 vs 2003
Amortization of non-cash distribution
and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
% of revenue (as reported)ÏÏÏÏÏÏÏÏÏ
% of revenue (on a comparable net
basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$12,597
$16,728
$41,974
(25)%
(60)%
1%
1%
1%
1%
2%
3%
Amortization of non-cash distribution and marketing expense consists mainly of advertising from
Universal Television contributed to us by IAC at Spin-Off. We use this advertising without any cash cost.
In 2005, the decrease in amortization of non-cash distribution and marketing expense compared to
2004 was due to a decline in the amount of television advertising that we used.
In 2004, the decrease in amortization of non-cash distribution and marketing expense compared to
2003 was primarily due to the termination of Hotels.com's distribution agreement with Travelocity in 2003.
Operating Income
Operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
% of revenue (as reported)ÏÏÏÏÏÏ
% of revenue (on a comparable
net basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
($ in thousands)
$240,473
2003
$243,518
$397,052
% Change
2005 vs 2004
2004 vs 2003
65%
(1)%
13%
13%
10%
17%
19%
19%
38
In 2005, the increase in operating income was primarily due to increased revenue, which contributed
to a higher gross profit, and a decrease in stock-based compensation due to changes in the estimated
forfeiture rates used to determine stock-based compensation, offset by an increase in selling and marketing,
general and administrative, and technology and content expense as discussed above. In 2005, operating
income included a $79.7 million decrease to stock-based compensation expense mainly due the benefit of
$44.7 million related to changes in estimated forfeiture rates for stock options, RSUs and other equity
compensation and capitalization of software development costs, partially offset by a modification charge on
stock option awards related to the Spin-Off. Operating income was favorably impacted in 2004 by a
$12.1 million net reserve adjustment primarily related to the reversal of an air excise tax reserve and the
resolution of a contractual dispute.
In 2004, the decrease in operating income was due to an increase in the amortization of intangibles
principally due to the increase in intangible assets upon IAC's acquisition of the minority interest in
Hotels.com and Expedia.com in 2003 and other acquisitions, an increase in stock-based compensation due
to the Expedia.com and Hotels.com mergers in 2003, partially offset by a decrease in non-cash distribution
and marketing expense due to the termination of Hotels.com distribution agreement with Travelocity and a
decrease in merger costs. Operating income was favorably impacted by a $4.7 million write-down relating
to packaging technology by Hotels.com in 2003.
Operating Income Before Amortization (""OIBA'')
OIBA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
% of revenue (as reported)ÏÏÏÏÏÏ
% of revenue (on a comparable
net basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
($ in thousands)
$553,692
2003
$469,010
$627,441
% Change
2005 vs 2004
2004 vs 2003
13%
18%
30%
30%
30%
30%
20%
33%
In 2005, the increase in OIBA was primarily due to increases in revenue that contributed to a higher
gross profit, offset by increases in selling and marketing, general and administrative, and technology and
content expense discussed above.
In 2004, the increase in OIBA was primarily due to increases in revenue that contributed to higher
gross profit, profitability from our European operations and acquisitions, partially offset by an increase in
selling and marketing, general and administrative, and technology and content expense discussed above.
Definition of OIBA
We provide OIBA as a supplemental measure to GAAP. We define OIBA as operating income plus:
(1) amortization of non-cash distribution and marketing expense (2) stock-based compensation expense,
(3) amortization of intangibles and goodwill impairment, if applicable and (4) certain one-time items, if
applicable.
OIBA is one of the primary metrics by which management evaluates the performance of the business,
on which internal budgets are based, and by which management is compensated. Management believes
that investors should have access to the same set of tools that management uses to analyze our results.
This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP,
but should not be considered a substitute for or superior to GAAP. We endeavor to compensate for the
limitation of the non-GAAP measure presented by also providing the comparable GAAP measures, GAAP
financial statements, and descriptions of the reconciling items and adjustments, to derive the non-GAAP
measure. We present a reconciliation of this non-GAAP financial measure from GAAP to non-GAAP
below.
OIBA represents the combined operating results of Expedia, Inc.'s businesses, taking into account
depreciation, which we believe is an ongoing cost of doing business, but excluding the effects of other non-
39
cash expenses that may not be indicative of our core business operations. We believe this measure is useful
to investors for the following reasons:
‚ It corresponds more closely to the cash operating income generated from our core operations by
excluding significant non-cash operating expenses.
‚ It aids in forecasting and analyzing future operating income as stock-based compensation and non-
cash distribution and marketing expenses are likely to decline significantly going forward.
‚ It provides greater insight into management decision making at Expedia, as OIBA is our primary
internal metric for evaluating the performance of our businesses.
OIBA has certain limitations in that it does not take into account the impact to Expedia, Inc.'s
statements of income of certain expenses, including stock-based compensation, non-cash payments to
partners, acquisition-related accounting and certain one-time items. Due to the high variability and
difficulty in predicting certain items that affect net income, such as interest rates and tax rates, we are
unable to provide reconciliation to net income on a forward-looking basis without unreasonable efforts.
Reconciliation of OIBA to Operating Income and Net Income
The following table presents a reconciliation of OIBA to operating income and net income for the
years ended December 31, 2005, 2004 and 2003:
OIBA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of non-cash distribution and marketingÏÏÏÏÏÏ
Merger costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Write-off of long-term investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest in loss (income) of consolidated
subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003
2005
Year Ended December 31,
2004
(In thousands)
$ 553,692
(125,091)
(171,400)
(16,728)
Ì
$ 627,441
(126,067)
(91,725)
(12,597)
Ì
$469,010
(76,073)
(95,781)
(41,974)
(11,664)
397,052
48,673
(23,426)
(8,428)
(185,977)
240,473
38,356
Ì
(9,286)
(106,371)
243,518
19,709
Ì
(7,729)
(97,202)
836
301
(46,889)
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 228,730
$ 163,473
$111,407
40
Interest Income, Net
2005
Year Ended December 31,
2004
($ in thousands)
2003
Interest income, net:
Interest income from IAC/
InterActiveCorp ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$40,089
$30,851
$ Ì
Other interest income (expense),
net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8,584
7,505
19,709
Interest income, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
% of revenue (as reported)ÏÏÏÏÏÏÏÏÏ
% of revenue (on a comparable net
basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$48,673
$38,356
$19,709
2%
2%
2%
2%
1%
1%
% Change
2005 vs 2004
2004 vs 2003
30%
14%
27%
N/A
(62)%
95%
Interest income increased due to the growth in our intercompany receivable balances with IAC, as
well as an increase in the interest rates earned on these balances. The intercompany receivable balances
were covered by a cash management arrangement with IAC until the Spin-Off. Because we extinguished
our intercompany receivable balances with IAC at Spin-Off, we expect our interest income to decrease
significantly in 2006. In 2005, other interest income (expense), net includes interest expense of
$1.8 million related to short-term borrowings on our revolving credit facility.
Write-Off of Long-Term Investment
Year Ended December 31,
2003
2005
2004
% Change
2005 vs 2004
2004 vs 2003
Write-off of long-term investment ÏÏÏÏÏÏÏÏÏ
% of revenue (as reported) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
% of revenue (on a comparable net basis) ÏÏ
($ in thousands)
$23,426
$Ì $Ì
N/A
N/A
1%
1%
0%
0%
0%
0%
In 2005, we received information regarding the deteriorating financial condition of our long-term
investment in a leisure travel company and determined that it was unlikely that we would recover any of
our investment because the decline in its value was other-than-temporary. As a result, we recorded a
write-off related to this impairment of $23.4 million, which consisted of $22.5 million of preferred stock
and $0.9 million of stock warrants.
Other, net
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
% of revenue (as reported)ÏÏÏÏÏÏÏÏÏ
% of revenue (on a comparable net
basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
($ in thousands)
$(9,286)
2003
$(8,428)
0%
$(7,729)
0%
(1)%
% Change
2005 vs 2004
2004 vs 2003
(9)%
20%
0%
(1)%
(1)%
In 2005, other, net primarily includes an unrealized loss of $6.0 million in the fair value of derivative
instruments related to the Ask Jeeves Notes and certain stock warrants, as well as losses from the
fluctuation of foreign exchange rates. For additional information about our derivative instruments, see
Note 10, Derivative Instruments, in the notes to consolidated financial statements.
In 2004 and 2003, other, net was primarily due to losses from the fluctuation of foreign exchange
rates.
41
Provision for Income Taxes
Provision for income taxes ÏÏÏÏÏÏÏ
% of revenue (as reported)ÏÏÏÏÏÏÏ
% of revenue (on a comparable net
basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
Year Ended December 31,
2004
($ in thousands)
$106,371
$185,977
2003
$97,202
% Change
2005 vs 2004
2004 vs 2003
75%
9%
9%
9%
6%
6%
4%
7%
Our effective tax rate was 45%, 39% and 38% in 2005, 2004 and 2003.
In 2005 and 2004, our effective tax rate was higher than the 35% statutory rate primarily due to state
taxes and an increase in the valuation allowance related to foreign operating losses. In addition, in 2005,
our effective tax rate was affected by non-deductible stock-based compensation expense, unrealized losses
on derivative instruments and loss from the write-off of our long-term investment.
In 2003, our effective tax rate was higher than the 35% statutory rate primarily due to state taxes.
For additional information about income taxes, see Note 13, Income Taxes, in the notes to
consolidated financial statements.
Financial Position, Liquidity and Capital Resources
Sources and Uses of Cash
In July 2005, we entered into a $1.0 billion revolving credit facility. As of December 31, 2005, our
outstanding balance on the revolving credit facility was $230.0 million, which consisted of short-term
borrowings. We repaid this balance during the first quarter of 2006, and as of March 24, 2006, we did not
have any outstanding borrowing under the revolving credit facility. At December 31, 2005, we were in
compliance with all related financial covenants.
In the merchant business, we receive cash from travelers at the time of booking and we record these
amounts on our consolidated balance sheets as deferred merchant bookings. We pay our suppliers related
to these bookings approximately one week after completing the transaction for air travel and, for all other
merchant bookings, after the travelers' use and the subsequent billing from the supplier. Therefore,
especially for the hotel business, which represents the majority of our merchant bookings, there is generally
some time from the receipt of the cash from the traveler to the payment to the suppliers.
As long as the merchant hotel business continues to grow, as it has historically, and our business
model does not change, we expect that the change in working capital will continue to be positive. If these
businesses decline or if the model changes, it could negatively affect our working capital. As of
December 31, 2005, we had a deficit in our working capital of $848.0 million, compared to a positive
amount of $1.3 billion as of December 31, 2004. The fluctuation in our working capital was due to the
$2.5 billion net intercompany receivable balance we extinguished through a non-cash distribution to IAC
upon our Spin-Off on August 9, 2005.
Seasonal fluctuations in our merchant bookings affect our cash flows. During the first half of the year,
hotel bookings have traditionally exceeded stays, resulting in much higher cash flow related to working
capital. During the second half of the year, this pattern reverses. While we expect the impact of seasonal
fluctuations to continue, changes in the rate of growth of merchant bookings may affect working capital,
which might counteract or intensify the anticipated seasonal fluctuations.
We anticipate continued investment in the development and expansion of our operations. These
investments include but are not limited to improvements of our product support infrastructure, marketing
and sales strategy, corresponding distribution channels and existing technology. Our future capital
requirements may include capital needs for acquisitions, legal risks and to support our business strategy. In
42
the event we have acquisitions, this may reduce our cash balance and increase our debt. Legal risks and
challenges to our business strategy may also negatively affect our cash balance.
In our opinion, available cash, funds from operations and available borrowings, in the form of the
revolving credit facility, will provide sufficient capital resources to meet our foreseeable liquidity needs.
Cash Flows
In 2005, net cash provided by operating activities increased by $47.0 million, to $849.9 million. This
increase was primarily due to an increase in cash flows from operating income. In addition, we made tax
payments of $11.1 million, an increase of $3.9 million from 2004, reducing cash provided by operations.
Cash used in investing activities decreased by $131.1 million from 2004 primarily due to a $515.5 million
decrease in transfers to IAC and the absence of the 2004 cash acquisitions. Cash provided by financing
activities decreased due to withholding taxes for stock option exercises of $86.6 million that we paid on
behalf of a senior executive in exchange for surrendering a portion of his vested shares, and distributions to
IAC of $52.8 million, offset by an increase in short-term borrowings of $230.8 million and proceeds from
the exercise of stock option exercises of $29.1 million.
In 2004, net cash provided by operating activities increased by $158.8 million, to $802.9 million. This
increase was primarily due to cash flows from the merchant hotel business and changes in working capital.
In addition, we made tax payments of $7.3 million, an increase of $2.8 million from 2003, reducing cash
provided by operations. Cash used in investing activities decreased $319.1 million from 2003 primarily due
to a $1.3 billion decrease in marketable securities purchased and a $443.5 million decrease in cash used for
acquisitions, offset by a $724.4 million increase in transfers to IAC and a $606.8 million decrease in
marketable securities sales proceeds. These net transfers of our excess cash to IAC facilitated
centralization of their investment management. These activities ceased upon Spin-Off. Cash provided by
financing activities decreased $478.4 million in 2004 reflecting a decrease in IAC contributions of
$524.9 million.
Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments are as follows:
‚ Our revolving credit facility provides us with access to standby letters of credit (""LOC''), credit
lines and short-term loans for financing purposes.
‚ We have obligations related to the Ask Jeeves Convertible Subordinated Notes (""Ask Jeeves
Notes''). As a result of the Spin-Off, when holders of IAC's Ask Jeeves Notes convert their notes,
they will receive shares of both IAC and Expedia common stock. Under the terms of the Spin-Off,
we are obligated to issue shares of our common stock to IAC for delivery to the holders of the Ask
Jeeves Notes, or receive cash in equal value, in lieu of issuing such shares, at our option.
‚ The operating leases are for office space and related office equipment. We account for these leases
on a monthly basis. Certain leases contain periodic rent escalation adjustments and renewal options.
Operating lease obligations expire at various dates with the latest maturity in 2014.
‚ Purchase obligations, which currently include obligations for data transmissions lines and telephones
with three national telecommunications companies, are enforceable and legally binding agreements
to purchase goods or services in accordance with specified terms.
‚ Guarantees and LOCs are commitments that represent funding responsibilities that may require our
performance in the event of third party demands or contingent events. These commitments consist
of standby LOCs and guarantees. We use our standby LOCs to secure payment for hotel room
transactions to particular hotel properties. The outstanding balance of our standby LOCs directly
reduces the amount available to us from our revolving credit facility. In addition, we provide a
guarantee to the aviation authority of one country to protect against potential non-delivery of our
43
packaged travel services sold within that country. This country holds all travel agents and tour
companies to the same standard.
The following table presents our material contractual obligations and commercial commitments as of
December 31, 2005:
Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligation related to Ask Jeeves
Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Letters of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
By Period
Total
Less Than
1 Year
1 to
3 Years
(In thousands)
3 to
5 Years
More Than
5 Years
$230,755
$230,755
$
Ì $ Ì $ Ì
104,800
103,946
8,595
78,542
53,156
Ì
26,004
6,828
Ì
52,261
104,800
44,850
1,767
78,542
772
Ì
23,065
Ì
Ì
123
Ì
10,027
Ì
Ì
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$579,794
$315,848
$230,731
$23,188
$10,027
For additional information about our contractual obligations and commercial commitments, see
Note 16, Commitments and Contingencies, in the notes to consolidated financial statements. Other than
the items described above, we do not have any off-balance sheet arrangements as of December 31, 2005.
Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Management
Market risk is the potential loss from adverse changes in interest rates, foreign exchange rates and
market prices. Our exposure to market risk includes our revolving credit facility, derivative instruments and
marketable and debt securities. We manage our exposure to these risks through established policies and
procedures. Our objective is to mitigate potential income statement, cash flow and market exposures from
changes in interest and foreign exchange rates.
Interest Rate Risk
In July 2005, we entered into a $1.0 billion revolving credit facility. The revolving credit facility bears
interest based on our financial leverage and as of December 31, 2005, was equal to LIBOR plus 0.50%. As
a result, we may be susceptible to fluctuations in interest rates if we do not hedge the interest rate
exposure arising from any borrowings under our revolving credit facility.
As of December 31, 2005, our outstanding borrowing under the revolving credit facility was
$230.0 million. We repaid this balance in March 2006. We did not experience any significant impact from
changes in interest rate during the year ended December 31, 2005.
Foreign Exchange Risk
We conduct business in certain international markets, primarily in Australia, Canada, China and the
European Union. Because we operate in international markets, we have exposure to different economic
climates, political arenas, tax systems and regulations that could affect foreign exchange rates. Our primary
exposure to foreign currency risk relates to transacting in foreign currency and recording the activity in
U.S. dollars. We mitigate this exposure by maintaining natural hedges between our foreign currency
denominated current assets and current liabilities. Changes in exchange rates between the U.S. dollar and
these other currencies will result in a transaction gain or loss, which we will recognize in our consolidated
statements of income.
44
As we increase our operations in international markets, our exposure to fluctuations in foreign
currency exchange rates increases. The economic impact to us of foreign currency exchange rate
movements is linked to variability in real growth, inflation, interest rates, governmental actions and other
factors. These changes, if material, could cause us to adjust our financing and operating strategies.
As foreign currency exchange rates fluctuate, translation of the income statements of our international
businesses into U.S. dollars affects year-over-year comparability of operating results. Historically, we have
not hedged foreign exchange risks because we generally reinvested cash flows from international operations
locally. We periodically review our strategy for hedging foreign exchange risks. Our goal in managing our
foreign exchange risk is to minimize our potential exposure to the changes that exchange rates might have
on our earnings, cash flows and financial position.
We use cross-currency swaps to hedge against the change in value of an asset denominated in a
currency other than the subsidiary's functional currency. For additional information about our cross-
currency swaps, see Note 10, Derivative Instruments, in the notes to consolidated financial statements.
Equity Price Risk
We do not maintain any investments in equity securities as part of our marketable securities
investment strategy. Our equity price risk relates to fluctuation in our stock price, which affects our
derivative liabilities related to outstanding stock warrants and Ask Jeeves Notes. We base the fair value of
the these derivative instruments on the changes in the market price of our common stock.
In January 2006, certain of these notes were converted for approximately $68.2 million of common
stock, or 2.6 million shares. As notes conversion occur, and reduce the value of the derivative liabilities,
our equity price risk will decrease accordingly. The Ask Jeeves Notes are due June 1, 2008; upon maturity
of these notes, our obligation ceases.
As of March 1, 2006, each $1.00 fluctuation in our common stock will result in approximately
$1.7 million change in the aggregate fair value. An increase in our common stock price will result in a
charge to our consolidated statements of income and visa versa for a decrease in our common stock price.
For additional information about the stock warrants and Ask Jeeves Notes, see Note 10, Derivative
Instruments, in the notes to consolidated financial statements.
Part II. Item 8. Consolidated Financial Statements and Supplementary Data
The Consolidated Financial Statements and schedules listed in the Index to Financial Statements,
Schedules and Exhibits on page F-1 are filed as part of this report.
Part II. Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure
Not applicable.
Part II. Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures.
The Company's management, including the CEO and CFO, does not expect that our disclosure
controls or our internal control over financial reporting will prevent or detect all error and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute
assurance that the control system's objectives will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative to their
costs. The design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures.
45
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934,as amended (the
""Exchange Act''), our management, including our Chairman and Senior Executive, Chief Executive
Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined by Rule 13a-15(e) and 15d-15(e) under the Exchange Act).
Based upon that evaluation, our Chairman and Senior Executive, Chief Executive Officer and Chief
Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls
and procedures were effective in providing reasonable assurance that information we are required to
disclose in our filings with the SEC under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and include controls and
procedures designed to ensure that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is accumulated and communicated to management, including our
principal executive and principal financial officers, as appropriate to allow timely decisions regarding
required disclosure.
Changes in internal control over financial reporting.
We have been evaluating, designing and enhancing controls related to processes that previously were
handled by IAC, including equity transactions, income taxes, derivatives, treasury functions, and periodic
reporting in accordance with SEC rules and regulations. We also have been evaluating our internal
controls over financial reporting and discussing these matters with our independent accountants and our
audit committee.
Based on these evaluations and discussions, we consider what revisions, improvements, or corrections
are necessary in order for us to conclude that our internal controls are effective. As part of this process we
have identified a number of areas where there is a need for improvement in our internal controls over
financial reporting. We are in the process of designing and implementing controls and processes to address
the issues identified through this review.
As part of this ongoing process to improve our internal controls over financial reporting, we have
taken the following actions:
(a) Hiring a new financial management team, including our Chief Financial Officer, Chief
Accounting Officer, Vice President of Accounting Operations and Vice President of Corporate Audit
Services,
(b) Adding experienced staff to handle processes that previously were handled by IAC, including
treasury, income taxes, stock compensation and equity transactions, derivatives and periodic reporting
under SEC rules and regulations,
(c) Replacing a large number of temporary staff in accounting operations with experienced
accountants,
(d) Putting into place a more rigorous and timely process of account reconciliations, and
(e) Increasing communication between our operations and accounting departments.
Except as set forth in (a)-(e) above, there were no changes to our internal controls over financial
reporting that occurred during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. We expect to continue
monitoring and evaluating our disclosure controls and internal control over financial reporting on an
ongoing basis in an effort to improve their overall effectiveness. In the course of this evaluation, we
anticipate we will continue to modify and refine our internal processes over several reporting periods.
Part II. Item 9B. Other Information
None.
46
Part III.
We are incorporating by reference the information required by Part III of this report on Form 10-K
from our proxy statement relating to our 2006 annual meeting of stockholders that will be held on May 23,
2006, which will be filed with the Securities and Exchange Commission within 120 days after the end of
our fiscal year ended December 31, 2005.
Item 10
Item 11
Item 12
Item 13
Item 14
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Part IV. Item 15. Consolidated Financial Statement and Exhibits
(a)(1) Consolidated Financial Statements and (2) Financial Statement Schedules
We have filed the consolidated financial statements and consolidated financial statement schedules
listed in the Index to Consolidated Financial Statements, Schedules and Exhibits on page F-1 as a part of
this report.
(b)(3) Exhibits
The exhibits listed below are filed as part of this Annual Report on Form 10-K.
Exhibit
Number
2.1
3.1
3.2
3.3
4.1
4.2
4.3
4.4
10.1*
10.2*
10.3*
10.4*
10.5*
10.6
Description
Separation Agreement by and between Expedia, Inc. and IAC/InterActiveCorp, dated as of
August 9, 2005(5)
Amended and Restated Certificate of Incorporation of Expedia, Inc.(1)
Series A Cumulative Convertible Preferred Stock Certificate of Designation(1)
Amended and Restated Bylaws of Expedia, Inc.(1)
Specimen Expedia, Inc. Common Stock Certificate(2)
Equity Warrant Agreement for Warrants to Purchase up to 14,590,514 Shares of Common Stock
expiring February 4, 2009, by and between Expedia, Inc. and The Bank of New York, dated as of
August 9, 2005(3)
Stockholder Equity Warrant Agreement for Warrants to Purchase up to 11,450,182 Shares of
Common Stock, by and between Expedia, Inc. and Mellon Investor Services LLC, dated as of
August 9, 2005(3)
Optionholder Equity Warrant Agreement for Warrants to Purchase up to 1,558,651 Shares of
Common Stock, by and between Expedia, Inc. and Investor Services LLC, dated as of August 9,
2005(3)
Employment Agreement by and between Mark Gunning and Expedia, Inc., effective as of
July 14, 2005(1)
Separation Agreement by and between Chris Bellairs and Expedia, Inc., effective as of August 12,
2005(1)
Expedia, Inc. Deferred Compensation Plan for Non-Employee Directors(2)
Expedia, Inc. 2005 Stock and Annual Incentive Plan(4)
Summary of Expedia, Inc. Non-Employee Director Compensation Arrangements(2)
Governance Agreement, by and among Expedia, Inc., Liberty Media and Barry Diller, dated as of
August 9, 2005(5)
47
Exhibit
Number
10.7
10.8*
10.9*
10.10
10.11
10.12
10.13
Description
Stockholders Agreement, by and between Liberty Media Corporation and Barry Diller, dated as
of August 9, 2005(5)
Form of Restricted Stock Unit Agreement (domestic employees)(5)
Form of Restricted Stock Unit Agreement (directors)(5)
CRS Marketing, Services and Development Agreement, by and between Worldspan, L.P. and
Expedia, Inc., a Washington corporation (or its predecessors), dated as of December 15, 1995, as
amended by amendments Nos. 1 through 10(6)
Tax Sharing Agreement by and between Expedia, Inc. and IAC/InterActiveCorp, dated as of
August 9, 2005(5)
Employee Matters Agreement by and between Expedia, Inc. and IAC/InterActiveCorp, dated as
of August 9, 2005(5)
Transition Services Agreement by and between Expedia, Inc. and IAC/InterActiveCorp, dated as
of August 9, 2005(5)
10.14* Expedia, Inc. Executive Deferred Compensation Plan, effective as of August 9, 2005(7)
10.15
Credit Agreement dated as of July 8, 2005, among Expedia, Inc., a Delaware corporation,
Expedia, Inc., a Washington corporation, Travelscape, Inc., a Nevada corporation, Hotels.com, a
Delaware corporation and Hotwire, Inc., a Delaware corporation, as Borrowers; the Lenders party
thereto; Bank of America, N.A., as Syndication Agent; Wachovia Bank, N.A. and The Royal
Bank of Scotland PLC, as Co-Documentation Agents; JPMorgan Chase Bank, N.A., as
Administrative Agent; and J.P. Morgan Europe Limited, as London Agent.(8)
10.16* Expedia Restricted Stock Unit Agreement between Dara Khosrowshahi and Expedia, Inc., dated
21.1
23.1
23.2
31.1
31.2
31.3
32.1
32.2
32.3
as of March 7, 2006
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
Certification of the Chairman and Senior Executive pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
Certification of the Chairman and Senior Executive pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
* Reflects management contracts and management and director compensatory plans.
(1) Incorporated by reference to Expedia, Inc.'s Current Report on Form 8-K dated as of August 15,
2005.
(2) Incorporated by reference to Expedia, Inc.'s Registration Statement on Form S-4 (File
No. 333-124303-01), filed on June 13, 2005, as amended.
(3) Incorporated by reference to Expedia, Inc.'s Registration Statement on Form 8-A12G, filed on
July 19, 2005, as amended.
48
(4) Incorporated by reference to Expedia, Inc.'s Registration Statement on Form S-8 (File
No. 333-127324) filed on August 9, 2005.
(5) Incorporated by reference to Expedia, Inc.'s Quarterly Report on Form 10-Q for the quarter ending
September 30, 2005.
(6) Incorporated by reference to Expedia, Inc.'s Registration Statement on Form S-4 (File
No. 333-124303-01), filed on June 17, 2005. Certain portions of this document have been omitted
pursuant to a confidential treatment request.
(7) Incorporated by reference to Expedia, Inc.'s Current Report on Form 8-K dated as of December 20,
2005.
(8) Incorporated by reference to Expedia, Inc.'s Current Report on Form 8-K dated as of July 15, 2005.
49
Pursuant to the requirements of the Section 13 or 15(d) Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
Signatures
March 30, 2006
Expedia, Inc.
By: /s/ DARA KHOSROWSHAHI
Dara Khosrowshahi
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated on March 30,
2006.
Signature
Title
/s/ DARA KHOSROWSHAHI
Dara Khosrowshahi
/s/ MARK S. GUNNING
Mark S. Gunning
Chief Executive Officer, President and Director
Executive Vice President and Chief Financial Officer
/s/ PATRICIA L. ZUCCOTTI
Patricia L. Zuccotti
Senior Vice President, Chief Accounting Officer and
Controller
/s/ BARRY DILLER
Barry Diller
/s/ VICTOR KAUFMAN
Victor Kaufman
/s/ A. GEORGE BATTLE
A. George Battle
JONATHAN DOLGEN
/s/
Jonathan Dolgen
/s/ WILLIAM FITZGERALD
William Fitzgerald
/s/ DAVID GOLDHILL
David Goldhill
/s/ PETER KERN
Peter Kern
JOHN MALONE
/s/
John Malone
Chairman of the Board
Vice Chairman, Director
Director
Director
Director
Director
Director
Director
50
Index to Consolidated Financial Statements, Schedules and Exhibits
Consolidated Financial Statements
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Balance Sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income ÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Cash Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
F-2
F-4
F-5
F-6
F-7
F-8
Exhibits
Index to Exhibits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-38
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Expedia, Inc.
We have audited the accompanying consolidated balance sheet of Expedia, Inc. (the Company) as of
December 31, 2005, and the related consolidated statements of income, stockholders' equity and
comprehensive income and cash flows for the year ended December 31, 2005. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Expedia, Inc. at December 31, 2005, and the consolidated results of its
operations and its cash flows for the year ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States.
Seattle, Washington
March 27, 2006
/s/ Ernst & Young LLP
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Expedia, Inc.
We have audited the accompanying combined balance sheet of Expedia, Inc. (the Company) as of
December 31, 2004, and the related combined statements of income, stockholders' equity and
comprehensive income and cash flows for each of the two years in the period ended December 31, 2004.
These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material
respects, the combined financial position of Expedia, Inc. as of December 31, 2004, and the combined
results of its operations and its cash flows for each of the two years in the period ended December 31,
2004, in conformity with accounting principles generally accepted in the United States.
New York, New York
April 18, 2005
/s/ Ernst & Young LLP
F-3
Consolidated Financial Statements
EXPEDIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,119,455
470,716
$1,843,013
390,318
$2,339,813
1,233,743
Year Ended December 31,
2004
2003
2005
1,648,739
1,452,695
1,106,070
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses:
Selling and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Technology and content ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of non-cash distribution and marketing ÏÏÏÏÏÏÏÏÏ
Merger costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income (expense):
Interest income:
697,503
211,515
112,280
126,067
91,725
12,597
Ì
397,052
Interest income from IAC/InterActiveCorpÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other interest income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Write-off of long-term investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
40,089
8,584
(23,426)
(8,428)
Total other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
16,819
653,018
160,965
85,020
125,091
171,400
16,728
Ì
240,473
30,851
7,505
Ì
(9,286)
29,070
Earnings before income taxes and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest in loss (income) of consolidated subsidiaries ÏÏÏ
413,871
(185,977)
269,543
(106,371)
836
301
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 228,730
$ 163,473
$ 111,407
Net earnings per share available to common stockholders:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
0.68
0.65
$
0.49
0.48
0.33
0.33
Shares used in computing earnings per share:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
336,819
349,530
335,540
340,549
335,540
340,549
See notes to consolidated financial statements.
F-4
463,684
113,633
59,743
76,073
95,781
41,974
11,664
243,518
Ì
19,709
Ì
(7,729)
11,980
255,498
(97,202)
(46,889)
EXPEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
2005
2004
ASSETS
Current assets:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restricted cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and notes receivable, net of allowance of $3,914 and $2,338 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receivable from IAC/InterActiveCorp ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid merchant bookings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses and other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term investments and other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TOTAL ASSETSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, merchant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable, tradeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred merchant bookings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other long-term liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commitments and contingencies (Note 16)
Stockholders' equity:
Preferred stock $.001 par value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Authorized shares: 100,000,000
Series A shares issued and outstanding: 846
Common stock $.001 par value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 297,416
23,585
174,019
Ì
Ì
30,655
64,569
590,244
90,984
39,431
1,176,503
5,859,730
$7,756,892
$ 515,561
127,260
230,755
406,948
7,068
43,405
3,178
104,050
1,438,225
368,880
105,827
38,423
71,774
Ì
323
Authorized shares: 1,600,000,000
Shares issued: 323,184,577
Shares outstanding: 321,979,486
Class B common stock $.001 par value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
26
Authorized shares: 400,000,000
Shares issued and outstanding: 25,599,998
$ 141,668
13,889
143,905
1,874,745
8,696
28,151
34,803
2,245,857
81,426
140,432
1,279,361
5,790,111
$9,537,187
$ 429,739
98,666
Ì
361,199
5,353
421
Ì
86,801
982,179
333,696
12,812
37,436
18,435
Ì
Ì
Ì
Invested capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock Ì Common stock, at cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
5,695,498
(25,464)
8,118,961
Ì
Ì
Shares: 1,205,091
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive (loss) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
64,978
(1,598)
5,733,763
$7,756,892
Ì
33,668
8,152,629
$9,537,187
See notes to consolidated financial statements.
F-5
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EXPEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2004
2003
2005
Operating activities:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 228,730
Adjustments to reconcile net income to net cash provided by
$
163,473
$
111,407
operating activities:
DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized loss on derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in income of unconsolidated affiliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interest in (loss) income of consolidated subsidiaries
Write-off of long-term investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in operating assets and current liabilities:
Accounts and notes receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid merchant bookings and prepaid expensesÏÏÏÏÏÏÏÏÏÏ
Accounts payable and other current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred merchant bookings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
50,445
230,389
68,198
6,042
(1,668)
(836)
23,426
1,161
(21,833)
(22,492)
241,567
45,051
1,715
Ì
Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
849,895
Investing activities:
44,066
313,219
(5,295)
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(175)
(301)
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161
10,904
3,038
225,679
54,872
(2,463)
(4,325)
802,853
34,772
213,828
774
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(9)
46,889
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2,392
(52,007)
(23,043)
221,550
69,474
13,981
4,015
644,023
Acquisitions, net of cash acquiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sale of marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Increase) decrease in long-term investments and depositsÏÏÏÏ
Transfers to IAC/InterActiveCorp, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10,547
(52,315)
(63)
1,000
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(757,206)
(2,937)
(261,390)
(53,407)
(5,015)
722,646
(62,441)
(1,272,714)
(85)
(704,885)
(46,183)
(1,259,388)
1,329,408
9,960
(548,356)
(32,093)
Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(801,343)
(932,406)
(1,251,537)
Financing activities:
Short-term borrowings, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in restricted cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from exercise of equity awards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Withholding taxes for stock option exercises ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Distribution to) contribution from IAC/InterActiveCorp, net
Principal payments on long-term obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
230,735
(9,495)
29,060
(86,556)
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(52,844)
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(4,393)
106,507
689
155,748
141,668
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(2,319)
Ì
Ì
Ì
103,807
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8,692
107,320
(13,768)
(36,001)
177,669
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(583)
57,358
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(98,492)
628,681
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(1,216)
585,748
(3,232)
(24,998)
202,667
Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 297,416
$
141,668
$
177,669
See notes to consolidated financial statements.
F-7
Expedia, Inc.
Notes to Consolidated Financial Statements
NOTE 1 Ì Organization and Basis of Presentation
Description of Business
Expedia, Inc. and its subsidiaries provide travel products and services to leisure and corporate travelers
in the United States (""U.S.'') and abroad. These travel products and services are offered through a
diversified portfolio of brands including: Expedia-branded websites, Hotels.com, Hotwire.com, our private
label programs (Worldwide Travel Exchange and Interactive Affiliate Network), Classic Vacations,
Expedia Corporate Travel (""ECT''), eLong, Inc. (""eLong'') and TripAdvisor. We refer to Expedia, Inc.
and its subsidiaries collectively as ""Expedia,'' the ""Company,'' ""us,'' ""we'' and ""our'' in these consolidated
financial statements.
Spin-Off from IAC/InterActiveCorp
On December 21, 2004, IAC/InterActiveCorp (""IAC'') announced its plan to separate into two
independent public companies to allow each company to focus on its individual strategic objectives. We
refer to this transaction as the ""Spin-Off.'' A new company, Expedia, Inc., was incorporated under
Delaware law in April 2005, to hold substantially all of IAC's travel and travel-related businesses
(""Expedia Businesses'').
On August 9, 2005, the Spin-Off of the Expedia Businesses from IAC was completed. Shares of
Expedia, Inc. began trading on The Nasdaq Stock Market, Inc. (""NASDAQ'') under the symbol
""EXPE.'' The Spin-Off affected our consolidated financial statements as described below.
Cash Transfer. Upon the Spin-Off, we transferred to IAC all cash in excess of $100 million,
excluding the cash and cash equivalents held by eLong.
Distribution of Intercompany Receivable and Payable Balances with IAC. Upon the Spin-Off, we
extinguished all intercompany receivable and payable balances with IAC by recording a non-cash
distribution to IAC for approximately $2.5 billion.
Contribution of Airplane.
In conjunction with the Spin-Off, we entered into a joint ownership and
cost sharing agreement with IAC, under which IAC transferred to us 50% ownership in an airplane, with a
value of $17.4 million, which is available for use by both companies. We will share equally in capital costs;
operating costs will be pro-rated based on actual usage. We have recorded our ownership interest in long-
term investments and other assets.
Contribution of Media Time.
In conjunction with the Spin-Off, we entered into a separation
agreement with IAC, under which Expedia retained rights to media time, with a value of $17.1 million, in
IAC's media channels. The media time, if unused, expires in July 2007. We have recorded the asset rights
in prepaid expenses and other assets and recognize the related expense as we use the media time. We
currently anticipate that the media time will be substantially utilized, and expensed, in 2006.
Derivative Instruments. Upon the Spin-Off, we assumed certain obligations to IAC related to IAC's
Ask Jeeves Convertible Subordinated Notes (""Ask Jeeves Notes'') and certain IAC stock warrants. We
have recorded these obligations as derivative liabilities at their fair values on our consolidated balance
sheet. For additional information about these obligations, see Note 10, Derivative Instruments.
Modification of Stock-Based Compensation Awards. Upon the Spin-Off, we issued restricted stock
units (""RSU''), stock options and warrants to replace the IAC stock-based compensation awards. For
additional information about the modifications, see Note 12, Stock-Based Awards and Other Equity
Instruments.
Recapitalization. Upon the Spin-Off, IAC common stockholders received one share of Expedia
common stock for each share of IAC common stock they held, and IAC Class B common stockholders
F-8
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
received one share of Expedia Class B common stock for each share of IAC Class B common stock they
held. The holders of IAC preferred stock were entitled to receive shares of Expedia preferred stock based
on a formula or cash ($50 per share plus accrued and unpaid dividends). Substantially all of the IAC
Series A preferred stockholders elected to receive cash. This transaction was recorded by IAC immediately
prior to the Spin-Off and is not reflected in the financial statements. For additional information about our
common stock, Class B common stock and preferred stock, see Note 14, Common Stock, Class B
Common Stock and Preferred Stock.
Basis of Presentation
The accompanying consolidated financial statements include Expedia, Inc., our wholly owned
subsidiaries, and entities we control. We record our investments in entities that we do not control, but over
which we have the ability to exercise significant influence, using the equity method. We record our
investments in entities over which we do not have the ability to exercise significant influence using the cost
method. We have eliminated significant intercompany transactions and accounts.
These consolidated financial statements present our results of operations, financial position,
stockholders' equity and comprehensive income, and cash flows since IAC acquired each of the Expedia
Businesses on a combined basis up through the Spin-Off on August 9, 2005, and on a consolidated basis
thereafter.
We have prepared the combined financial statements from the historical results of operations and
historical bases of the assets and liabilities of Expedia with the exception of income taxes. We have
computed income taxes using our stand-alone tax rate.
We believe that the assumptions underlying our consolidated financial statements are reasonable.
However, these consolidated financial statements do not present our future financial position, the results of
our future operations and cash flows, nor do they present what our historical financial position, results of
operations and cash flows would have been prior to Spin-Off had we been a stand-alone company.
Seasonality
We generally experience seasonal fluctuations in the demand for our travel products and services. For
example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers
plan and book their spring, summer and holiday travel. The number of bookings decreases in the fourth
quarter. Because revenue in the merchant business is generally recognized when the travel takes place
rather than when it is booked, revenue typically lags bookings by a month or longer. As a result, revenue is
typically the lowest in the first quarter and highest in the third quarter.
NOTE 2 Ì Significant Accounting Policies
Consolidation
Our consolidated financial statements include the accounts of Expedia, Inc., our wholly owned
subsidiaries, and entities for which we control a majority of the entity's outstanding common stock. We
record minority interest in our consolidated financial statements to recognize the minority ownership
interest in our consolidated subsidiaries. Minority interests in the earnings and losses of consolidated
subsidiaries represent the share of net income or loss allocated to members or partners in our consolidated
entities, which include the minority interest share of net income or loss from eLong, TripAdvisor and
ECT Ì Europe (formerly Egencia). We have eliminated significant intercompany transactions and
accounts in our consolidated financial statements.
F-9
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
Accounting Estimates
We use estimates and assumptions in the preparation of our consolidated financial statements in
accordance with accounting principles generally accepted in the United States (""GAAP''). Our estimates
and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of our consolidated financial statements. These estimates and assumptions also
affect the reported amount of net income during any period. Our actual financial results could differ
significantly from these estimates. Our significant estimates underlying our consolidated financial
statements include revenue recognition, accounting for merchant payables, recoverability of long-lived and
intangible assets and goodwill, income taxes, occupancy tax, stock-based compensation and accounting for
derivative instruments.
Revenue Recognition
We offer travel products and services on a stand-alone and package basis primarily through two
business models: the merchant model and the agency model.
Under the merchant model, we facilitate the booking of hotel rooms, airline seats, car rentals and
destination services from our travel suppliers and we are the merchant of record for such bookings.
Under the agency model, we act as the agent in the transaction, passing reservations booked by the
traveler to the relevant travel provider. We receive commissions or ticketing fees from the travel supplier
and/or traveler. For agency airline, hotel and car transactions, we also receive fees from global distribution
systems partners that control the computer systems through which these reservations are booked.
We record revenue based principally on Staff Accounting Bulletin (""SAB'') No. 104 ""Revenue
Recognition.'' We recognize revenue when it is earned and realizable based on the following criteria:
persuasive evidence of an arrangement exists, services have been rendered, the price is fixed or
determinable and collectibility is reasonably assured.
The prevailing accounting guidance with respect to the presentation of revenue on a gross versus a net
basis is contained in Emerging Issues Task Force No. 99-19, ""Reporting Revenue Gross as a Principal
versus Net as an Agent (""EITF 99-19'').'' The consensus of this literature is that the presentation of
revenue as ""the gross amount billed to a customer because it has earned revenue from the sale of goods or
services or the net amount retained (that is, the amount billed to a customer less the amount paid to a
supplier) because it has earned a commission or fee'' is a matter of judgment that depends on the relevant
facts and circumstances. If the conclusion drawn is that we perform as an agent or a broker without
assuming the risks and rewards of ownership of goods, revenue should be reported on a net basis.
In making an evaluation of this issue, some of the factors that should be considered are: whether we
are the primary obligor in the arrangement (strong indicator); whether we have general inventory risk
(before customer order is placed or upon customer return) (strong indicator); and whether we have
latitude in establishing price. EITF 99-19 clearly indicates that the evaluations of these factors, which at
times can be contradictory, are subject to significant judgment and subjectivity.
Merchant Hotel
Our travelers pay us for merchant hotel transactions prior to departing on their trip, generally when
they book the reservation. We record the payment in deferred merchant bookings until the stay occurs, at
which point we record the revenue. In certain non-refundable, non-changeable transactions where we have
no significant post-delivery obligations, we record revenue when the traveler completes the transaction on
our website, less a reserve for chargebacks and cancellations based on historical experience. In certain
instances when a supplier invoices us for less than the cost we accrued, we recognize those amounts as
F-10
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
revenue six months in arrears, net of an allowance, when we determine it is not probable that we will be
required to pay the supplier, based on historical experience.
We generally contract in advance with lodging providers to obtain access to room allotments at
wholesale rates. Certain contracts specifically identify the number of potential rooms and the negotiated
rate of the rooms to which we may have access over the terms of the contracts, which generally range
from one to three years. Other contracts are not specific with respect to the number of rooms and the
rates of the rooms to which we may have access over the terms of the contracts. In either case we may
return unbooked hotel room allotments with no obligation to the lodging providers within a period specified
in each contract. For hotel rooms that are cancelled by the traveler after the specified period of time, we
charge the traveler a cancellation fee or penalty that is at least equal to the amount a hotel may invoice us
for the cancellation.
Beginning January 1, 2004, as part of the integration of our businesses, Hotels.com conformed its
merchant hotel business practices with those of our other businesses. As a result, we commenced
prospectively reporting revenue for Hotels.com on a net basis. This change in reporting did not affect gross
profit, operating income or net income.
Merchant Air
Generally, we determine the ticket price for merchant air transactions. We pay the cost of the airline
ticket within two weeks after booking. We record cash paid by the traveler as deferred merchant bookings
and the cost of the airline ticket as prepaid merchant bookings. When the flight occurs, we record the
difference between the deferred merchant bookings and the prepaid merchant bookings as revenue on a net
basis.
When we have nonrefundable and generally noncancelable merchant air transactions, with no
significant post-delivery obligations, we record revenue upon booking. We record a reserve for chargebacks
and cancellations at the time of the transaction based on historical experience.
Agency Air, Hotel, Car and Cruise
Our agency revenue comes from airline ticket transactions, certain hotel transactions as well as cruise
and car rental reservations. We record agency revenue on air transactions when the traveler books the
transaction, as we have no significant post-delivery obligations. We record agency revenue on hotel
reservations, cruise and car rental reservations either on an accrual basis for payments from a commission
clearinghouse, or on receipt of commissions from an individual supplier. We record an allowance for
cancellations and chargebacks on this revenue based on historical experience.
Click-Through Fees
We record revenue from click-through fees charged to our travel partners for traveler leads sent to the
travel partners' websites. We record revenue from click-through fees after the traveler makes the click-
through to the related travel partners' websites.
Advertising
We record advertising revenue ratably over the advertising period or upon delivery of advertising
impressions, depending on the terms of the advertising contract.
Other
We record revenue from all other sources either upon delivery or when we provide the service.
F-11
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
Cash and Cash Equivalents
Our cash and cash equivalents include cash and liquid financial instruments with original maturities of
90 days or less when purchased.
Accounts Receivable
Accounts receivable are generally due within thirty days and are recorded net of an allowance for
doubtful accounts. We consider accounts outstanding longer than the contractual payment terms as past
due. We determine our allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, previous loss history, a specific traveler's ability to pay its obligations to
us, and the condition of the general economy and industry as a whole.
Property and Equipment
We record property and equipment at cost, net of accumulated depreciation and amortization. We
also capitalize certain costs incurred related to the development of internal use software in accordance with
Statement of Position 98-1, ""Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use,'' and EITF No. 00-02, ""Accounting for Website Development Costs.'' We capitalize costs
incurred during the application development stage related to the development of internal-use software. We
expense costs incurred related to the planning and post-implementation phases of development as incurred.
We compute depreciation using the straight-line method over the estimated useful lives of the assets,
which range from three to five years for computer equipment and capitalized software development, and
three to seven years for furniture and other equipment. We amortize leasehold improvement using the
straight-line method, over the shorter of the estimated useful life of the improvement or the remaining
term of the lease.
Goodwill and Indefinite-Lived Intangible Assets
In accordance with SFAS No. 142, ""Goodwill and Other Intangible Assets,'' (""SFAS 142''), goodwill
is assigned to reporting units that are expected to benefit from the synergies of the business combination as
of the acquisition date. We assess goodwill and indefinite-lived intangible assets, neither of which are
amortized, for impairment annually at the beginning of the fourth quarter, or more frequently if events and
circumstances indicate impairment may have occurred.
In the evaluation of goodwill for impairment, we first compare the fair value of reporting unit to the
carrying value. If the carrying value of the reporting unit exceeds the fair value, the goodwill of the
reporting unit is potentially impaired and we proceed to step two of the impairment analysis which we will
record an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its
implied fair value.
In evaluation of indefinite-lived intangible assets, an impairment charge is recorded for the excess the
carrying value of indefinite-lived intangible assets over their fair value.
We generally base our measurement of fair value of reporting units on a blend of an analysis of the
present value of estimated future discounted cash flows and a comparison of revenue and operating income
multiples for companies of similar industry and/or size. Our analysis is based on available information and
on assumptions and projections that we consider to be reasonable and supportable. The discounted cash
flow analysis considers the likelihood of possible outcomes and is based on our best estimates of projected
future cash flows. We base our measurement of fair value of indefinite-lived intangible asset, which
primarily consist of tradename and trademarks using the relief-from-royalty method. This method assumes
F-12
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
that the tradename and trademarks have value to the extent that their owner is relieved of the obligation
to pay royalties for the benefits received from them.
Intangible Assets with Definite Lives and Other Long-Lived Assets
In accordance with SFAS No. 144, ""Accounting for the Impairment or Disposal of Long-Lived
Assets,'' we review the carrying value of intangible assets with definite lives and other long-lived assets,
which we amortize on a straight-line basis over the estimated useful lives of two to ten years, on a regular
basis for the existence of facts that may indicate that the assets are impaired. If such facts indicate a
potential impairment, we estimate the fair value of the asset using appropriate valuation methodologies,
usually based on estimated future discounted cash flows. If the fair value is determined to be less than an
asset's carrying value, we then further evaluate to determine whether or not the carrying value is
unrecoverable. Our analyses are based on available information and on assumptions and projections that we
consider to be reasonable and supportable.
Our impairment evaluations as of October 1, 2005, 2004 and 2003, indicated that we did not have any
impairment to our goodwill, intangible assets and long-lived assets.
Investments
We record investments using the cost basis when we do not have the ability to exercise significant
influence over the investee and generally when our ownership in the investee is less than 20%. We record
investments using the equity method when we have the ability to exercise significant influence over the
investee. We periodically evaluate the recoverability of investments and record a write-down if a decline in
value is determined to be other-than-temporary.
Income Taxes
In accordance with SFAS No. 109, ""Accounting for Income Taxes,'' we record income taxes under
the liability method. Deferred tax assets and liabilities reflect the expected future tax consequences of
temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We
determine deferred income taxes based on the differences in accounting methods and timing between
financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability
for each temporary difference based on the tax rates that we expect will be in effect when we realize the
underlying items of income and expense. We consider many factors when assessing the likelihood of future
realization of our deferred tax assets, including our recent earnings experience by jurisdiction, expectations
of future taxable income, and the carryforward periods available to us for tax reporting purposes, as well as
other relevant factors. We may establish a valuation allowance to reduce deferred tax assets to the amount
we expect to realize. Due to inherent complexities arising from the nature of our businesses, future
changes in income tax law, tax sharing agreements or variances between our actual and anticipated
operating results, we make certain judgments and estimates. Therefore, actual income taxes could vary
from these estimates.
Occupancy Tax
Some states and localities impose a transient occupancy or accommodation tax, or a form of sales tax,
on the use or occupancy of hotel accommodations. Hotel operators generally collect and remit these taxes
to the various tax authorities. Consistent with this practice, when a customer books a room through one of
our travel services, the hotel charges the customer taxes based on the room rate paid to the hotel, we pay
the hotel those taxes invoiced by the hotel and we recover an equivalent amount from the customer. We
do not collect or remit occupancy taxes on the portion of the customer payment we retain, and some
jurisdictions have questioned our practice in this regard. While the applicable tax provisions vary among
F-13
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
the jurisdictions, we generally believe that we are not required to collect and remit such occupancy taxes.
We are engaged in discussions with tax authorities in various jurisdictions to resolve this issue, but the
ultimate resolution in all jurisdictions cannot be determined at this time. We have established a reserve
with respect to potential occupancy tax liability and we do not believe, however, that the amount of
liability on account of this issue, if any, will have a material adverse effect on our past or future financial
results.
Derivative Instruments
We record the fair value of derivative instruments on our consolidated balance sheets in accordance
with SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities'' (""SFAS 133''), as
amended. We use derivative instruments to manage certain foreign currency risks. We record the changes
in the fair value of a derivative that qualifies as and that we designate as a cash flow hedge, to the extent
that the hedge is effective, in other comprehensive income, until earnings are affected by the variability of
cash flows of the hedged transaction. We reclassify amounts recorded in other comprehensive income to
other income or expense during the period in which the hedged transaction affects earnings. We report the
ineffective portion of a derivative instruments change in fair value immediately in other income or expense
in our consolidated statements of income. We report the change in the fair value of derivative instruments
that do not qualify for hedge accounting treatment in other income or expense in our consolidated
statements of income. We do not hold or issue financial instruments for speculative or trading purposes.
For additional information about derivative instruments, see Note 10, Derivative Instruments.
Foreign Currency Translation and Transaction Gains and Losses
We record foreign currency transactions in accordance with SFAS No. 52, ""Foreign Currency
Translation.'' Our operations outside of the United States use the related local currency as their functional
currency. We translate revenue and expense at average rates of exchange during the period. We translate
assets and liabilities at the rates of exchange as of the consolidated balance sheet dates and include foreign
currency translation gains and losses as a component of accumulated other comprehensive income. We
record transaction gains and losses in our consolidated statements of income.
Advertising Expense
We incur advertising expense consisting of offline costs, including television and radio advertising, and
online advertising expense to promote our brands. We expense the production costs associated with
advertisements in the period in which the advertisement first takes place. We expense the costs of
communicating the advertisement (e.g. television airtime) as incurred each time that the advertisement is
shown. For the years ended December 31, 2005, 2004 and 2003, our advertising expense was
$425.2 million, $452.9 million and $389.6 million.
Stock-Based Compensation
On January 1, 2003, we adopted the expense provisions of SFAS No. 123, ""Accounting for Stock-
Based Compensation'', (""SFAS 123''), and we record expense for stock-based compensation in accordance
with SFAS No. 123 and SFAS No. 148, ""Accounting for Stock-Based Compensation Ì Transition and
Disclosure'', for all periods presented in our consolidated statements of income.
We measure the value of RSUs issued at the grant date at fair value and amortize the value, net of
forfeitures, as stock-based compensation expense over the vesting term on a straight-line basis. The terms
of our RSU awards vary, but generally provide for the underlying shares to vest over a period of 5 years.
We measure the value of stock options and warrants issued since January 1, 2003, including unvested
options assumed in acquisitions, on the grant date (or acquisition dates, if applicable) at fair value, using
F-14
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
the Black-Scholes option valuation model and amortize the fair value over the remaining vesting term on a
straight-line basis.
In determining the estimated forfeiture rates, we periodically conduct an assessment of the actual
number of instruments that have been forfeited to date as well as those expected to be forfeited in the
future. We consider many factors when estimating expected forfeitures, including the type of award, the
employee class and historical experience. The estimation of stock awards that will ultimately be forfeited
requires significant judgment and to the extent that actual results or updated estimates differ from our
current estimates, such amounts will be recorded as a cumulative adjustment in the period such estimates
are revised. For additional information about the changes in estimated forfeiture rates, see Note 12, Stock-
Based Awards and Other Equity Instruments.
The following table presents the effect on net income if the fair value based method was applied to
the outstanding and unvested awards for the year ended December 31, 2003. For the years ended
December 31, 2005 and 2004, the stock-based compensation expense included in net income equaled the
stock-based compensation expense determined under the fair value based method for all awards.
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add: Stock-based employee compensation expense included in reported net
December 31, 2003
(In thousands)
$111,407
income, net of related tax effectsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
55,563
Deduct: Total stock-based compensation expense determined under fair value
based method for all awards, net of related tax effects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(74,636)
Pro forma net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 92,334
Earnings Per Share
We compute basic earnings per share, in accordance with SFAS No. 128, ""Earnings per Share,''
(""SFAS 128''), by taking net income available to common shareholders divided by the weighted average
number of common and Class B common shares outstanding during the period excluding restricted stock
and stock held in escrow. Diluted earnings per share include the potential dilution that could occur from
stock-based awards and other stock-based commitments using the treasury stock or the as if converted
methods, as applicable. For additional information on how we compute earnings per share, see Note 15,
Earnings Per Share.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents reported
on our consolidated balance sheets approximate fair value as we maintain them with various high-quality
financial institutions or in short-term duration high-quality debt securities. The accounts and notes
receivable are short-term in nature and are generally settled shortly after the sale. The carrying amounts
for the short-term borrowings and all other financial instruments approximate their fair value. We maintain
the carrying amounts of the derivative liabilities created in the Spin-Off at fair value, which is based upon
appropriate valuation methodologies.
Certain Risks and Concentrations
Our business is subject to certain risks and concentrations including dependence on relationships with
travel suppliers, primarily airlines and hotels, dependence on third party technology providers, exposure to
risks associated with online commerce security and credit card fraud. We are highly dependent on our
F-15
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
relationships with six major airlines in the United States. We also depend on global distribution system
partners and third party service providers for certain fulfillment services.
Financial instruments, which potentially subject us to concentration of credit risk, consist primarily of
cash and cash equivalents. We maintain some cash and cash equivalents balances with financial
institutions that are in excess of Federal Deposit Insurance Corporation insurance limits.
Contingent Liabilities
We have a number of regulatory and legal matters outstanding, as discussed further in Note 16,
Commitments and Contingencies. We provide for contingent liabilities in accordance with SFAS No. 5
""Accounting for Contingencies,'' (""SFAS 5''). In accordance with SFAS 5 a loss contingency is charged
to income when (i) it is probable that an asset has been impaired or a liability has been incurred at the
date of the consolidated financials statements and (ii) the amount of the loss can be reasonably estimated.
Disclosure in the notes to the financial statements is required for loss contingencies that do not meet both
these conditions if there is a reasonable possibility that a loss may have been incurred. We do not record
gain contingencies until realized. We expense all related legal costs as incurred. Periodically, we review the
status of each significant matter to assess the potential financial exposure. If a potential loss is considered
probable and the amount can be reasonably estimated as defined by SFAS 5, we record the estimated loss
in our consolidated statements of income. Significant judgment is required to determine the probability
that a liability has been incurred and whether such liability is reasonably estimable. We base accruals
made on the best information available at the time and are highly subjective. The final outcome of these
matters could vary significantly from the amounts included in the accompanying consolidated financial
statements.
NOTE 3 Ì Reclassifications
We reclassified certain amounts relating to our prior periods' results to conform with our current year
presentation. The significant reclassifications were as follows:
Consolidated Statements of Income. During 2005, we aligned our financial statement classification
across the Company. As a result, we reclassified certain amounts in 2004 and 2003 to conform to the
current year presentation as follows:
‚ Agency Commission Expense Ì We reclassified agency commission expense from cost of revenue
to selling and marketing for all periods presented.
‚ Personnel Expense Ì We reclassified certain personnel expense from general and administrative to
selling and marketing, technology and content, and cost of revenue.
‚ Depreciation Expense Ì We allocated depreciation to selling and marketing, general and adminis-
trative, and technology and content to report the depreciation associated with each of these
operating activities.
‚ Technology and Content Expense Ì We are now reporting technology and content as a separate
item on our consolidated statements of income.
F-16
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
The following table present a summary of the amounts as reported and as reclassified in our
consolidated statements of income for the years ended December 31, 2004 and 2003.
December 31, 2004
As
As
Reclassified
Reported
December 31, 2003
As
As
Reclassified
Reported
(In thousands)
Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,843,013
412,701
$1,843,013
390,318
$2,339,813
1,199,414
$2,339,813
1,233,743
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses:
Selling and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏ
Technology and content ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of intangiblesÏÏÏÏÏÏÏÏÏÏÏ
Stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏ
Amortization of non-cash distribution
and marketingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Merger costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,430,312
1,452,695
1,140,399
1,106,070
608,618
236,439
Ì
125,091
171,400
16,728
31,563
Ì
653,018
160,965
85,020
125,091
171,400
16,728
Ì
Ì
416,492
227,315
Ì
76,073
95,781
41,974
27,582
11,664
463,684
113,633
59,743
76,073
95,781
41,974
Ì
11,664
Operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 240,473
$ 240,473
$ 243,518
$ 243,518
Consolidated Balance Sheets. We reclassified $13.3 million from cash and cash equivalents to
restricted cash and cash equivalents as of December 31, 2004.
Consolidated Statements of Cash Flows.
In our consolidated statements of cash flows, we reclassified
the following items:
‚ Transfers to IAC Ì We reclassified $1.3 billion and $548.4 million of transfers to IAC from
financing activities to investing activities for the years ended December 31, 2004 and 2003. We
previously reported these transfers to IAC with contribution from (distribution to) IAC, net in
financing activities of the consolidated statements of cash flows.
‚ Restricted Cash and Cash Equivalents Ì We reclassified $13.3 million, $11.0 million and
$10.4 million as of December 31, 2004, 2003 and 2002, of restricted cash and cash equivalents from
cash and cash equivalents to changes in restricted cash and cash equivalents in financing activities
in the consolidated statements of cash flows.
NOTE 4 Ì New Accounting Pronouncements
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123(R) ""Share-Based Payment''
(""SFAS 123(R)''), and related guidance, which are revisions of SFAS 123. Generally, the approach in
SFAS 123(R) is similar to the approach described in SFAS 123; however, SFAS 123(R) requires that
companies record all share-based payments to employees, including grants of employee stock options, in
the statement of income based on their fair values. SFAS 123(R) also requires the benefits of tax
deductions in excess of recorded compensation cost to be reported as a financing cash flow, rather than as
an operating cash flow as required under current literature. We expect to continue using the Black-Scholes
option valuation model upon the required adoption of SFAS 123(R) on January 1, 2006.
F-17
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
In March 2005, the Securities and Exchange Commission issued SAB 107, which provides additional
guidance related to the implementation of SFAS 123(R), including guidance regarding valuation methods
and related assumptions, and classification of compensation expense and income tax effects of share-based
payment arrangements.
We adopted SFAS 123(R) and related guidance on January 1, 2006, and we do not expect it to have
a material effect on our results of operations or financial position.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, ""Accounting Changes and Error Corrections,''
(""SFAS 154''), which changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS 154 will require companies to account for and apply changes in accounting
principles retrospectively to prior periods' financial statements, instead of recording a cumulative effect
adjustment within the period of the change, unless it is impracticable to determine the effects of the
change to each period presented. SFAS 154 is effective for accounting changes and corrections made in
fiscal years beginning after December 15, 2005. We adopted SFAS 154 on January 1, 2006, and we do not
expect it to have a material impact on our financial position, results of operations or cash flows.
NOTE 5 Ì Business Acquisitions
On August 9, 2005, we completed the Spin-Off of the Expedia Businesses, all of which had been
acquired by IAC, either directly or through its subsidiaries. We have included these entities in our
historical combined financial statements from the dates of their respective acquisitions. We discuss the
significant business acquisitions below.
Fair value of net tangible assets
acquiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 79.0
$ 21.4
$ 3.8
$ 12.4
$
Ì(A) $
Ì(A)
eLong
TripAdvisor Eqencia Hotwire.com Expedia.com
Hotels.com
(In millions)
Intangible assets:
Supplier relationships ÏÏÏÏÏÏÏÏÏÏÏÏ
Customer relationships ÏÏÏÏÏÏÏÏÏÏÏ
Affiliate agreementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tradename and trademarks ÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net proceeds from warrant exercise ÏÏ
Deferred tax assets (liabilities) ÏÏÏÏÏÏ
Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3.5
3.0
Ì
Ì
1.4
14.5
77.9
53.7
(7.4)
(55.0)
Ì
2.5
Ì
Ì
22.1
30.3
163.0
Ì
(20.0)
Ì
1.3
13.4
Ì
Ì
2.9
0.5
42.1
Ì
1.7
Ì
28.5
1.3
Ì
Ì
7.0
90.0
533.0
Ì
(5.5)
Ì
67.3
7.5
114.1
78.8
Ì
531.3
2,737.0
Ì
(293.3)
326.7
63.4
0.3
Ì
Ì
40.2
115.7
683.3
Ì
(80.6)
357.0
Net Purchase Price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$170.6
$219.3
$65.7
$666.7
$3,569.4
$1,179.3
Weighted average life of intangible
assets (in years)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3.9
2.9
8.1
4.1
5.0
6.5
(A) We acquired a majority ownership interest in these entities prior to 2003; as such there was no
significant amount of step-up in basis of net tangible assets when we acquired the remaining shares of
these companies in 2003.
F-18
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
We generally obtain a third-party valuation of identifiable intangible assets acquired to support our
allocation of the purchase price to these assets. We based the net purchase price for our acquisitions on
historical as well as expected performance metrics, which include net income and cash flow. In certain
situations, we agreed to a purchase price that resulted in a significant amount of goodwill for the following
reasons: (1) the acquisitions' market leading position and brand, (2) business model which complements
the business models of our other brands, and (3) growth opportunities in the markets in which they
operate. As a result, we based the predominant portion of purchase price on the expected financial
performance of the business acquisition, and not the net asset value on the books at the time of the
acquisition. As a result, a significant amount of the purchase price was allocated to goodwill. Generally,
none of the amounts allocated to goodwill or intangible assets are tax deductible.
eLong
In August 2004, we purchased a 30% ownership interest in eLong, a publicly-traded Cayman Island
company, whose principal business is the operation of an internet-based travel business in the People's
Republic of China, for approximately $59.0 million in cash, which we accounted for under the equity
method. eLong's American Depositary Shares (""ADS'') trade on the NASDAQ under the symbol
""LONG.'' Each ADS is equivalent to two shares of eLong capital stock. Concurrent with this investment,
eLong issued a warrant to allow us to acquire additional shares, with an exercise price of approximately
$6.21 per share, or $108 million.
In January 2005, we exercised the warrant that increased our ownership interest to 59% and total
voting rights to approximately 96%. We accounted for the transaction under the purchase method and have
consolidated the operating results of eLong since the date of the warrant exercise. The aggregate purchase
price of $170.6 million included our initial investment, exercise of the warrant and related transaction
costs. Of the consideration paid on the exercise of the warrant, we used approximately $54 million to
purchase newly issued eLong common shares and approximately $54 million to purchase shares from
existing eLong shareholders. Net cash inflow as a result of cash paid on the warrant exercise, less the
equity infusion on the purchase of new common shares and acquisition of eLong's existing cash balance of
approximately $78 million, was approximately $19 million. As of December 31, 2005, our ownership
interest in eLong was 57%.
TripAdvisor
In April 2004 and July 2005, we acquired 94.1% and an additional 1%, respectively, of TripAdvisor, a
travel search engine and directory that enables consumers to research their travel and destination place
through the internet. The aggregate purchase price for our acquisition in April 2004 was $219.3 million.
Egencia
In April 2004, we acquired 91.4% of the ownership of Egencia (renamed ECT-Europe), an online
corporate travel agency in France, for an aggregate purchase price of $65.7 million.
Hotwire.com
In November 2003, we completed our acquisition of Hotwire.com, a discount travel website for
$666.7 million in cash, plus the assumption of options to acquire approximately 0.5 million shares of IAC
common stock, warrants to acquire approximately 0.1 million shares of IAC common stock and 0.3 million
restricted stock units.
F-19
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
Expedia.com
In August 2003, we completed our acquisition of all the outstanding shares of Expedia.com. Prior to
the acquisition, we owned approximately 59% of Expedia.com. The purchase price, after deducting the fair
value of unvested options and warrants to purchase IAC common stock, was $3.6 billion.
Hotels.com
In June 2003, we completed our acquisition of all the outstanding shares of Hotels.com. Prior to the
acquisition, we owned approximately 67% of Hotels.com. The purchase price, after deducting the fair value
of unvested options and warrants to purchase IAC common stock, was $1.2 billion.
NOTE 6 Ì Property and Equipment, Net
Our property and equipment consists of the following:
December 31,
2005
2004
(In thousands)
Computer equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized software development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Furniture and other equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 60,648
133,256
20,711
29,394
Ì
$
47,893
90,347
18,327
24,180
8
Less: accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Projects in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
244,009
(162,865)
9,840
180,755
(106,256)
6,927
Property and equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 90,984
$
81,426
As of December 31, 2005 and 2004, our recorded capitalized software development costs, net of
accumulated amortization, of $49.5 million and $38.7 million. For the years ended December 31, 2005,
2004 and 2003, we recorded amortization of capitalized software development costs of $38.6 million,
$24.0 million and $12.9 million.
NOTE 7 Ì Long-Term Investment and Other Assets
Write-off of Long-Term Investment
In 2005, we received information regarding the deteriorating financial condition of our long-term
investment in a leisure travel company and we determined that it was not likely we would recover any of
our investment because the decline in its value was determined to be other-than-temporary. As a result,
we recorded a loss related to this impairment of $23.4 million, which consisted of $22.5 million of
preferred stock and $0.9 million of stock warrants.
F-20
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
Equity Investment in Unconsolidated Affiliates
The following is a list of investments that we record using the equity method, the principal market in
which the venture operates, and the relevant ownership percentage:
December 31,
2004
2003
2005
L'Agence Voyages-SNCF.com (France)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
eLong, Inc. (People's Republic of China)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 30.0% Ì
49.9% 49.9% 47.0%
L'Agence Voyages-SNCF.com. We made an investment in travel and travel-related businesses abroad
through a joint venture with Sociπetπe Nationale des Chemins de Fer Fran•cais (""SNCF''), the state-owned
railway group in France, which operates www.voyages-sncf.com, an online site for e-tourism in France.
SNCF owns 50.1% and we own 49.9% of the joint venture as of December 31, 2005.
eLong. In August 2004, we purchased a 30% ownership interest in eLong, a publicly-traded Cayman
Island company, whose principal business is the operation of an internet-based travel business in the
People's Republic of China, for approximately $59.0 million in cash, which we accounted for under the
equity method. Concurrent with this investment, eLong issued a warrant to allow us to acquire additional
shares, with an exercise price of approximately $6.21 per share, or $108 million.
In October 2004, eLong completed an initial public offering (""IPO'') of its shares. As a result of the
IPO, our warrant became subject to the mark-to-market provisions of SFAS No. 115 ""Accounting for
Certain Investments in Debt and Equity Securities.'' As such, we recorded an unrealized gain of
$27.2 million, net of deferred taxes of $16.4 million, related to the warrant in other comprehensive income
in 2004. We reversed the unrealized gain in January 2005 upon exercise of our warrant.
For additional information about our acquisition of eLong, see Note 5, Business Acquisitions.
NOTE 8 Ì Goodwill and Intangible Assets
The following table presents our goodwill and intangible assets as of December 31, 2005 and 2004.
December 31,
2005
2004
(In thousands)
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assets with indefinite lives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assets with definite lives, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,859,730
912,972
263,531
$5,790,111
895,446
383,915
$7,036,233
$7,069,472
Our indefinite lived intangible assets relate principally to trade names and trademarks acquired in
various acquisitions. As of October 1, 2005, 2004 and 2003, we performed our annual impairment
assessment for goodwill and intangible assets. We do not have any goodwill or intangible assets that we
consider impaired.
F-21
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
The following table presents the changes in goodwill:
Beginning Balance as of January 1, ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign exchange translation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,790,111
140,482
(50,777)
(20,086)
$5,650,322
345,373
(218,840)
13,256
Ending Balance as of December 31, ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,859,730
$5,790,111
2005
2004
(In thousands)
In 2005, the additions to goodwill relate to new acquisitions, primarily eLong, as well as adjustments
to the carrying value of goodwill based upon the finalization of the valuation of intangible assets and their
related deferred tax impacts, and the deductions from goodwill relate to the income tax benefit realized
pursuant to the exercise of stock options assumed in business acquisitions that were vested at the
transaction date and are treated as a reduction in purchase price when the deductions are realized.
In 2004, the additions to goodwill principally relate to (1) acquisitions, primarily TripAdvisor and
Egencia, and (2) adjustments to the carrying value of goodwill based upon the finalization of the valuation
of intangible assets and their related deferred tax impacts. In 2004, the deductions from goodwill
principally relate to (1) the income tax benefit realized pursuant to the exercise of stock options assumed
in business acquisitions that were vested at the transaction date and are treated as a reduction in purchase
price when the deductions are realized; (2) adjustments to the carrying value of goodwill based upon the
finalization of the valuation of intangible assets and their related deferred tax impacts; and (3) the
elimination of valuation allowances recorded against purchased net operating losses.
The following table presents the components of our intangible assets with definite lives as of
December 31, 2005 and 2004.
December 31, 2005
December 31, 2004
Distribution agreements
Supplier relationship ÏÏÏ
TechnologyÏÏÏÏÏÏÏÏÏÏÏ
Customer lists ÏÏÏÏÏÏÏÏ
Affiliate agreements ÏÏÏ
Domain namesÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost
$177,426
211,670
187,540
25,163
33,049
10,871
47,364
Accumulated
Amortization
(In thousands)
Net
$(105,502) $ 71,924
61,346
(150,324)
68,527
(119,013)
7,897
(17,266)
24,760
(8,289)
8,951
(1,920)
20,126
(27,238)
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$693,083
$(429,552) $263,531
Weighted
Average
Life
(Years)
5.5
4.2
4.6
4.7
10.0
9.7
6.4
5.2
Cost
$176,722
208,776
187,753
21,662
33,049
10,865
50,007
Accumulated
Amortization
(In thousands)
Net
$ (78,362) $ 98,360
103,791
(104,985)
106,698
(81,055)
9,243
(12,419)
28,065
(4,984)
10,834
(31)
26,924
(23,083)
$688,834
$(304,919) $383,915
Weighted
Average
Life
(Years)
5.5
3.6
4.7
4.7
10.0
9.7
6.6
5.0
F-22
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
Amortization expense was $126.1 million, $125.1 million and $76.1 million for the years ended
December 31, 2005, 2004 and 2003. The estimated future amortization expense related to intangible assets
with definite lives as of December 31, 2005, assuming no subsequent impairment of the underlying assets,
is as follows:
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2011 and thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization
of Intangible
Assets
(In thousands)
$110,131
70,724
48,501
10,894
6,492
16,789
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$263,531
NOTE 9 Ì Short-term Borrowings
In July 2005, we entered into a $1.0 billion five-year unsecured revolving credit facility with a group
of lenders, which was effective as of the Spin-Off. Certain Expedia subsidiaries have unconditionally
guaranteed Expedia, Inc.'s obligation under this facility. The facility bears interest based on our financial
leverage, which as of December 31, 2005, was equal to LIBOR plus 0.50%. The facility also contains
financial covenants consisting of a leverage ratio and a minimum net worth requirement. As of
December 31, 2005, we were in compliance with all financial covenants.
The amount of stand-by letters of credit issued under the facility reduces the amount available to us
under the facility. As of December 31, 2005, there were $53.2 million of outstanding stand-by letters of
credit issued under the facility. We capitalized $3.5 million in financing costs related to the facility, and
we will amortize these costs to interest expense over the facility's five-year life. The annual fee to maintain
the facility is 0.1% on the unused portion of the facility, or approximately $1.0 million if all of the facility
is unused.
As of December 31, 2005, we had $230.8 million of outstanding short-term borrowings, of which
$230.0 million was borrowing under the revolving credit facility. As of March 24, 2006, we fully repaid the
revolving credit facility.
NOTE 10 Ì Derivative Instruments
The fair values of the derivative financial instruments generally represent the estimated amounts we
would expect to receive or pay upon termination of the contracts as of the reporting date. Components of
our derivative liabilities balance are as follows:
December 31,
2005
2004
(In thousands)
Ask Jeeves NotesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cross-currency swapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock warrants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$104,800
927
100
$ Ì
12,812
Ì
$105,827
$12,812
F-23
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
Ask Jeeves Notes
As a result of the Spin-Off, when holders of IAC's Ask Jeeves Notes convert their notes, they will
receive shares of both IAC and Expedia common stock, Under the terms of the Spin-Off, we are obligated
to issue shares of our common stock to IAC for delivery to the holders of the Ask Jeeves Notes, or
receive cash in equal value, in lieu of issuing such shares, at our option. This obligation represents a
derivative liability in our consolidated balance sheet because it is not indexed solely to shares of our
common stock. We record the fair value of this derivative obligation on our consolidated balance sheets
with any changes in fair value recorded in our consolidated statements of income. The estimated fair value
of this liability fluctuates based on changes in the price of our common stock. As of August 9, 2005, we
estimated that we could be required to issue up to 4.3 million shares of our common stock (or pay cash in
equal value, in lieu of issuing such shares, at our option), with a value of $99.7 million, upon conversion of
these notes.
In 2005, we recorded in other income an unrealized loss of $6.0 million related to the derivative
liability on the outstanding Ask Jeeves Notes, and a realized loss of $0.1 million related to Ask Jeeves
Notes that were converted. In December 2005, certain of these notes were converted for $0.9 million of
cash. Our estimated liability was $104.8 million as of December 31, 2005. In January 2006, certain of
these notes were converted for approximately 2.6 million shares at a value of approximately $68.2 million.
The Ask Jeeves Notes are due June 1, 2008; upon maturity of these notes, our obligation ceases.
Cross-Currency Swaps
We enter into cross-currency swaps to hedge against the change in value of assets denominated in a
currency other than our subsidiary's functional currency.
In November 2003, we entered into a swap with a notional amount of Euro 39.0 million that matures
in October 2013. Under the terms of this swap, we pay Euro at a rate of the three-month EURIBOR plus
0.50% on Euro 39.0 million and we receive 4.90% interest on $46.4 million in U.S. dollars.
In April 2004, we entered into a swap with a notional amount of Euro 38.2 million that matures in
April 2014. Under the terms of this swap, we pay Euro at a rate of the six-month EURIBOR plus 0.90%
on Euro 38.2 million and we receive 5.47% interest on $45.9 million in U.S. dollars.
Upon maturity, these cross-currency swap agreements call for the exchange of notional amounts. We
have designated these derivative contracts as cash flow hedges for accounting purposes. We record foreign
exchange re-measurement gains and losses related to these contracts and assets, which are offsetting, in
each period in other income (expense) in our consolidated statements of income.
Because these derivatives are perfectly effective, we record the net gain and loss in other
comprehensive income and will reclassify the gains and losses into other income or expense when we
extinguish the hedged items. There was no ineffectiveness related to these cash flow hedges for the years
ended December 31, 2005, 2004 and 2003.
In addition, as of December 31, 2005, we had $5.1 million of cash held by counterparties as collateral
for our cross-currency swaps.
Stock Warrants
In connection with prior transactions, IAC assumed a number of stock warrants that were adjusted to
become exercisable into IAC common stock and subsequent to the Spin-Off, also in our common stock.
As of December 31, 2005, there are approximately 43,800 of these stock warrants outstanding with
expiration dates through May 2010. In addition, IAC is potentially obligated to issue an additional 509,500
stock warrants to its vendor upon the vendor meeting certain performance targets. Each stock warrant
F-24
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
represents the right to receive the number of shares of IAC common stock and Expedia common stock
that the stock warrant holder would have received had the holder exercised the stock warrant immediately
prior to the Spin-Off. Under the terms of the Spin-Off between IAC and Expedia, we assumed the
obligation to deliver our common stock to the stock warrant holders upon exercise and will receive a
portion of the proceeds from exercise. This obligation represents a derivative instrument that we record at
fair value on our consolidated balance sheets with any changes in value recorded in our consolidated
statements of income. The estimated fair value of this liability fluctuates based on changes in the price of
our common stock.
NOTE 11 Ì Employee Benefit Plans
Our U.S. employees are generally eligible to participate in a retirement and savings plan that qualifies
under Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to 16% of
their pretax salary, but not more than statutory limits. We contribute fifty cents for each dollar a
participant contributes in this plan, with a maximum contribution of 3% of a participant's earnings. Our
contribution vests with the employee after the employee completes two years of service. Participating
employees have the option to invest in our common stock, but there is no requirement for participating
employees to invest their contribution or our matching contribution in our common stock. Our matching
contribution was $6.0 million, $4.1 million and $2.1 million for the years ended December 31, 2005, 2004
and 2003.
In connection with the Spin-Off, we established a Voluntary Employees' Beneficiary Association trust
(""VEBA trust'') to fund costs associated with self-insuring medical, dental and vision benefits that we
provide to our employees. The VEBA trust is a separate legal entity that is administered by a third-party.
Our contributions to the VEBA trust represent the employees' and employer's cost, which is based on
actuarial estimates that are calculated by an outside consulting firm on a quarterly basis. As of
December 31, 2005, the VEBA trust was appropriately funded.
NOTE 12 Ì Stock-Based Awards and Other Equity Instruments
As described below in ""Modification of Stock-Based Compensation Awards,'' certain stock options,
restricted stock, RSUs and other equity based awards granted to our employees, officers, directors and
consultants by IAC prior to the Spin-Off were converted into awards based on our common stock in
connection with the Spin-Off. We generally recognize compensation expense for these awards to the extent
that they are unvested in accordance with SFAS 123. For the period from January 1, 2005 to August 8,
2005, and for the years ended December 31, 2004 and 2003, IAC allocated to us stock-based
compensation expense that was attributable to our employees.
In connection with the Spin-Off, our Board of Directors approved our 2005 Stock and Annual
Incentive Plan. Under this plan we can grant restricted stock, restricted stock awards (""RSA''), RSUs,
stock options, and other stock-based awards to officers, employees and consultants.
RSUs, which are awards in the form of phantom shares or units that are denominated in a
hypothetical equivalent number of shares of our common stock, are our primary form of stock-based
award. At the time of grant, we determine if we will settle the RSUs in cash, stock or both. We record
RSUs that will settle in cash as a liability and we remeasure them to fair value at the end of each
reporting period. Our RSUs generally vest over five years, but may accelerate in certain circumstances,
including changes in control.
While we do not generally compensate our employees with stock options, when we do make such
grants, they are granted at an exercise price not less than the fair market value of the stock on the grant
date. The terms and conditions upon which the stock options become exercisable vary.
F-25
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
We have stock warrants outstanding, certain of which trade on the NASDAQ under the symbols
""EXPEW'' and ""EXPEZ.'' These stock warrants have expiration dates through February 2012. Almost all
of these stock warrants are vested. Each stock warrant is exercisable for a certain number of shares of our
common stock or a fraction thereof.
As of December 31, 2005, we had approximately 11.5 million shares of common stock reserved for
new stock-based awards under the 2005 Stock and Annual Incentive Plan.
As of December 31, 2005, we had 5.6 million RSUs and 0.2 million RSAs outstanding. The following
table presents a summary of these awards from August 9, 2005, through December 31, 2005:
Beginning Balance as of August 9, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted at Spin-Off, based on conversion of IAC awardsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vested and released ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ending Balance as of December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RSU and RSA
(In thousands)
Ì
5,848
497
(144)
(436)
5,765
The following table presents a summary of our stock warrants (equivalent shares) from August 9,
2005 through December 31, 2005:
Expiration Date
Weighted
Average
Exercise Price
February 2012 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
February 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
February 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
November 2009 to May 2010 ÏÏÏ
$25.56
$31.22
$11.93
$13.25
Warrants at
Spin-Off
Cancelled
(In thousands, except per warrant data)
Exercised
16,094
7,295
11,099
320
34,808
Ì
Ì
Ì
(156)
(156)
Ì
Ì
(3)
Ì
(3)
Outstanding
Warrants at
December 31,
2005
16,094
7,295
11,096
164
34,649
The following table presents a summary of our stock option transactions from August 9, 2005 through
December 31, 2005:
Beginning Balance as of August 9, 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted at Spin-Off, based on conversions from IAC
optionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Options
Price Range
Weighted
Average
Exercise Price
(In thousands, except per share data)
Ì
41,097
(12,540)
(851)
$0.01 - $96.89
$0.01 - $21.84
$0.50 - $37.45
$12.87
$ 5.79
$24.62
Ending Balance as of December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏ
27,706
F-26
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
The following table presents a summary of our stock options outstanding and exercisable at
December 31, 2005:
Options Outstanding
Options Exercisable
Range of Exercise Prices
$ 0.01 - $ 5.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
$ 5.01 - $ 8.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
$ 8.01 - $12.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
$12.01 - $18.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
$18.01 - $25.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
$25.01 - $35.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
$35.01 - $45.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
$45.01 - $55.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
$55.01 - $65.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
$65.01 - $97.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
(In thousands)
1,942
499
11,999
3,470
4,497
3,198
2,038
10
5
48
$ 0.01 - $97.00 ÏÏÏÏÏÏÏÏÏÏÏÏ
27,706
Weighted-
Average
Price Per
Share
Remaining
Contractual
Life (Years)
$ 2.95
$ 6.26
$ 8.88
$14.57
$21.47
$28.28
$38.11
$54.58
$58.30
$79.39
$15.71
3.2
2.2
2.1
6.2
4.6
8.7
7.7
4.1
4.0
3.9
4.3
Weighted-
Average
Exercise
Price
$ 2.95
$ 6.22
$ 8.80
$14.64
$21.49
$27.24
$37.63
$54.58
$58.30
$79.39
$13.01
Shares
(In thousands)
1,940
431
11,184
2,393
4,366
694
608
10
5
48
21,679
Evaluation of Estimated Equity Award Forfeitures
In 2005, we changed the estimated forfeiture rates we use in the determination of our stock-based
compensation expense; this change was a result of an assessment that included an analysis of the actual
number of equity awards that had been forfeited to date compared to prior estimates and an evaluation of
future estimated forfeitures. We periodically evaluate our forfeiture rates and update the rates we use in
the determination of our stock-based compensation expense. We recorded a cumulative benefit from the
change in estimate of approximately $43.4 million, which reduced non-cash compensation expense in the
consolidated statements of income for the year ended December 31, 2005.
Modification of Stock-Based Awards
In connection with the Spin-Off, all existing IAC stock-based awards, which included RSUs, stock
options and warrants, were converted as follows:
‚ each vested stock option to purchase shares of IAC common stock converted into an option to
purchase shares of IAC common stock and an option to purchase shares of Expedia common stock,
‚ each unvested stock option to purchase shares of IAC common stock converted into a stock option
to purchase shares of common stock of the applicable company for which the employee worked
following the Spin-Off,
‚ all RSUs converted into RSUs of the applicable company for which the employee worked following
the Spin-Off, and
‚ each vested and unvested warrant converted into a warrant to purchase shares of IAC common
stock and a warrant to purchase shares of Expedia common stock.
The adjustments to the number of shares subject to each option and the option exercise prices were
based on the relative market capitalization of IAC and Expedia following the Spin-Off. These
modifications resulted in a one-time expense of $5.4 million due to the increase in the estimated fair value
F-27
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
of vested stock options. Expenses related to incremental value due to modification of warrants, RSUs and
unvested stock options were not material.
NOTE 13 Ì Income Taxes
The following table presents a summary of our U.S. and foreign earnings (losses) before income taxes
and minority interest.
U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$424,733
(10,862)
2005
Year Ended December 31,
2004
(In thousands)
$278,352
(8,809)
$252,358
3,140
2003
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$413,871
$269,543
$255,498
The following table presents a summary of our income tax expense components.
2005
Year Ended December 31,
2004
(In thousands)
2003
Current income tax expense:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$108,180
9,190
409
$ 95,668
11,347
4,651
$88,656
7,072
700
Current income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income tax (benefit) expense:
117,779
111,666
96,428
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
69,238
(2,654)
1,614
1,810
(4,251)
(2,854)
263
20
491
Deferred income tax (benefit) expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
68,198
$185,977
(5,295)
$106,371
774
$97,202
For all periods presented, we have computed current and deferred tax expense using our stand-alone
effective tax rate. As of December 31, 2005, our current income tax payable represents amounts that we
will pay to the Internal Revenue Service and other tax authorities based on our taxable income after the
Spin-Off.
For the period January 1, 2005 through the Spin-Off date, we were a member of the IAC
consolidated tax group. Accordingly, IAC will file a federal income tax return and certain state income tax
returns on a combined basis with us for that period. IAC will pay the entire combined income tax liability
related to these filings. As such, our estimated income tax liability for this period was transferred to IAC
upon Spin-Off and is not included in income taxes payable at December 31, 2005. Under the terms of the
Tax Sharing Agreement, IAC can make certain elections in preparation of these tax returns, which may
change the amount of income taxes we owe for the period after the Spin-Off. We intend to record such
changes as adjustments to stockholders' equity in accordance with Emerging Issues Task Force No. 94-10,
""Accounting by a Company for the Income Tax Effects of Transactions Among or With its Shareholders
under FASB Statement 109'' (""EITF 94-10'').
We reduced our current income tax payable by $50.6 million, $120.8 million and $106.2 million for
the years ended December 31, 2005, 2004 and 2003, for tax deductions attributable to stock-based
F-28
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
compensation. For 2005, we recorded $25.3 million of the related income tax benefits of this stock-based
compensation as a reduction of goodwill.
The tax effect of cumulative temporary differences and net operating losses that give rise to our
deferred tax assets and deferred tax liabilities as of December 31, 2005 and 2004 are as follows:
December 31,
2005
2004
(In thousands)
Deferred tax assets:
Provision for accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net operating loss and tax credit carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized R&D expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment impairment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
14,500
2,766
46,017
21,941
41,599
8,527
8,867
$
16,462
2,526
124,685
25,736
50,124
Ì
5,426
Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
144,217
(25,506)
224,959
(11,374)
Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 118,711
$ 213,585
Deferred tax liabilities:
Prepaid merchant bookings and prepaid expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment in subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (30,448)
(436,466)
(12,426)
Ì
(9,967)
(1,461)
$ (27,284)
(463,078)
(13,853)
(15,318)
(13,114)
(5,938)
Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(490,768)
$(538,585)
Net deferred tax liabilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(372,057)
$(325,000)
At December 31, 2005, we had federal, state and foreign net operating loss carryforwards (""NOLs'')
of approximately $44.7 million, $83.4 million and $49.7 million. If not utilized, the federal NOLs will
expire at various times between 2018 and 2023; the state NOLs will expire at various times between 2007
and 2024; and the foreign NOLs can be carried forward indefinitely. Changes in ownership, as defined by
Sections 382 and 1502 of the Internal Revenue Code, as amended, may limit the amount of federal and
state net operating loss carryforwards utilized in any one year.
At December 31, 2005, we had federal research credit carryforwards of approximately $5.4 million
and foreign research credit carryforwards of approximately $1.2 million. Unused federal research credit
carryforwards will expire at various times between 2020 and 2024 and $0.6 million of the foreign research
credit will expire in 2014, if unused, while the remainder can be carried forward indefinitely.
At December 31, 2005, we had a valuation allowance of approximately $25.5 million related to the
portion of tax operating loss carryforwards and other items for which it is more likely than not that the tax
benefit will not be realized. This amount represented an increase of approximately $14.1 million over the
amount recorded as of December 31, 2004 and was primarily attributable to an investment impairment and
F-29
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
foreign operating losses. The tax benefit for approximately $4.6 million of the valuation allowance recorded
at December 31, 2005 will be recorded as a reduction of goodwill if recognized in future years.
A reconciliation of total income tax expense to the amounts computed by applying the statutory
federal income tax rate to earnings from continuing operations before income taxes and minority interest is
as follows:
Income tax expense at the federal statutory rate of 35% ÏÏÏÏÏÏ
State income taxes, net of effect of federal tax benefit ÏÏÏÏÏÏÏ
Non-deductible stock compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized loss on derivative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003
2005
Year Ended December 31,
2004
(In thousands)
$ 94,340
4,746
Ì
Ì
2,474
4,811
$144,855
8,302
15,030
2,115
9,681
5,994
$89,424
4,646
Ì
Ì
Ì
3,132
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$185,977
$106,371
$97,202
By virtue of the previously filed separate company and consolidated income tax returns filed with
IAC, we are routinely under audit by federal, state, local and foreign authorities. These audits include
questioning the timing and the amount of deductions and the allocation of income among various tax
jurisdictions. Annual tax provisions include amounts considered sufficient to pay assessments that may
result from the examination of prior year returns; however, the amount ultimately paid upon resolution of
issues raised may differ from the amount provided. Differences between our contingent tax liabilities and
the amounts actually owed are recorded in the period they become known. We believe our contingent tax
liabilities are adequate in the event the tax positions are not ultimately upheld.
In addition, we have a tax allocation agreement with the Microsoft Corporation as well as the Tax
Sharing Agreement with IAC. For additional information about these agreements, see Note 17, Related
Party Transactions.
NOTE 14 Ì Common Stock, Class B Common Stock and Preferred Stock
Common Stock and Class B Common Stock
Our authorized common stock consists of 1.6 billion shares of common stock with par value of
$0.001 per share, and 400 million shares of Class B common stock with par value of $0.001 per share.
Both classes of common stock qualify for and would share equally in dividends, if declared by our board of
directors, and generally vote together on all matters. Common stock carries one vote per share and Class B
common stock carries 10 votes per share. Holders of common stock, voting as a single, separate class are
entitled to elect 25% of the total number of directors. Class B common stockholders may, at any time,
convert their shares into common stock, on a one for one share basis. Upon conversion, the Class B
common stock is retired and is not available for reissue. In the event of liquidation, dissolution, distribution
of assets or winding-up of Expedia, Inc., the holders of both classes of common stock have equal rights to
receive all the assets of Expedia, Inc. after the rights of the holders of the preferred stock have been
satisfied.
Preferred Stock
Our preferred stock has a face value of $22.23 per share; each share is entitled to an annual dividend
of 1.99%. Each preferred stockholder is entitled to two votes per share. Preferred stockholders may, at
F-30
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
certain times through 2017, elect to have their shares redeemed or elect to convert their shares into
common stock based upon formulas described in the related Certificate of Designations of Series A
Cumulative Convertible Preferred Stock of Expedia, Inc. Beginning February 4, 2012, we may redeem the
preferred stock for cash or common stock. On February 4, 2022, all outstanding shares of preferred stock
automatically convert into common stock.
NOTE 15 Ì Earnings Per Share
Basic Earnings Per Share
For the year ended December 31, 2005, we computed basic earnings per share using the number of
shares of common stock and Class B common stock outstanding immediately following the Spin-Off, as if
such shares were outstanding for the entire period prior to the Spin-Off, plus the weighted average of such
shares outstanding following the Spin-Off.
For the years ended December 31, 2004 and 2003, we computed basic earnings per share using the
number of shares of common stock and Class B common stock outstanding immediately following the
Spin-Off, as if such shares were outstanding for the entire period.
Diluted Earnings Per Share
For the year ended December 31, 2005, we computed diluted earnings per share using (i) the number
of shares of common stock and Class B common stock used in the basic earnings per share calculation as
indicated above (ii) if dilutive, the incremental common stock that we would issue upon the assumed
exercise of stock options and stock warrants and the vesting of restricted stock units using the treasury
stock method, and (iii) the shares we are contractually obligated to issue associated with the Ask Jeeves
Notes, if converted, and other stock-based commitments.
For the years ended December 31, 2004 and 2003, we computed diluted earnings per share using
(i) the number of shares of common stock and Class B common stock used in the basic earnings per
share calculation as indicated above, and (ii) if dilutive, the incremental common stock that we would
issue upon exercise of potentially dilutive stock-based commitments if the terms of the agreement under
which the commitments were issued obligate us to issue the instrument as of the Spin-Off. Some of the
stock warrant agreements meet this requirement, but options to purchase common stock and other
potentially dilutive items do not. Warrants meeting this requirement were included in our diluted earnings
per share calculation for the year ended December 31, 2004 and 2003, based on the number of days they
were outstanding at Spin-Off. We treated all other securities as if they were granted as of the Spin-Off.
F-31
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
The following table presents our basic and diluted earnings per share:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net earnings per share available to common stockholders:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average number of shares outstanding:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dilutive effect of:
2005
Year Ended December 31,
2004
(In thousands, except per share data)
$163,473
2003
$228,730
$111,407
$
$
0.68
0.65
$
$
0.49
0.48
$
$
0.33
0.33
336,819
335,540
335,540
Options to purchase common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Warrants to purchase common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other potentially dilutive securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,568
5,007
2,136
5,009
5,009
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
349,530
340,549
340,549
NOTE 16 Ì Commitments and Contingencies
Letters of Credit, Purchase Obligations and Guarantees
We have commitments and obligations that include purchase obligations, guarantees and letters of
credit (""LOC''), which could potentially require our payment in the event of demands by third parties or
contingent events. The following table presents these commitments and obligations as of December 31,
2005.
By Period
Total
Less Than
1 Year
Purchase obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Letters of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
8,595
78,542
53,156
$ 6,828
Ì
52,261
1 to
3 Years
(In thousands)
$ 1,767
78,542
772
$140,293
$59,089
$81,081
3 to
5 Years
More Than
5 Years
$ Ì
Ì
123
$123
$Ì
Ì
Ì
$Ì
We have purchase obligations primarily with three national telecommunications companies related to
data transmission lines and telephones.
We have guarantees primarily related to a specific country aviation authority for the potential non-
delivery, by us, of packaged travel sold in that country. The authority also requires that a portion of the
total amount of packaged travel sold be bonded.
Our LOCs consist of standby LOCs, underwritten by a group of lenders, which we primarily issue to
certain hotel properties to secure our payment for hotel room transactions. There were no claims made
against any standby LOCs during the year ended December 31, 2005 and 2004.
Lease Commitments
We have contractual obligations in the form of operating leases for office space and related office
equipment; record the related expense on a monthly basis. Certain leases contain periodic rent escalation
adjustments and renewal options. Operating lease obligations expire at various dates with the latest
F-32
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
maturity in 2014. For the years ended December 31, 2005, 2004 and 2003, we recorded rental expense of
$26.0 million, $23.6 million and $14.6 million related thereto.
The following table presents our estimated future minimum rental payments under operating leases
with noncancelable lease terms that expire after December 31, 2005:
Year Ending December 31,
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
After ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(In thousands)
$ 26,004
24,083
20,767
16,676
6,389
10,027
$103,946
Legal Proceedings
In the ordinary course of business, we are a party to various lawsuits. In the opinion of management,
none of these lawsuits should have a material impact on the liquidity, results of operations, or financial
condition of Expedia. We also evaluate other potential contingent matters, including value-added tax,
transient occupancy or accommodation tax and similar matters. We do not believe that the amount of
liability that could be reasonably possible with respect to these matters would have a material adverse
affect on our financial results.
Securities Related Class Action Litigations. While we are not a party to the securities litigation filed
against IAC, under the terms of our Separation Agreement with IAC, we have generally agreed to bear a
portion of the costs and liabilities, if any, associated with any securities law litigation relating to conduct
prior to the Spin-Off of the businesses or entities that comprise Expedia following the Spin-Off. This case
arises out of IAC's August 4, 2004, announcement of its earnings for the second quarter of 2004.
Litigation relating to the IAC/Hotels.com merger agreement announced April 10, 2003, is pending in
Delaware. The principal claim in these actions is that the defendants breached their fiduciary duty to the
plaintiffs by entering into or approving the merger agreement.
Hotels.com is also a party to a securities class action and a shareholder derivative suit relating to
Hotels.com's guidance for the fourth quarter of 2002. The principal claim in these actions is that the
defendants violated federal securities laws by making misstatements of material facts, failing to disclose
material information, and trading in the company's securities while in possession of material, non-public
information. In 2004, the court dismissed virtually all of the plaintiffs' claims with prejudice in the
securities class action. In the shareholder derivative suit, on March 7, 2005, the district court issued orders
staying the case until further notice and directing that the case be administratively closed pending a
decision in the appeal of the action discussed above. The case remains administratively closed.
Litigation Relating to Hotel Occupancy Taxes. Expedia and certain of its businesses are parties to
consumer and municipality litigation involving hotel occupancy taxes.
We believe that the claims in the litigation discussed above lack merit and will continue to defend
vigorously against them.
F-33
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
Put and Call Option Agreements
In connection with our acquisitions of TripAdvisor and Egencia, we have call and put option
agreements in place to acquire the remaining shares held by the minority shareholders of each company.
In March 2006, the minority holders of Egencia notified us of their intention to exercise their put right
whereby they would sell their remaining minority ownership interest in exchange for approximately
$6.4 million in cash. We expect the put exercise to be executed in April 2006. We estimate that the call
option value for TripAdvisor is approximately $16.0 million as of December 31, 2005.
NOTE 17 Ì Related Party Transactions
Expenses Allocated from IAC
Prior to Spin-Off, our operating expenses include allocations from IAC for accounting, treasury, legal,
tax, corporate support, human resource functions and internal audit. Expenses allocated from IAC were
$5.0 million for the period from January 1, 2005 to August 8, 2005, and $7.5 million and $2.0 million for
the years ended December 31, 2004 and 2003. We recorded the expense allocation from IAC in general
and administrative expense in our consolidated statements of income.
Additional allocations from IAC prior to the Spin-Off related to stock-based compensation expense
attributable to our employees. Stock-based compensation expense allocated from IAC was $56.5 million
for the period from January 1, 2005 to August 8, 2005, and $171.4 million and $79.6 million for the years
ended December 31, 2004 and 2003.
Interest Income from IAC
The majority of the interest income recorded in our consolidated statements of income arose from
intercompany receivable balances from IAC. The interest income from IAC ceased upon Spin-Off on
August 9, 2005.
Relationship Between IAC and Expedia, Inc. after the Spin-Off
In connection with the Spin-Off, we entered into various agreements with IAC to provide for an
orderly transition and to govern our ongoing relationships with IAC. These agreements include the
following:
‚ a Separation Agreement that sets forth the arrangements between IAC and Expedia with respect to
the principal corporate transactions necessary to complete the Spin-Off, and a number of other
principles governing the relationship between IAC and Expedia following the Spin-Off;
‚ a Tax Sharing Agreement that governs the respective rights, responsibilities and obligations of IAC
and Expedia after the Spin-Off with respect to tax liabilities and benefits, tax attributes, tax
contests and other matters regarding income taxes, other taxes and related tax returns;
‚ an Employee Matters Agreement that governs a wide range of compensation and benefit issues,
including the allocation between IAC and Expedia of responsibility for the employment and benefit
obligations and liabilities of each company's current and former employees (and their dependents
and beneficiaries); and
‚ a Transition Services Agreement that governs the provision of transition services from IAC to
Expedia.
F-34
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
Commercial Agreements
We continue to work with some of the businesses that comprise IAC after the Spin-Off pursuant to a
variety of commercial relationships. These commercial agreements generally include (i) distribution
agreements, pursuant to which certain subsidiaries of IAC distribute their respective products and services
via arrangements with Expedia, and vice versa, (ii) services agreements, pursuant to which certain
subsidiaries of IAC provide Expedia with various services and vice versa and (iii) office space lease
agreements. The distribution agreements typically involve the payment of fees, usually on a fixed amount-
per-transaction, revenue share or commission basis, from the party seeking distribution of the product or
service to the party that is providing the distribution. From August 8, 2005 to December 31, 2005, we
received $0.8 million from IAC and paid $10.7 million to IAC. At December 31, 2005, amounts
receivable from IAC totaled $0.6 million; amounts payable to IAC totaled $3.6 million. These amounts are
included in accounts and notes receivable and accounts payable, trade, respectively.
Agreements with Microsoft Corporation
We have various agreements with Microsoft Corporation (""Microsoft''), which is currently the
beneficial owner of more than 5% of our outstanding common stock, including an agreement that
maintains our presence as the provider of travel shopping services on MSN.com and several international
MSN websites and, in 2004 and 2003, a data center services agreement. Total fees we paid with respect to
these agreements were $20.0 million, $12.6 million and $20.5 million for the years ended December 31,
2005, 2004 and 2003. Amounts payable related to these agreements was $6.2 million and $3.4 million as of
December 31, 2005 and 2004.
Prior to November 1999, Microsoft owned 100% of our outstanding common stock. Concurrent with
our separation from them, we entered into a number of agreements with them to facilitate the separation.
Currently, we have a tax allocation agreement where we must pay Microsoft for a portion of the tax
savings resulting from the exercise of certain stock options. We have recorded $36.3 million in other long-
term liabilities on our consolidated balance sheets as of December 31, 2005 and 2004, related to this
agreement. We will pay Microsoft under this agreement when we realize the tax savings on our tax return.
As of December 31, 2005, we have not realized the tax savings related to the exercise of these stock
options.
NOTE 18 Ì Segment Information
We determine our operating segments based on how our chief operating decision makers manage our
businesses, including making operating decisions and evaluating operating performance. We operate in
several operating segments; however, there is only one reportable segment as the significant operating
segments exhibit similar economic characteristics and meet the aggregation criteria pursuant to
SFAS No. 131, ""Disclosures about Segments of an Enterprise and Related Information.'' As such, we
have aggregated them for reporting purposes. Each of the significant operating segments is a supplier of
travel services whether by a merchant model or as an agency model.
In conjunction with the reorganization of our business, which we began in 2005, our chief operating
decision makers have been assessing our operations to determine how we will manage the business and
report our financial results. We expect, beginning with the first quarter of 2006 financial statements, that
we will report our results based primarily on geographic location.
F-35
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
We maintain operations in the United States, Australia, Belgium, Canada, China, France, Germany,
Italy, Japan, Mexico, the Netherlands, Spain and the United Kingdom and other international territories.
The following table presents the revenue and long-lived assets by geographic area, the United States and
all other countries, for the years ended December 31, 2005, 2004 and 2003.
Revenue
United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All other countries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,661,996
457,459
$1,523,867
319,146
$1,988,113
351,700
2005
Year Ended December 31,
2004
(In thousands)
2003
$2,119,455
$1,843,013
$2,339,813
2005
As of December 31,
2004
(In thousands)
2003
$
$
77,390
13,594
90,984
$
$
70,965
10,461
81,426
$
$
64,474
11,144
75,618
Long-lived assets
United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All other countries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
NOTE 19 Ì Supplemental Cash Flow Information
The following table presents certain cash payments.
2005
Year Ended December 31,
2004
(In thousands)
2003
$ Ì $
7,255
(9,134)
269
4,452
(9,789)
Cash paid during the periods
Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax refundÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
251
11,139
(755)
F-36
Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
NOTE 20 Ì Valuation and Qualifying Accounts
We accrue the cost associated with purchases made on our website related to the use of fraudulent
credit cards ""charged-back'' due to payment disputes and cancellation fees. The following table presents
the changes in the valuation and qualifying accounts.
Description
Balance of
Beginning of
Period
Charges to
Earnings
Charges to
Other
Accounts
Deductions
Balance at
End of
Period
2005
Allowance for doubtful accountsÏÏÏ
Credit card charge-backs ÏÏÏÏÏÏÏÏÏ
Cancellation feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,338
3,010
2,120
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$7,468
2004
Allowance for doubtful accountsÏÏÏ
Credit card charge-backs ÏÏÏÏÏÏÏÏÏ
Cancellation feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003
Allowance for doubtful accountsÏÏÏ
Credit card charge-backs ÏÏÏÏÏÏÏÏÏ
Cancellation feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,231
1,818
Ì
$5,049
$2,395
2,161
Ì
$4,556
$1,753
596
Ì
$2,349
$ (510)
1,680
2,120
$3,290
$ 896
463
Ì
$1,359
$ Ì
Ì
$ Ì
$100
Ì
Ì
$100
$366
160
Ì
$526
$ (177)
(586)
(15)
$3,914
3,020
2,105
$ (778)
$9,039
$ (483)
(488)
Ì
$2,338
3,010
2,120
$ (971)
$7,468
$ (426)
(966)
Ì
$3,231
1,818
Ì
$(1,392)
$5,049
NOTE 21 Ì Quarterly Financial Information (Unaudited)
Three Months Ended
March 31
June 30
September 30
December 31
(In thousands, except per share data)
Year ended December 31, 2005
Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year ended December 31, 2004
Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$485,046
376,863
66,325
48,029
0.14
0.14
$
$413,262
323,184
16,677
12,719
0.04
0.04
$
$555,007
430,788
96,379
73,432
0.22
0.22
$
$486,959
387,807
73,522
48,542
0.14
0.14
$
$584,653
456,581
148,639
82,035
0.24
0.23
$
$503,793
399,071
80,261
58,092
0.17
0.17
$
$494,749
384,507
85,709
25,234
0.07
0.07
$
$438,999
342,633
70,013
44,120
0.13
0.13
$
F-37
Exhibit
Number
2.1
3.1
3.2
3.3
4.1
4.2
4.3
4.4
10.1*
10.2*
10.3*
10.4*
10.5*
10.6
10.7
10.8*
10.9*
10.10
10.11
10.12
10.13
Index to Exhibits
Description
Separation Agreement by and between Expedia, Inc. and IAC/InterActiveCorp, dated as of
August 9, 2005(5)
Amended and Restated Certificate of Incorporation of Expedia, Inc.(1)
Series A Cumulative Convertible Preferred Stock Certificate of Designation(1)
Amended and Restated Bylaws of Expedia, Inc.(1)
Specimen Expedia, Inc. Common Stock Certificate(2)
Equity Warrant Agreement for Warrants to Purchase up to 14,590,514 Shares of Common Stock
expiring February 4, 2009, by and between Expedia, Inc. and The Bank of New York, dated as of
August 9, 2005(3)
Stockholder Equity Warrant Agreement for Warrants to Purchase up to 11,450,182 Shares of
Common Stock, by and between Expedia, Inc. and Mellon Investor Services LLC, dated as of
August 9, 2005(3)
Optionholder Equity Warrant Agreement for Warrants to Purchase up to 1,558,651 Shares of
Common Stock, by and between Expedia, Inc. and Investor Services LLC, dated as of August 9,
2005(3)
Employment Agreement by and between Mark Gunning and Expedia, Inc., effective as of
July 14, 2005(1)
Separation Agreement by and between Chris Bellairs and Expedia, Inc., effective as of August 12,
2005(1)
Expedia, Inc. Deferred Compensation Plan for Non-Employee Directors(2)
Expedia, Inc. 2005 Stock and Annual Incentive Plan(4)
Summary of Expedia, Inc. Non-Employee Director Compensation Arrangements(2)
Governance Agreement, by and among Expedia, Inc., Liberty Media and Barry Diller, dated as of
August 9, 2005(5)
Stockholders Agreement, by and between Liberty Media Corporation and Barry Diller, dated as
of August 9, 2005(5)
Form of Restricted Stock Unit Agreement (domestic employees)(5)
Form of Restricted Stock Unit Agreement (directors)(5)
CRS Marketing, Services and Development Agreement, by and between Worldspan, L.P. and
Expedia, Inc., a Washington corporation (or its predecessors), dated as of December 15, 1995, as
amended by amendments Nos. 1 through 10(6)
Tax Sharing Agreement by and between Expedia, Inc. and IAC/InterActiveCorp, dated as of
August 9, 2005(5)
Employee Matters Agreement by and between Expedia, Inc. and IAC/InterActiveCorp, dated as
of August 9, 2005(5)
Transition Services Agreement by and between Expedia, Inc. and IAC/InterActiveCorp, dated as
of August 9, 2005(5)
10.14* Expedia, Inc. Executive Deferred Compensation Plan, effective as of August 9, 2005(7)
F-38
Exhibit
Number
10.15
Description
Credit Agreement dated as of July 8, 2005, among Expedia, Inc., a Delaware corporation,
Expedia, Inc., a Washington corporation, Travelscape, Inc., a Nevada corporation, Hotels.com, a
Delaware corporation and Hotwire, Inc., a Delaware corporation, as Borrowers; the Lenders party
thereto; Bank of America, N.A., as Syndication Agent; Wachovia Bank, N.A. and The Royal
Bank of Scotland PLC, as Co-Documentation Agents; JPMorgan Chase Bank, N.A., as
Administrative Agent; and J.P. Morgan Europe Limited, as London Agent.(8)
10.16* Expedia Restricted Stock Unit Agreement between Dara Khosrowshahi and Expedia, Inc., dated
21.1
23.1
23.2
31.1
31.2
31.3
32.1
32.2
32.3
as of March 7, 2006
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
Certification of the Chairman and Senior Executive pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
Certification of the Chairman and Senior Executive pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
* Reflects management contracts and management and director compensatory plans.
(1) Incorporated by reference to Expedia, Inc.'s Current Report on Form 8-K dated as of August 15,
2005.
(2) Incorporated by reference to Expedia, Inc.'s Registration Statement on Form S-4 (File
No. 333-124303-01), filed on June 13, 2005, as amended.
(3) Incorporated by reference to Expedia, Inc.'s Registration Statement on Form 8-A12G, filed on
July 19, 2005, as amended.
(4) Incorporated by reference to Expedia, Inc.'s Registration Statement on Form S-8 (File
No. 333-127324) filed on August 9, 2005.
(5) Incorporated by reference to Expedia, Inc.'s Quarterly Report on Form 10-Q for the quarter ending
September 30, 2005.
(6) Incorporated by reference to Expedia, Inc.'s Registration Statement on Form S-4 (File
No. 333-124303-01), filed on June 17, 2005. Certain portions of this document have been omitted
pursuant to a confidential treatment request.
(7) Incorporated by reference to Expedia, Inc.'s Current Report on Form 8-K dated as of December 20,
2005.
(8) Incorporated by reference to Expedia, Inc.'s Current Report on Form 8-K dated as of July 15, 2005.
F-39
55