e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-51447
EXPEDIA, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-2705720
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3150 139th Avenue SE
Bellevue, WA 98005
(Address of principal executive
office) (Zip Code)
Registrants telephone number, including area code:
(425) 679-7200
Securities registered pursuant to Section 12(b) 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 þ No o
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 o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller Reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2007, the aggregate market value of the
registrants common equity held by non-affiliates was
$7,474,695,000. For the purpose of the foregoing calculation
only, all directors and executive officers of the registrant are
assumed to be affiliates of the registrant.
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Outstanding Shares at February 15, 2008
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Class
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were approximately,
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Common stock, $0.001 par value per share
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259,997,900 shares
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Class B common stock, $0.001 par value per share
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25,599,998 shares
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Documents
Incorporated by Reference
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Document
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Parts Into Which Incorporated
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Portions of the definitive Proxy Statement for the 2008 Annual
Meeting of Stockholders (Proxy Statement)
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Part III
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Expedia,
Inc.
Form 10-K
For the Year Ended December 31, 2007
Contents
1
Expedia,
Inc.
Form 10-K
For the Year Ended December 31, 2007
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, offline retail travel agents
and travel service providers. 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 product and service companies. We also offer travel and
non-travel advertisers access to a potential source of
incremental traffic and transactions through our various media
and advertising offerings on both the TripAdvisor Media Network
and on our transaction-based websites.
Our portfolio of brands, which is described below, includes:
Expedia.com®,
Hotels.com®,
Hotwire.comtm,
Worldwide Travel Exchange (WWTE), Interactive
Affiliate Network (IAN), Classic Vacations,
Expedia®
Corporate Travel (ECT),
eLongtm
and
TripAdvisor®.
In addition, many of these brands have corresponding
international points of sale. We refer to Expedia, Inc. and its
subsidiaries collectively as Expedia, the
Company, us, we and
our in this Annual Report on
Form 10-K.
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 IACs 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.
(NASDAQ) under the symbol EXPE. In
conjunction with the Spin-Off, we completed
2
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 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 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.
Equity
Ownership and Voting Control
As of December 31, 2007, there were approximately
259,489,102 shares of Expedia common stock,
25,599,998 shares of Expedia Class B common stock and
751 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 28% of Expedias outstanding common
stock and 100% of Expedias outstanding Class B common
stock. As of such date, Mr. Diller (through 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 60% of the outstanding total
voting power of Expedia.
Pursuant to the Stockholders Agreement, dated as of
August 9, 2005, as amended 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 Expedias stockholders (other than with respect
to the election by the Expedia common stockholders of 25% of the
members of Expedias 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 or any of its
subsidiaries incurs any new obligations for borrowed money
within the definition of total debt set forth in the
Governance Agreement for as long as Expedias ratio of
total debt to EBITDA, as defined therein, equals or exceeds
eight to one.
Portfolio
of Brands
Expedia leverages its brand portfolio to target the broadest
possible range of travelers, travel suppliers and advertisers.
Our brands provide a wide selection of travel products and
services, from simple, discounted travel to more complex, luxury
travel. Our travel offerings primarily consist of airline
flights, hotel stays, car rentals, destination services, cruises
and package travel, which encompasses multiple travel products.
We also offer travel and non-travel advertisers access to a
potential source of incremental traffic and transactions through
our various media and advertising offerings on both the
TripAdvisor Media Network and on our transaction-based websites.
Expedia.com®. 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 the Expedia website in Australia, Austria, Canada, Denmark,
France, Germany, Ireland, Italy, Japan, the Netherlands, New
Zealand, Norway, Spain, Sweden and the United Kingdom.
Expedia-branded websites also serve as the travel channel on
MSN.com, Microsoft Corporations (Microsoft)
online services network in the United States, as well as certain
international MSN sites. Expedia-branded websites target many
different types of travelers, from families booking a summer
vacation to individual travelers arranging a quick weekend
getaway. Travelers can search for, compare information about
(including pricing, availability and traveler reviews) and book
travel products and services on Expedia-branded websites,
including airline tickets, lodging, car rentals, cruises and
many destination services such as airport transfers,
local attractions and tours from a large number of
suppliers, on both a stand-alone and package basis.
3
Hotels.com®. Our
Hotels.com website makes available nearly 80,000 hotel
properties 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 through localized versions
in the Americas, Europe, Asia Pacific and South Africa. With
Hotels.com, we differentiate our offering by positioning the
brand as the hotel expert, with premium content about lodging
properties.
Hotwire.comtm. Our
discount travel website, Hotwire.com, makes available airline
tickets, hotel rooms, rental cars, cruises and vacation
packages. Hotwire.coms approach matches flexible,
price-sensitive travelers with suppliers who have excess seats,
rooms and cars they wish to fill without affecting the
publics perception of their brands. Hotwire.com travelers
may enjoy significant discounts by electing to book travel
services 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. Recent
product innovation allows air travelers to discover available
discounts by altering details of their air travel plans such as
date of departure or destination airport. Hotwire.com works with
many domestic and international airlines, including
U.S. 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.
Worldwide Travel Exchange and Interactive Affiliate
Network. Our private label and co-brand 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 substantially similar to those made available
on Expedia-branded and Hotels.com-branded websites,
respectively. We generally compensate participants in the
WWTE®
and
IANtm
private label programs on a revenue-share basis. We also
leverage our WWTE and IAN platforms to make Expedia and
Hotels.com branded sites available in various international
points of sale.
Classic
Vacations®. Classic
Vacations offers individually tailored vacations primarily
through a national network of third-party retail travel agents.
We deliver a full line of premium vacation packages
air, hotels, car rentals, activities and private
transportation to create customized luxury vacations
in Hawaii, the Caribbean, Mexico, Costa Rica, Europe, Australia,
New Zealand, Fiji and Tahiti. Travel agents and travelers can
preview our product offering through our websites,
www.classicforagents.com and www.classicvacations.com.
Expedia Local Expert. Our network of travel
desks located at hotels and resorts in Hawaii, Las Vegas,
Mexico, Orlando and San Francisco enables travelers to
enjoy local tours, attractions and dining, as well as purchase
airport transfers and other travel-related services. Our network
expanded through our acquisition of Activity World and Activity
Hut, destination service providers in Hawaii in 2004 and 2006,
and our 2005 acquisition of Premier Getaways in Florida.
Expedia®
Corporate Travel. Our full-service travel
management company makes travel products and services available
to corporate travelers in the United States, Canada, China and
Europe. In 2004, we established ECT 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 supplier rates and consolidated reporting targeted
to the SME (Small & Medium size
Enterprise) business segment. ECT charges its corporate client
companies account management 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 more fully support
the account.
eLongtm. Our
majority-owned online travel service company, based in Beijing,
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 more than 4,700 hotels in over
300 cities across China. eLong also offers air ticketing
and other travel related services, such as rental cars.
Travelers can access travel products and services through the
websites, www.elong.com and www.elong.net.
4
The
TripAdvisor®
Media Network. TripAdvisor.com, our comprehensive
online travel search engine and directory, aggregates unbiased
articles and traveler opinions on cities, hotels, restaurants
and activities in a variety of destinations through
www.TripAdvisor.com and localized versions of the site in
France, Germany, Ireland, Italy, Spain and the UK. In addition
to travel-related information, TripAdvisors
destination-specific search results provide links to the
websites of TripAdvisors travel partners (travel service
providers and marketers) through which travelers can make
related travel arrangements. TripAdvisor has also acquired and
now operates a number of travel media content properties within
the TripAdvisor Media Network, including
bookingbuddy.comtm,
cruisecritic.comtm,
holidaywatchdog.com,
independenttraveler.comtm,
seatguru.com®,
smartertravel.comtm,
travel-library.comtm
and
travelpod.comtm,
expanding the Networks reach and appeal to advertisers.
Business
Strategy
We play a fundamental role in facilitating travel, whether for
leisure or business. We are committed to providing our travelers
with the best set of resources to serve their travel needs by
taking advantage of our critical assets our brand
portfolio, our technology and commitment to continuous
innovation, our global reach and our breadth of product
offering. In addition, we take advantage of our growing base of
knowledge about our destinations, suppliers and travelers based
on our unique position in the travel value chain.
A discussion of the critical assets that we leverage in
achieving our business strategy follows:
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 ranging from single item bookings 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 destinations. Our brands also enable travelers to
interact with us how and when they prefer with 24/7 1-800
telesales service, which has become an increasingly important
part of the Companys growth strategy.
We believe our appeal to suppliers is enhanced by our breadth of
brands and international points of sale, allowing suppliers to
offer the industrys broadest range of online travelers
their product and service offerings. We intend to continue
supporting and investing in our brand portfolio and expanding
our geographic footprint for the benefit of our travelers,
suppliers and advertisers.
Technology and Continuous Innovation. Expedia
has an established tradition of innovation, from
Expedia.coms inception as a division of Microsoft, to our
introduction of more recent innovations such as
Expedia.coms TravelAds sponsored search product for hotel
advertisers, Hotwires Airfare Savings Hub,
Hotels.coms slider tools for improving search results and
the TripAdvisor Media Networks offering of leading travel
applications for download on Facebook.com.
We intend to continue to aggressively innovate on behalf of our
travelers, suppliers and advertisers, including our current
efforts to build a scaleable, service-oriented technology
platform for our various websites across our portfolio of
brands. We expect this to result in improved flexibility and
faster innovation. This transition should allow us to improve
our site merchandising, browse and search functionality, improve
search engine indexing, and add significant personalization
features. This transition is occurring in a phased approach,
with a portion of our worldwide points of sale continuing to
migrate to the new platform during 2008.
For our suppliers, we have developed proprietary technology that
streamlines the interaction between some of our websites and
hotel central reservation systems, making it easier 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 extranet.
5
Our travelers can now book hotel stays with over 35,000
worldwide merchant hotel properties, of which over 45% are now
fully direct-connected. We began offering a more streamlined
application programming interface for certain of our lodging
partners in 2007 to enable faster and simpler integration of
real-time hotel content. We intend to continue investing in
tools to make supplier integration easier, seamless and cost
effective, including efforts in Europe to add multi-lingual
interfaces with easier price and inventory upload features.
We are also improving our data handling capabilities across
Expedia with the installation of an enterprise data warehouse,
which will allow enhanced segmentation and merchandising on our
websites and in our
e-mail
communications with our travelers.
Global Reach. We currently operate our points
of sale both in the U.S. and internationally. Our Hotels.com and
TripAdvisor brands also maintain both U.S. websites and
international sites outside the United States. We also
offer Chinese travelers an array of products and services
through our majority ownership in eLong. In 2007, our European
segment gross bookings and revenue accounted for approximately
21% of worldwide gross bookings and 23% of worldwide revenue.
We intend to continue investing in and growing our existing
international points of sale. We anticipate launching points of
sale in additional countries where we find large travel markets
and rapid growth of online commerce. Future launches may occur
under our flagship Expedia brand, through one of our other
brands, or through acquisition of third-party brands, as in the
case of eLong.
Expedia Corporate Travel currently operates in the United
States, Belgium, Canada, China, France, Germany, Italy, Spain
and the United Kingdom. We believe the corporate travel sector
represents a large opportunity for Expedia, and we believe we
offer a compelling technology solution to businesses seeking to
control travel costs and improve their employees travel
experiences. We intend to continue investing in and expanding
the geographic footprint of our ECT business.
In expanding our global reach, we leverage significant
investments in technology, operations, brand building, supplier
relationships and other initiatives that we have made since the
launch of Expedia.com in 1996. We intend to continue leveraging
this investment when launching additional points of sale in new
countries, introducing website features, adding supplier
products and services, or offering proprietary and
user-generated content for travelers.
Expedias scale of operations enhances the value of
technology innovations we introduce on behalf of our travelers
and suppliers. As an example, our traveler review
feature whereby Expedia travelers have created
nearly 300,000 qualified reviews of hotel properties
is able to accumulate a larger base of reviews due to the higher
base of online traffic that frequents our various websites. In
addition, our increasing scale enhances our websites
appeal to travel and non-travel advertisers.
Breadth of Product Offering. We believe we
offer a comprehensive array of innovative travel products and
services to travelers. We plan to continue improving and growing
these offerings, as well as expand them to our worldwide points
of sale over time.
Most of our revenue comes from transactions involving the
booking of hotel reservations and the sale of airline tickets,
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
product offerings. We are also working to increase the mix of
advertising and media revenue from both the expansion of our
TripAdvisor Media Network, as well as increased advertising
revenue from our worldwide websites which have historically been
focused on transaction revenue, such as Expedia.com and
Hotels.com.
Merchant
and Agency Business Models
We make travel products and services available both 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
6
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. We are also expanding our use of
third-party provided pre-assembled package offerings,
particularly through our international points of sale, further
broadening our scope of products and services to travelers.
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 compared to the merchant model,
due to the high volume of airline tickets sold our agency gross
bookings accounted for 58% of total gross bookings for the year
ended December 31, 2007.
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. Our Partner
Services Group consists mainly of strategic account managers and
local market managers who work directly with travel suppliers to
increase the marketing of their travel products and brands
through our points of sale, including participation in our
seasonal and event-driven promotions.
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 via a proprietary extranet. Our
travelers can now book reservations with over 35,000 merchant
hotel properties worldwide, of which over 45% are now fully
direct-connected.
Distribution Partners. GDSs, also referred to
as computer reservation services, provide a centralized,
comprehensive repository of travel suppliers
content such as availability and pricing
of seats on various airline point-to-point flights, or
segments. The GDSs act as intermediaries between the
travel suppliers and travel agencies, allowing agents to reserve
and book flights, rooms or other travel products.
While we 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 diversified our use of GDS providers in 2006 and
2007 by adding distribution agreements with Sabre and Amadeus,
who are now our primary segment providers.
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Fulfillment Partners. We outsource certain of
our airline ticket fulfillment functions to third-party
suppliers. Such functions include 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, optimize ongoing
traveler acquisition costs and strategically position our brands
in relation to one another. Our long-term success and
profitability depends on our continued ability to maintain and
increase the overall number of traveler transactions in a
cost-effective manner.
Our marketing channels primarily include offline advertising,
online advertising including search engine marketing and
optimization, direct
and/or
personalized traveler communications on our websites as well as
through direct
e-mail
communication with our travelers. In addition, our
Expedia-branded websites provide content and services to the
travel channel on the MSN.com website in the United States and
MSN websites in Canada, France, Germany, Italy, and the United
Kingdom. Our marketing programs and initiatives include
promotional offers such as coupons as well as seasonal or
periodic special offers from our travel suppliers based on our
supplier relationships. In addition, we introduced the ThankYou
Rewards Network in 2006 and a co-branded credit card with
Citigroup in 2007, whereby Expedia travelers can earn ThankYou
reward points by purchasing select travel bookings on
www.expedia.com, as well as for purchases with their co-branded
card.
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. 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 outsourced and in-house
call centers, which are located in various locations throughout
the world, including extensive outsourced operations in the
Philippines and El Salvador. We plan to make significant
investments in our call center technologies in 2008 and beyond.
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 owned 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 Best Fare Search technology
essentially deconstructs segment feeds in the US 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. We are looking to
expand this technology internationally. We are also investing in
improving our fare discovery technologies and user interfaces to
provide more comprehensive and easier discovery of competitive
rates for our travelers.
We are investing in and building a scaleable, service-oriented
technology platform for our travelers, which will extend across
our portfolio of brands. We plan to significantly invest in this
platform in 2008 and beyond. We expect this investment to result
in long-term cost savings, improved flexibility and faster
go-forward innovation. This transition should also allow us to
improve our site merchandising, browse and search functionality,
improve search engine indexing, add significant personalization
features, and ultimately improve
8
our ability to drive higher
return-on-investment
in our online and offline advertising efforts. We are also
adding a significant upgrade to our data aggregation, mining and
segmentation capabilities across Expedia leveraging our
enterprise data warehouse.
We are continuing to invest in our re-platforming and enterprise
data warehouse initiatives, and we anticipate traveler-facing
benefits beginning in late 2008 or early 2009.
Competition
Our brands compete in rapidly evolving and intensely competitive
markets. We believe the relatively low percentage of total
travel sales transacted online, particularly in international
markets, 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. We face these competitors in local, regional, national
and/or
international markets. In some cases competitors are offering
favorable terms and improved interfaces to suppliers and
travelers which make competition increasingly difficult.
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 or promotional offers, 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 long standing loyalty programs,
lower transaction fees and better pricing. Our websites feature
travel products and services from numerous travel suppliers (as
opposed to a single supplier), and allow travelers to combine
products and services from multiple providers in one
transaction. 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, supplier consolidation or business
models.
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, business practices and
contractual obligations with employees, 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 maintain our trademark portfolio by filing trademark
applications with the appropriate international trademark
offices, maintaining our current registrations, securing
contractual trademark rights when appropriate, and relying on
common law trademark rights when appropriate. We also register
domain names as we deem appropriate. We protect our trademarks
and domain names with an enforcement program and use of
trademark licenses. While we seek to protect our trademarks and
domain names, effective trademark and domain name protection may
not be available or may not be sought by us for every trademark
and domain name used in every country, and contractual disputes
may affect the use of trademarks and domain names
9
governed by private contract. In addition, our infringement
monitoring resources may not locate every trademark or domain
name infringement that exists. Similarly, not every variation of
a domain 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 are
increasingly subject to laws and regulations applicable to
travel agents in those markets, including, in some countries,
laws regulating the provision of travel packages and industry
specific value-added tax regimes. For example, the European
Economic Community 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 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.
In the first quarter of 2006, we began reporting two segments:
North America and Europe. The change from a single reportable
segment is a result of the reorganization of our business. We
have not reported segment information for the year ended
December 31, 2005, as it is not practicable to do so. The
segment and geographic information required herein is contained
in Note 16 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. Except as
explicitly noted, 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 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
10
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 post our code of business
conduct and ethics, which applies to all employees, including
all executive officers, 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
Regulation S-K
and the rules of the NASDAQ. 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, senior financial officers or directors, on our
corporate website.
Employees
As of December 31, 2007, we employed approximately
7,150 full-time and part-time employees, including
approximately 1,690 employees of eLong. We believe we have
good relationships with our employees, including relationships
with employees represented by works councils or other similar
organizations.
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Part I.
Item 1A.
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Risk
Factors
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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 an increasingly competitive global
environment.
The market for the services we offer is increasingly and
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, particularly travel suppliers such as airlines and
hotels, may offer products and services on more favorable terms,
including lower prices, no fees or unique access to proprietary
loyalty programs, such as points and miles. Many of these
competitors, such as airlines, hotel and rental car companies,
have been steadily focusing on increasing online demand on their
own websites in lieu of third-party distributors such as
Expedia. For instance, some low cost airlines, which are having
increasing success in the marketplace, distribute their online
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 increased
or exclusive product availability and their own bonus miles or
loyalty points, which could make their offerings more attractive
to consumers than offerings like ours. In addition, we face
increasing competition from other travel agencies, which in some
cases may have favorable offerings for both travelers and
suppliers, including pricing, connectivity and supply breadth.
We also compete with other travel agencies for both travelers
and the acquisition and retention of supply. The introduction of
new technologies and the expansion of existing technologies,
such as metasearch and other search engine technologies, may
increase competitive pressures or lead to changes in our
business model. Increased competition has resulted in and may
continue to result in reduced 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.
Our business depends on our relationships with travel
suppliers.
An important component of our business success depends on our
ability to maintain and expand relationships with travel
suppliers and 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 and financial performance.
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 best rate
guarantees, loyalty programs
and/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
11
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.
Declines or disruptions in the travel industry could
adversely affect our business or financial performance.
Our business and financial performance are affected by the
health of the worldwide travel industry. Accordingly, if there
is a downturn or weakness in the travel industry it could have a
material adverse effect on our business. Travel expenditures are
sensitive to business and personal discretionary spending levels
and tend to decline or grow more slowly during economic
downturns, including downturns in any of our major markets.
Events or weakness specific to the air travel industry that
could negatively affect our business include continued fare
increases, travel-related strikes or labor unrest,
consolidations, bankruptcies or liquidations and further fuel
price escalation. Additionally, our business is sensitive to
safety concerns, and thus our business has in the past and may
in the future decline after incidents of actual or threatened
terrorism, during periods of political instability or
geopolitical conflict in which travelers become concerned about
safety issues, as a result of natural disasters such as
hurricanes or earthquakes 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
and financial performance 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 actual or threatened terrorist activity or war,
could result in the incurrence of significant additional costs
and constrained liquidity if we provide relief to affected
travelers by not charging cancellation fees
and/or by
refunding the price of airline tickets, hotel reservations and
other travel products and services.
We rely on the value of our brands, and the costs of
maintaining and enhancing our brand awareness are increasing.
We believe continued investment in our brands, including
Expedia.com, Hotels.com, Hotwire.com, Classic Vacation, Expedia
Corporate Travel, eLong, the TripAdvisor Media Network and
Expedia Local Expert, is critical to retain and expand our
traveler, supplier and advertiser bases. We have and expect to
continue having to spend more to maintain our brands value
due to a variety of factors. These include increased spending
from our competitors, expansion into geographies and products
where our brands are less well known, inflation in media pricing
including search engine keywords and the continued emergence and
relative traffic share growth of search engines and meta search
engines as destination sites for travelers. We have spent
considerable money and resources to date on the establishment
and maintenance of our brands, and we will continue to spend
money on, and devote resources to, advertising and marketing, as
well as other brand building efforts to preserve and enhance
consumer awareness of our brands. We may not be able to
successfully maintain or enhance consumer awareness of our
brands, and, even if we are successful in our branding efforts,
such efforts may not be cost-effective, or as cost-effective as
they have been historically. If we are unable to maintain or
enhance consumer awareness of our brands and generate demand in
a cost-effective manner, it would have a material adverse effect
on our business, financial condition and results of operations.
Our business could be negatively affected by changes in
search engine algorithms and dynamics.
We increasingly utilize internet search engines, principally
through the purchase of travel-related keywords, to generate
traffic to our websites. Search engines frequently update and
change the logic that determines the placement and display of
results of a users search, such that the purchased or
algorithmic placement of links to our websites can be negatively
affected. In addition, a significant amount of our business is
directed to our own websites through our participation in
pay-per-click
and display advertising campaigns on internet media properties
and search engines whose pricing and operating dynamics can
experience rapid change, both technically and competitively. If
a major search engine changes its algorithms in a manner that
negatively affects the search engine ranking, paid or unpaid, of
our websites or that of our third-party distribution partners,
or if competitive dynamics further impact market pricing in a
negative manner, our business and financial performance would be
adversely affected.
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We rely on information technology to operate our businesses
and maintain our competitiveness, and any failure to adapt to
technological developments or industry trends could harm our
business.
We depend on the use of sophisticated information technologies
and systems, including technology and systems used for
reservations, communications, procurement and administration. As
our operations grow in both size and scope, we must continuously
improve and upgrade our systems and infrastructure to offer an
increasing number of travelers enhanced products, services,
features and functionality, while maintaining the reliability
and integrity of our systems and infrastructure. Our future
success also depends on our ability to adapt our services and
infrastructure to meet rapidly evolving consumer trends and
demands while continuing to improve the performance, features
and reliability of our service in response to competitive
service and product offerings.
In addition, we may not be able to maintain our existing systems
or replace or introduce new technologies and systems as quickly
as we would like or in a cost-effective manner. We are currently
in the process of migrating portions of our site functionality
to a new technology platform to enable us to introduce
innovation more rapidly, achieve better search engine
optimization and improve our site merchandising capability,
among other anticipated benefits. We have experienced some
delays with this migration. Delays or difficulties in
implementing new or enhanced systems may keep us from achieving
the desired results in a timely manner, to the extent
anticipated, or at all. Also, we may be unable to devote
financial resources to new technologies and systems in the
future. If any of these events occur, our business could suffer.
We rely on third-parties for many systems and services.
We rely on third-party service providers for certain
fulfillment, processing, development, technology and other
services. If these third-parties experience difficulty meeting
our requirements or standards, it could damage our reputation or
make it difficult for us to provide certain services to our
travelers and operate some aspects of our business. In addition,
if such third-party service providers were to cease operations,
temporarily or permanently, face financial distress or we were
unable to successfully negotiate future contracts with such
providers, we could suffer increased costs and delays in our
ability to provide similar services until an equivalent service
provider could be found or we could develop our technology or
operations. In addition, we rely increasingly on outsourced
providers of traveler care and information technology services.
If we are unsuccessful in choosing high quality partners or we
ineffectively manage these partnerships it could have an adverse
impact on our operations and financial results.
Over the last several years, we have experienced downward
pressure on remuneration from our suppliers.
A substantial portion of our revenue is derived from
compensation negotiated with travel suppliers and GDS partners
for bookings made through our websites. Over the last several
years, air and hotel travel suppliers have generally reduced or
in some cases eliminated payments to travel agents and other
travel intermediaries. In addition, as our hotel remuneration
varies with the room rates paid by travelers (Average Daily
Rates, or ADRs), to the extent ADRs grow more slowly
than anticipated or decline, our revenue for each room sold will
generally be proportionately lower. Each year we typically
negotiate or renegotiate numerous long-term airline and hotel
contracts. No assurances can be given that GDS partners or
travel suppliers will not further reduce of eliminate
compensation, or attempt to charge travel agencies for content,
any of which could reduce our revenue and margins thereby
adversely affecting our business and financial performance.
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.
13
In addition, we have experienced a high rate of executive
turnover since 2005. 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. We do not maintain any key
person life insurance policies.
Our stock price is highly volatile.
The market price of our common stock is highly volatile and
could continue to be subject to wide fluctuations in response to
factors such as the following, some of which are beyond our
control:
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Quarterly variations in our operating results;
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Operating results that vary from the expectations of securities
analysts and investors;
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Changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors;
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Reaction to our earnings releases and conference calls, or
presentations by executives at investor and industry conferences;
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Changes in our capital structure;
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Changes in market valuations of other internet or online service
companies;
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Announcements of technological innovations or new services by us
or our competitors;
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Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
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Loss of a major supplier participant, such as an airline or
hotel chain;
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Changes in the status of our intellectual property rights;
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Lack of success in the expansion of our business model
geographically;
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Announcements by third parties of significant claims or
proceedings against us or adverse developments in pending
proceedings;
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Additions or departures of key personnel;
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Rumors or public speculation about any of the above
factors; and
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Market and volume fluctuations in the stock markets in general.
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Our international operations involve additional risks and our
exposure to these risks will increase as we expand our
international operations.
We operate in a number of jurisdictions outside of the United
States 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 and business model to the unique circumstances of such
countries and markets, including supplier relationships and
traveler preferences. 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 adapt our practices and
models effectively to the traveler and supplier preferences of
each country into which we expand could slow our international
growth.
We expect to continue to face additional risks in international
operations. These risks include political instability;
threatened or actual acts of terrorism; changes in regulatory
requirements;, our ability to comply with additional
U.S. laws applicable to U.S. companies operating
internationally as well as local laws and
14
regulations; diminished ability to legally enforce our
contractual rights; increased risk and limits on our ability to
enforce intellectual property rights; possible preferences by
local populations for local providers; restrictions on the
withdrawal of
non-U.S. investment
and earnings; currency exchange restrictions; slower adoption of
the internet as an advertising, broadcast and commerce medium in
those markets as compared to the United States and difficulties
in managing staffing and operations due to distance, time zones,
language and cultural differences.
Changing laws, rules and regulations and legal uncertainties
may adversely affect our business or financial performance.
Our business and financial performance 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. Such unfavorable changes 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.
Adverse application of tax laws, rules or regulations could
have an adverse effect on our businesses and financial
performance.
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.
Many of the fundamental statutes and regulations that impose
these taxes were established before the growth of the internet
and
e-commerce.
If the tax laws, rules and regulations were amended, if new
adverse laws, rules or regulations were adopted, or if current
laws are interpreted adversely to our interests, particularly
with respect to occupancy or value-added taxes, the results
could increase our tax payments (prospectively or
retrospectively)
and/or
subject us to penalties and decrease the demand for our products
and services if we pass on such costs to the consumer. As a
result these changes could have an adverse affect on our
businesses or financial performance. We continue to work with
relevant tax authorities and legislators to clarify our
obligations under existing, new and emerging laws and
regulations. There have been, and will continue to be,
substantial ongoing costs associated with complying with, and
defending our position in, the various indirect tax requirements
in the numerous markets in which we conduct or will conduct
business.
System interruption and the lack of redundancy in our
information systems may harm our businesses.
We rely on computer systems to facilitate and process
transactions. We have experienced and may in the future
experience system interruptions that make some or all of these
systems unavailable or prevent us from efficiently fulfilling
orders or providing services to third-parties. Any
interruptions, outages or delays in our systems, or
deterioration in their performance, could impair our ability to
process transactions and decrease our quality of service that we
can offer to our travelers. If we were to experience frequent or
persistent system failures, our reputation and brands could be
harmed.
In addition, we do not have backup systems or contingency plans
for certain critical aspects of our operations or business
processes, many other systems are not fully redundant and our
disaster recovery or business continuity 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 impact or interrupt computer
or communications systems or business processes at any time.
Although we have put measures in place to protect certain
portions of our facilities and assets, 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. Remediation may be
costly and we may not have adequate insurance to cover such
costs. Moreover, the costs
15
of enhancing infrastructure to attain improved stability and
redundancy may be time consuming and expensive and may require
resources and expertise that are difficult to obtain.
Intense competition for advertising revenue may adversely
affect our ability to achieve or maintain market share and
operate profitably.
Expedia, Inc. websites, including in particular the TripAdvisor
Media Network, compete for advertising dollars with large
internet portal sites, such as American Online, MSN and Yahoo!,
that offer listing or other advertising opportunities for
travel-related companies. These companies have significantly
greater financial, technical, marketing and other resources and
large client bases. We also compete with search engines like
Google and Yahoo! Search that offer
pay-per-click
advertising services. In addition, we compete with newspapers,
magazines and other traditional media companies that provide
offline and online advertising opportunities. We expect to face
additional competition as other established and emerging
companies, including print media companies, enter the online
advertising market. Competition could results in reduced margins
on our advertising services, loss of market share or less use of
our sites by travel companies and travelers. If we are not able
to compete effectively with current or future competitors as a
result of these and other factors, our business could be
materially adversely affected. In addition, the TripAdvisor
Media Network is increasingly reliant on natural and paid search
traffic from major search engines, whose per unit costs have
been increasing.
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 a Stockholders Agreement between
Mr. Diller and Liberty Media Corporation, Mr. Diller
holds an irrevocable proxy to vote shares of Expedia stock held
by 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. Dillers
permanent departure from Expedia, the irrevocable proxy would
terminate and depending on the capitalization of Expedia at such
time, Liberty could 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,
controlled approximately 60% of the combined voting power of the
outstanding Expedia capital stock as of December 31, 2007.
In addition, under a Governance Agreement among Mr. Diller,
Liberty Media Corporation and Expedia, Inc., as amended, each of
Mr. Diller and Liberty generally has the right to consent
to limited matters in the event that we incur debt such that our
ratio of total debt to EBITDA, as defined in the Governance
Agreement, equals or exceeds 8:1 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. Dillers ownership interests and
voting power, and Libertys ownership interests and voting
power upon Mr. Dillers 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.
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 facing 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.
16
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.
We may be unable to access capital when necessary or
desirable.
The availability of funds depends in large measure on capital
markets and liquidity factors over which we exert no control. We
can provide no assurance that sufficient financing will be
available on desirable terms to fund investments, acquisitions,
stock repurchases or extraordinary actions. In addition, any
downgrade of our debt ratings by Standard &
Poors, Moodys Investor Service or similar ratings
agencies, increases in general interest rate levels or general
weakening in the credit markets could increase our cost of
capital.
We have foreign exchange risk.
As a result of our international websites and acquisitions, we
conduct a significant and growing portion of our business
outside the United States. Further, due to the nature of our
operations and our corporate structure, we have subsidiaries
that have significant transactions in foreign currencies other
than their functional currency. As a result, we face exposure to
movements in currency exchange rates, particularly those related
to the British Pound Sterling, the Euro, Canadian dollar and
Chinese Renminbi. Foreign exchange rate fluctuations may
adversely impact our results of operations as exchange rate
fluctuations on transactions denominated in currencies other
than the functional currency results in gains and losses that
are reflected in our consolidated statements of operations.
Additionally, the results of operations of our foreign
subsidiaries are exposed to foreign exchange rate fluctuations
as the financial results of our foreign subsidiaries are
translated from local currency into U.S. dollars upon
consolidation. 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. If the U.S. dollar strengthens against the local
currency of profitable, cash generating foreign operations and
we choose not to hedge or fail to hedge effectively our
exposure, it could cause us to adjust our financing and
operating strategies and could have a material adverse effect on
our financial statements and financial condition.
Our investment in eLong creates risks and uncertainties
relating to the laws in China.
The success of our investment in eLong, a company organized
under Cayman law, whose principal business is the operation of
an internet-based travel business in China, is subject to risks
and uncertainties regarding the interpretation of Chinas
laws and regulations. The Chinese 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 Chinese law to involve uncertainties that could
limit the available legal protections. In addition, we cannot
predict the effect of future developments in Chinas legal
system, particularly with respect to the travel industry, the
internet, foreign investment or licensing, 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
certain direct 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 eLongs
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.
17
Our processing, storage, use and disclosure of personal data
could give rise to liabilities as a result of governmental
regulation, conflicting legal requirements, differing views of
personal privacy rights, or data security breaches.
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
and security 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
and/or
online data.
We cannot guarantee that our security measures will prevent data
breaches. A substantial data breach could significantly harm our
business, damage our reputation, expose us to a risk of loss or
litigation and possible liability
and/or cause
customers and potential customers to lose confidence in our
security, which would have a negative effect on the value of our
brands.
These and other privacy and security developments that are
difficult to anticipate could adversely affect our business,
financial condition and results of operations.
Acquisitions could result in operating and financial
difficulties.
Our future growth may depend, in part, on acquisitions. To the
extent that we grow through acquisitions, we will 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, increased
complexity of our business, 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, may divert management
time and other resources. Some acquisitions may not be
successful and their performance 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:
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Use of cash resources and incurrence of debt and contingent
liabilities in funding acquisitions;
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Amortization expenses related to acquired intangible assets and
other adverse accounting consequences;
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Costs incurred in identifying and performing due diligence on
potential acquisition targets that may or may not be successful;
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Difficulties and expenses in assimilating the operations,
products, technology, information systems or personnel of the
acquired company;
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Impairment of relationships with employees, suppliers and
affiliates of our business and the acquired business;
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The assumption of known and unknown debt and liabilities of the
acquired company;
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Failure to generate adequate returns on our acquisitions and
investments;
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Entrance into markets in which we have no direct prior
experience; and
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Impairment of goodwill or other intangible assets arising from
our acquisitions (for example, in the quarter ended
September 30, 2006, we recognized a $47.0 million
impairment charge related to an indefinite lived intangible
asset of Hotwire).
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18
We cannot be sure that our intellectual property is protected
from copying or use by others, including potential
competitors.
Our websites rely on content and technology intellectual
property, much of which we regard as proprietary. We 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 or content
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.
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Part I. Item 1B.
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Unresolved
Staff Comments
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None.
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Part I. Item 2.
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Properties
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We lease approximately 1.6 million square feet of office
space worldwide, pursuant to leases with expiration dates
through October 2018.
We lease approximately 340,000 square feet for our current
headquarters in Bellevue, Washington, pursuant to leases with
expiration dates primarily through September 2009. We also lease
approximately 550,000 square feet of office space for our
domestic operations in various cities and locations in Arizona,
California, Florida, Hawaii, Idaho, Illinois, Massachusetts,
Michigan, Missouri, Nevada, New Jersey, New York, Texas and
Washington, pursuant to leases with expiration dates through
January 2015. In addition, in June 2007, we entered into a
ten-year lease for approximately 348,000 square feet of
office space for our new headquarters located in Bellevue,
Washington. We expect the term and cash payments related to this
lease to begin in November 2008.
We also lease approximately 360,000 square feet of office
space for our international operations in various cities and
locations, including Canada, China, France, Germany and the
United Kingdom, pursuant to leases with expiration dates through
December 2016.
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Part I. Item 3.
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Legal
Proceedings
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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 SEC require the description of material pending
legal proceedings, other than ordinary, routine litigation
incident to the registrants 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 December 31, 2007, and involve
issues or claims that may be
19
of particular interest to our stockholders, regardless of
whether any of these matters may be material to our financial
position or results of operations based upon the standard set
forth in the SECs 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
IACs August 4, 2004 announcement of its earnings for
the second quarter of 2004 and generally alleged that the value
of the Companys 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 IACs 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 IACs 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 IACs 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 IACs 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. The court issued an opinion and
order (i) granting the defendants motion to dismiss
the complaint in the securities class action, with leave to
replead, and (ii) granting the defendants motion to
dismiss the complaint in the shareholder derivative suits, with
prejudice.
On April 23, 2007, the plaintiffs in the shareholder
derivative suits filed a notice of appeal to the
United States Court of Appeals for the Second Circuit from
the District Courts order of dismissal. On June 14,
on consent of the parties, the appeal was withdrawn from active
consideration by the Court of Appeals, subject to reinstatement
by no later than March 31, 2008.
On May 15, 2007, the plaintiffs in the securities class
action filed a second amended complaint. The new pleading
continues to allege that the defendants failed to disclose
material information concerning problems at the Companys
then-travel businesses and to assert the same legal claims as
its predecessor. On August 15, 2007, the defendants filed a
motion to dismiss the second amended complaint. On
October 19, 2007, the plaintiffs opposed the motion. On
November 9, 2007, the defendants filed their reply brief in
support of the motion. A hearing on the motion has not been
scheduled.
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Expedia believes that the claims in the class action and
derivative suits lack merit and will continue to vigorously
defend against them.
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 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.coms 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 plaintiffs 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.
On April 20, 2006, Canales filed a fourth amended petition
and a new motion for class certification. Certification briefing
has been deferred indefinitely. On April 11, 2007, the
parties submitted a joint status report to the court asking that
the next status conference be reset to October 2007. On
November 13, 2007, the parties filed a joint report
requesting postponement of the status hearing for six months.
Expedia®
Washington. On February 18, 2005, three
actions filed against Expedia, Inc., a Washington corporation
and wholly-owned subsidiary of the registrant (Expedia
Washington) 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 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 Washington 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 Washington. 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. Six of the seven originally named
plaintiffs have withdrawn from the suit. On March 27, 2006,
a new named plaintiff was permitted to intervene. During a
March 2, 2007 hearing, the court indicated that the
plaintiff should amend its complaint and that the parties should
provide further briefing on class certification issues. A
hearing on plaintiffs motion for class certification took
place on September 28, 2007. A new judge was recently
assigned to the case and another hearing on plaintiffs
motion for class certification is scheduled for April 4,
2008.
Hotwire®. On
April 19, 2005, three actions filed against Hotwire, Inc.
(Hotwire) were consolidated and now are pending
under the caption Bruce Deaton v. Hotwire, Inc. et
al., Case
No. CGC-05-437631,
in the Superior Court of the State of California, County of
San Francisco. The consolidated complaint, which was
21
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. The Court
held a hearing on January 16, 2007, on plaintiffs
motion for class certification. On March 15, 2007, the
court certified a class of all residents of the United States to
whom Hotwire charged taxes/fees for the facilitation
of reservations for stand-alone hotel rooms on its website. The
court has not yet required that Hotwire provide notice to the
potential class members. A case management conference is
scheduled for March 18, 2008.
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
Washington, 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. On July 1, 2005, plaintiffs filed an amended
complaint, adding claims pursuant to Californias 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 Washington 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 also 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. On July 12, 2006, the lawsuit filed by
the city of San Diego was coordinated with this lawsuit. On
January 17, 2007, the defendants filed additional demurrers
and a motion to strike class allegations. On March 2, 2007,
the plaintiffs filed a third amended complaint and on
March 7, 2007, the court denied defendants demurrers
on misjoinder. On April 11, 2007, the defendants filed
additional demurrers. On June 11, 2007, a hearing took
place on defendants demurrers and motion to strike class
allegations and on July 26, 2007, the court signed an order
staying the lawsuit until the cities have exhausted their
administrative remedies.
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 Washington.
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
22
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. On July 12, 2006, the Court granted
in part and denied in part defendants motion to dismiss.
On August 1, 2007, plaintiff filed a motion for class
certification. On February 12, 2008, the court issued an
order stating that a hearing on plaintiffs motion for
class certification was not necessary and that plaintiffs
motion was under advisement.
City of Findlay, Ohio Litigation. On
October 25, 2005, the city of Findlay, Ohio filed a
purported state wide class action in state court against a
number of internet travel companies, including Hotels.com,
Hotwire and Expedia Washington. 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. On July 26, 2006, the Court granted in part and
denied in part defendants motion to dismiss. Discovery is
ongoing. The court has consolidated this lawsuit with the
lawsuit filed by the cities of Columbus and Dayton, Ohio.
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 Washington.
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. A hearing on
defendants motion to dismiss was held on January 16,
2007. On September 27, 2007, the court denied the
defendants motion to dismiss.
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
Washington. 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. On May 9, 2006, the Court granted in
part and denied in part defendants motion to dismiss. On
June 8, 2006, plaintiffs filed an amended complaint
adding 16 more municipalities and political subdivisions as
named plaintiffs. On February 9, 2007, the defendants filed
a motion for summary judgment based on plaintiffs failure
to exhaust their administrative remedies. On May 10, 2007,
the court denied, without prejudice, defendants motion for
summary judgment based on plaintiffs failure to exhaust
administrative remedies, but stayed the litigation, concluding
that the plaintiffs must exhaust their administrative remedies
before continuing to litigate their tax claims.
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 Washington. 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
23
Eastern District of North Carolina. On March 14, 2006, the
defendants filed a motion to dismiss the complaint. Defendants
removed the case to federal court on February 13, 2006. A
hearing on defendants motion to dismiss was held on
October 17, 2006. On March 29, 2007, the court denied
the defendants motion to dismiss. On April 13, 2007,
the defendants filed a motion for reconsideration or
certification of an interlocutory appeal. On August 13,
2007, the court granted defendants motion for
reconsideration, dismissing the lawsuit. The court found that
the hotel occupancy tax ordinance at issue only applied to
operators of hotels and because the defendants did
not operate hotels, the tax only applied to the room price
charged by the hotels themselves. The plaintiffs have appealed
the courts order.
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 Washington. 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. On
July 12, 2006, this lawsuit was coordinated with the City
of Los Angeles lawsuit (No. DC326693, Superior Court of the
State of California, Los Angeles County, Central District).
Orange County, Florida Litigation. On
March 13, 2006, Orange County, Florida filed an action in
state court against a number of internet travel companies,
including Hotels.com, Hotwire and Expedia Washington. See
Orange County et al v. Expedia, Inc., et al.,
2006-CA-2104 Div. 39 (Circuit Court Ninth Judicial District,
Orange County, FL). The complaint alleges that the defendants
have failed to pay the county hotel accommodations taxes as
required by municipal ordinance. The complaint seeks a
declaratory judgment regarding the countys right to audit
and collect tax on certain of the defendants hotel room
transactions. The case was removed to federal court on
April 13, 2006. The federal court remanded the case to
state court on August 2, 2006. On February 2, 2007,
the Court granted defendants motion to dismiss. On
February 9, 2007, the County filed a motion for rehearing
and on February 19, 2007, the court denied the
plaintiffs motion for rehearing. On March 9, 2007,
the plaintiff filed an amended complaint. On April 9, 2007,
the defendants filed a motion to dismiss or, in the alternative,
stay the lawsuit. On July 17, 2007, the court entered an
order granting defendants motion to dismiss the
Countys Amended Complaint. On August 9, 2007, the
County filed a notice of appeal. The briefing on the
Countys appeal will be complete in February 2008.
City of Atlanta, Georgia Litigation. On
March 29, 2006, the city of Atlanta, Georgia filed suit
against a number of internet travel companies, including
Hotels.com, Hotwire and Expedia Washington. See City of
Atlanta, Georgia v. Hotels.com, L.P., et al.,
2006-CV-114732 (Superior Court of Fulton County, Georgia). The
complaint alleges that the defendants have failed to pay to the
city hotel accommodations taxes as required by municipal
ordinances. The complaint purports to assert claims for
violation of the ordinance, conversion, unjust enrichment,
imposition of a constructive trust, declaratory judgment and an
equitable accounting. The complaint seeks damages and other
relief in an unspecified amount. The defendants answered on
June 5, 2006. On December 11, 2006, the Court
dismissed the lawsuit. The city of Atlanta filed a notice of
appeal on January 10, 2007. On October 26, 2007, the
Georgia Court of Appeals affirmed the trial courts order
dismissing the City of Atlantas lawsuit for failure to
exhaust its administrative remedies. On November 5, 2007,
the City of Atlanta filed a motion for reconsideration of the
Court of Appeals decision. On November 13, 2007, the Court
of Appeals denied plaintiffs motion. On December 10,
2007, the City filed a Petition of Certiorari to the Georgia
Supreme Court. On January 7, 2008, the defendants filed
their response to the Citys Petition for Certiorari.
City of Charleston, South Carolina
Litigation. On April 26, 2006, the city of
Charleston, South Carolina filed suit in state court against a
number of internet travel companies, including Hotels.com,
Hotwire and Expedia Washington. See City of Charleston, South
Carolina v. Hotels.com, et al., 2:06-CV-01646-PMD
(United States District Court, District of South Carolina,
Charleston Division). The case was removed to federal court on
May 31, 2006. The complaint alleges that the defendants
have failed to pay the city hotel accommodations taxes as
required by municipal ordinance. The complaint purports to
assert claims for violation of that ordinance, conversion,
constructive trust and legal accounting. The complaint seeks
damages in an unspecified amount. The
24
defendants answered on July 7, 2006. On August 22,
2006, Hotels.com GP, LLC was voluntarily dismissed. On
April 26, 2007, the court entered an order consolidating
the lawsuits filed by the City of Charleston and the Town of Mt.
Pleasant. On May 14, 2007, the plaintiff filed its first
amended complaint. On June 4, 2007, the defendants filed a
motion to dismiss and on November 5, 2007, the court denied
the defendants motion to dismiss. On November 30,
2007, the defendants filed a motion for reconsideration or for
certification of interlocutory appeal. Trial is currently
scheduled to begin on December 8, 2008.
City of San Antonio, Texas Litigation. On
May 8, 2006, the city of San Antonio filed a putative
statewide class action in federal court against a number of
internet travel companies, including Hotels.com, Hotwire, and
Expedia Washington. See City of San Antonio, et
al. v. Hotels.com, L.P., et al., SA06CA0381 (United
States District Court, Western District of Texas,
San Antonio 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, common-law
conversion, and declaratory judgment. The complaint seeks
damages in an unspecified amount, restitution and disgorgement.
The defendants filed a motion to dismiss on June 30, 2006.
On August 28, 2006, the plaintiffs filed a motion for class
certification. On March 20, 2007, the court denied the
defendants motion to dismiss. On May 16 and 17, 2007, the
court held a hearing on plaintiffs motion for
certification. The court has not ruled on that motion.
City of Gallup, New Mexico Litigation. On
May 17, 2006, the city of Gallup, New Mexico filed a
putative statewide class action in state court against a number
of internet travel companies, including Hotels.com, Hotwire and
Expedia Washington. See City of Gallup, New Mexico, et
al. v. Hotels.com, L.P., et al., CIV-06-0549
JC/RLP (United States District Court, District of New Mexico).
The case was removed to federal court on June 23, 2006. The
complaint alleges that the defendants have failed to pay to the
city hotel accommodations taxes as required by municipal
ordinances. The complaint purports to assert claims for
violation of those ordinances, conversion, and declaratory
judgment. The complaint seeks damages in an unspecified amount,
restitution and disgorgement. On July 31, 2006, the defendants
filed a motion to dismiss. On January 30, 2007, the Court
granted in part and denied in part defendants motion to
dismiss. On April 18, 2007, the court granted
plaintiffs motion to dismiss its own lawsuit. On
July 6, 2007, the City of Gallup refiled its lawsuit. The
defendants answered the complaint on August 27, 2007. Class
certification discovery is ongoing.
Town of Mt. Pleasant, South Carolina
Litigation. On May 23, 2006, the Town of
Mount Pleasant, South Carolina filed suit in state court against
a number of internet travel companies, including Hotels.com,
Hotwire and Expedia Washington. See Town of Mount Pleasant,
South Carolina v. Hotel.com, et al., 2-06-CV-020987-PMD
(United States District Court, District of South Carolina,
Charleston Division). The case was removed to federal court on
July 21, 2006. 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, conversion,
constructive trust and legal accounting. The complaint seeks
damages in an unspecified amount. On August 22, 2006,
Hotels.com GP, LLC was voluntarily dismissed The defendants
answered the complaint on September 15, 2006.. Discovery is
ongoing. On April 26, 2007, the court consolidated the
lawsuits filed by the City of Charleston and the Town of Mt.
Pleasant. On May 14, 2007, the town filed its first amended
complaint. On June 4, 2007, the defendants filed a motion
to dismiss. On November 5, 2007, the court denied the
defendants motion to dismiss. On November 30, 2007,
the defendants filed a motion for reconsideration or for
certification of interlocutory appeal.
Columbus, Georgia Litigation. On May 30,
2006, the city of Columbus, Georgia filed suit against Expedia,
Inc. and on June 7, 2006 filed suit against
Hotels.com both in state court. See Columbus,
Georgia v. Hotels.com, Inc., et al., 4:06-CV-80;
Columbus, Georgia v. Expedia, Inc., 4:06-CV-79
(United States District Court, Middle District of Georgia,
Columbus Division). The cases were removed to federal court on
July 12, 2006. During this same time period, the city of
Columbus filed similar lawsuits against other internet travel
companies. The complaints allege that the defendants have failed
to pay the city hotel accommodations taxes as required by
municipal ordinance. The complaints purport to assert claims for
violation of that ordinance, unjust enrichment, imposition of a
constructive trust, equitable accounting, and declaratory
judgment. The complaint seeks damages in an unspecified amount,
restitution and disgorgement. The lawsuits
25
were removed to federal court on July 12, 2006. Defendants
filed answers on July 26, 2006. On August 1, 2007,
Expedia and Hotels.com filed motions for summary judgment based
on the plaintiffs failure to exhaust its administrative
remedies prior to filing the lawsuit. On October 5, 2007,
the plaintiff filed a motion for declaratory judgment and
injunctive relief in the Expedia lawsuit. On November 5,
2007, Expedia and Hotels.com re-removed the lawsuit to federal
court. On November 8, 2007, the plaintiff filed an
emergency motion to remand the case to state court. On
November 16, 2007, the Court denied expedited consideration
of plaintiffs emergency motion to remand the case to state
court. On November 26, 2007, the Court granted the
parties joint motion to stay the proceedings pending the
Courts decision on the plaintiffs motion to remand.
Lake County, Indiana Convention and Visitors Bureau
Litigation. On June 12, 2006, the Lake
County Convention and Visitors Bureau, Inc. and Marshall County
filed a putative statewide class action in federal court on
behalf of themselves and all other similarly situated political
subdivisions in the state of Indiana against a number of
internet travel companies, including Hotels.com, Hotwire and
Expedia Washington. See Lake County Convention and Visitors
Bureau, Inc., et al. v. Hotels.com, LP, 2:06-CV-207
(United States District Court for the Northern District of
Indiana, Hammond Division). The complaint alleges that the
defendants have failed to pay to municipalities hotel
accommodations taxes as required by municipal ordinances. The
complaint purports to assert claims for violation of those
ordinances, conversion, unjust enrichment, imposition of a
constructive trust, and declaratory judgment. The complaint
seeks damages in an unspecified amount. On August 17, 2006,
the plaintiffs filed an amended complaint. The defendants filed
a motion to dismiss, which is pending.
City of Orange, Texas Litigation. On
July 18, 2006, the city of Orange, Texas filed a putative
statewide class action in federal court against a number of
internet travel companies, including Hotels.com, Hotwire and
Expedia Washington. See City of Orange, Texas, et al. v.
Hotels.com, L.P., et al., 1:06-CV-0413-RHC-KFG (United
States District Court, Eastern District of Texas, Beaumont
Division). The complaint alleges that the defendants have failed
to pay to municipalities hotel accommodations taxes as required
by municipal ordinances. The complaint purports to assert claims
for violation of those ordinances, conversion, civil conspiracy,
and declaratory judgment. The complaint seeks damages in an
unspecified amount. Defendants filed a motion to dismiss on
September 12, 2006, which is pending. On September 5,
2007, a federal magistrate issued a Report &
Recommendation that the lawsuit be dismissed because the tax
ordinance at issue imposes a tax consideration paid to a hotel
or motel, not on the amount that the guest pays to the
defendants. On September 21, 2007, the court adopted the
magistrates Report & Recommendation and dismissed the
case in its entirety.
Cities of Columbus and Dayton, Ohio
Litigation. On August 8, 2006, the city of
Columbus, Ohio and the city of Dayton, Ohio, filed a putative
statewide class action in federal court against a number of
internet travel companies, including Hotels.com, Hotwire and
Expedia Washington. See City of Columbus,
et al. v. Hotels.com, L.P., et al.,
2:06-cv-00677 (United States District Court, Southern District
of Ohio). The complaint alleges that the defendants have failed
to pay to counties and cities in Ohio hotel accommodation taxes
as required by local ordinances. The complaint purports to
assert claims for violation of those ordinances, unjust
enrichment, violation of the doctrine of money had and received,
conversion, declaratory judgment, and seeks imposition of a
constructive trust. The complaint seeks damages in an
unspecified amount. Defendants filed a motion to dismiss on
September 25, 2006 and a motion to transfer venue to the
Northern District of Ohio on September 27, 2006. The motion
to dismiss is pending. The case was transferred to the Northern
District of Ohio and defendants motion to dismiss was
granted in part, consistent with the ruling in the City of
Findlay, Ohio lawsuit.
North Myrtle Beach Litigation. On
August 28, 2006, the city of North Myrtle Beach, South
Carolina filed a lawsuit in state court against a number of
internet travel companies, including Hotels.com, Hotwire, and
Expedia Washington. See City of North Myrtle Beach v.
Hotels.com, et al., 4: 06-cv-03063-RBH (United States
District Court, District of South Carolina, Florence Division).
The complaint alleges that the defendants have failed to pay the
hotel accommodation taxes as required by local ordinances. The
complaint purports to assert claims for violation of those
ordinances, as well as a claim for conversion, imposition of a
constructive trust, and demand for an accounting. On
October 27, 2006, the case was removed to federal court. On
December 1, 2006, the defendants filed a motion to dismiss.
On September 30, 2007, the court denied
26
defendants motion to dismiss. On October 15, 2007,
the defendants answered the complaint. Trial is currently
scheduled to begin on or after March 9, 2009.
Louisville/Jefferson County Metro Government, Kentucky
Litigation. On September 21, 2006, the
Louisville/Jefferson County Metro Government filed a putative
statewide class action in federal court against a number of
internet travel companies, including Hotels.com, Hotwire, and
Expedia Washington. See Louisville/Jefferson County Metro
Government v. Hotels.com, L.P., et al., 3:06CV-480-R
(United States District Court for the Western District of
Kentucky, Louisville Division). The complaint alleges that the
defendants have failed to pay the counties and cities in
Kentucky hotel accommodation taxes as required by local
ordinances. The complaint purports to assert claims for
violation of those ordinances, unjust enrichment, money had and
received, conversion, imposition of a constructive trust, and
declaratory judgment. The complaint seeks damages in an
unspecified amount. On December 22, 2006, the defendants
filed a motion to dismiss, which was denied on August 10,
2007. On October 26, 2007, the defendants filed a motion
for reconsideration or certification of interlocutory appeal.
That motion is pending.
Nassau County, New York Litigation. On
October 24, 2006, the County of Nassau, New York filed a
putative statewide class action in federal court against a
number of internet travel companies, including Hotels.com,
Hotwire, and Expedia Washington. See Nassau County, New York,
et al. v. Hotels.com, L.P., et al., (United States
District Court, Eastern District of New York). The complaint
alleges that the defendants have failed to pay cities, counties
and local governments in New York hotel accommodation taxes as
required by local ordinances. The complaint purports to assert
claims for violations of those ordinances, as well as claims for
conversion, unjust enrichment, and imposition of a constructive
trust. The defendants filed a motion to dismiss on
January 31, 2007. The Countys deadline to respond to
the motion was April 2, 2007. On August 17, 2007, the
court granted defendants motion dismissing the lawsuit due
to the plaintiffs failure to exhaust its administrative
remedies. On September 12, 2007, the plaintiff filed a
notice of appeal and on November 15, 2007 plaintiff filled
its appellant brief.
Wake County, North Carolina Litigation. On
November 3, 2006, the County of Wake, North Carolina filed
a lawsuit in state court against a number of internet travel
companies, including Hotels.com, Hotwire, and Expedia
Washington. See Wake County v. Hotels.com, L.P., et
al., 06 CV 016256 (General Court of Justice, Superior Court
Division, Wake County). The complaint alleges that the
defendants have failed to pay the County hotel accommodation
taxes as required by local ordinance. The complaint purports to
assert claims for violation of the local ordinance, as well as
claims for declaratory judgment or injunction, conversion,
imposition of a constructive trust, demand for an accounting,
unfair and deceptive trade practices, and agency. The defendants
filed a motion to dismiss on February 12, 2007. On
April 4, 2007, the court consolidated the Wake County, Dare
County, Buncombe County, and Cumberland County lawsuits. On
May 9, 2007, the defendants moved to dismiss the lawsuits.
On November 19, 2007, the Court granted in part and denied
in part defendants motion to dismiss the Wake County
lawsuit.
Cumberland County, North Carolina
Litigation. On December 4, 2006, the County
of Cumberland, North Carolina filed a lawsuit in state court
against a number of internet travel companies, including
Hotels.com, Hotwire, and Expedia Washington. See Cumberland
County v. Hotels.com, L.P., et al., 06 CVS 10630
(General Court of Justice, Superior Court Division, Cumberland
County). The complaint alleges that the defendants have failed
to pay the County hotel accommodation taxes as required by local
ordinance. The complaint purports to assert claims for violation
of the local ordinance, as well as claims for declaratory
judgment or injunction, conversion, imposition of a constructive
trust, demand for an accounting, unfair and deceptive trade
practices, and agency. The defendants filed a motion to dismiss
on February 12, 2007. On April 4, 2007, the court
consolidated the Wake County, Dare County, Buncombe County, and
Cumberland County lawsuits. On May 9, 2007, the defendants
moved to dismiss the lawsuits. On November 19, 2007, the
Court granted defendants motion to dismiss the Cumberland
County lawsuit due to the Countys failure to exhaust its
administrative remedies. This dismissal is without prejudice and
allows the plaintiff to refile its lawsuit following exhaustion
of its administrative remedies.
Branson, Missouri Litigation. On
December 28, 2006, the city of Branson, Missouri filed a
lawsuit in state court against a number of internet travel
companies, including Hotels.com, Hotwire, and Expedia
27
Washington. See City of Branson, MO v. Hotels.com, L.P.,
et al., 106CC5164 (Circuit Court of Greene County,
Missouri). The complaint alleges that the defendants have failed
to pay the city hotel accommodation taxes as required by local
ordinance. The complaint purports to assert claims for violation
of the local ordinance, as well as claims for declaratory
judgment, conversion, and demand for an accounting. The deadline
for defendants to respond to the lawsuit has not yet been
established. On April 23, 2007, the defendants filed a
motion to dismiss the lawsuit. On November 26, 2007, the
court denied the defendants motion to dismiss.
Buncombe County Litigation. On
February 1, 2007, Buncombe County, North Carolina filed a
lawsuit in state court against a number of internet travel
companies, including Hotels.com, Hotwire, and Expedia
Washington. See Buncombe County v. Hotels.com, et
al., 7 CV 00585 (General Court of Justice, Superior Court
Division, Buncombe County, North Carolina). The complaint
alleges that the defendants have failed to pay the county hotel
accommodation taxes as required by local ordinance. The
complaint purports to assert claims for violation of the local
ordinance, as well as claims for declaratory judgment. The
deadline for defendants to respond to the lawsuit has not yet
been established. On April 4, 2007, the court consolidated
the Wake County, Dare County, Buncombe County, and Cumberland
County lawsuits. On May 9, 2007, the defendants moved to
dismiss the lawsuits. On November 19, 2007, the Court
granted in part and denied in part defendants motion to
dismiss the Buncombe County lawsuit.
Dare County, North Carolina Litigation. On
January 26, 2007, Dare County, North Carolina filed a
lawsuit in state court against a number of internet travel
companies, including Hotels.com, Hotwire, and Expedia
Washington. See Dare County v. Hotels.com, L.P., et
al., 07 CVS 56 (General Court of Justice, Superior Court
Division, Dare County, North Carolina). The complaint alleges
that the defendants have failed to pay the county hotel
accommodation taxes as required by local ordinance. The
complaint purports to assert claims for violation of the local
ordinance, as well as claims for declaratory judgment,
injunction, conversion, constructive trust, accounting, unfair
and deceptive trade practices and agency. The deadline for
defendants to respond to the lawsuit has not yet been
established. On April 4, 2007, the court consolidated the
Wake County, Dare County, Buncombe County, and Cumberland County
lawsuits. On May 9, 2007, the defendants moved to dismiss
the lawsuits. On November 19, 2007, the Court granted in
part and denied in part defendants motion to dismiss the
Dare County lawsuit.
Myrtle Beach, South Carolina Litigation. On
February 2, 2007, the City of Myrtle Beach, South Carolina
filed an individual lawsuit in state court against a number of
internet travel companies, including Hotels.com, Hotwire and
Expedia. City of Myrtle Beach v. Hotels.com, LP, et
al., 2007 CP26-0738 (Court of Common Pleas, Fifteenth
Judicial Circuit, County of Horry, South Carolina). The
complaint alleges that the defendants have failed to pay to the
county hotel accommodations taxes as required by municipal
ordinances. The complaint purports to assert a claim for
declaratory judgment that the accommodations tax at issue is
owed by the defendants. A hearing on the defendants motion
to dismiss was held on December 11, 2007.
Horry County, South Carolina Litigation. On
February 2, 2007, Horry County, South Carolina filed an
individual lawsuit in state court against a number of internet
travel companies, including Hotels.com, Hotwire and Expedia.
Horry County v. Hotels.com, LP, et al., 2007
CP26-0737 (Court of Common Please, County of Horry, South
Carolina). The complaint alleges that the defendants have failed
to pay to the county hotel accommodations taxes as required by
municipal ordinances. The complaint purports to assert a claim
for declaratory judgment that the accommodations tax at issue is
owed by the defendants. On April 23, 2007, the defendants
filed a motion to dismiss the Countys complaint. On
January 7, 2008, the Court denied the defendants
motion.
City of Fayetteville, Arkansas Litigation. On
February 28, 2007, the City of Fayetteville filed a
putative class action in state court against a number of
internet travel companies, including Hotels.com, Hotwire and
Expedia. City of Fayetteville v. Hotels.com, L.P., et
al., CV 07
567-1
(Circuit Court of Washington County, Arkansas). The complaint
alleges that the defendants have failed to pay to the city hotel
accommodations taxes as required by municipal ordinances. The
complaint purports to assert claims for violation of those
ordinances, unjust enrichment, conversion, imposition of a
constructive trust, and declaratory judgment. The complaint
seeks damages in an unspecified amount. Plaintiff filed an
amended complaint on July 24, 2007. On August 7, 2007,
defendants filed a motion to dismiss. That motion is pending.
28
City of Houston, Texas Litigation. On
March 5, 2007, the City of Houston filed an individual
lawsuit in state court against a number of internet travel
companies, including Hotels.com, Hotwire and Expedia. City of
Houston v. Hotels.com, L.P., et al.,
2007-13227
(District Court of Harris County, 270th Judicial District,
Texas). The lawsuit alleges that the defendants have failed to
pay to the city hotel accommodations taxes as required by
municipal ordinance. The lawsuit purports to assert claims for
violation of that ordinance, conversion, imposition of a
constructive trust, civil conspiracy, and demand for accounting.
The complaint seeks damages in an unspecified amount. On
April 30, 2007, the defendants filed their answers and
special exceptions to the plaintiffs complaint. On
July 5, 2007, the Court held a hearing on defendants
special exceptions. The Court granted the defendants
special exception with respect to requiring plaintiff to plead
the maximum amount of damages sought and denied the remaining
special exceptions. Plaintiff filed an amended petition on
October 4, 2007, adding the Harris County-Houston Sports
Authority as a plaintiff. On October 15, 2007, defendants
again filed special exceptions to the plaintiffs amended
petition. The Court held a hearing on defendants special
exceptions on November 9, 2007, during which the Court
indicated that it would grant defendants special
exceptions. On January 2, 2008, the plaintiffs filed a
motion for clarification of the Courts November 9,
2007 ruling. On January 11, 2008, the Court issued an order
granting defendants special exceptions and ordering the
plaintiffs to replead their petition by January 22, 2008.
On February 4, 2008, defendants filed special exceptions to
plaintiffs second amended petition.
Jefferson City, Missouri Litigation. On
June 27, 2007, Jefferson City, Missouri filed a putative
class action in state court against a number of internet travel
companies, including Hotels.com, Hotwire and Expedia.
Jefferson City v. Hotels.com, L.P., et al.,
07AC-CC0055 (Circuit Court of Cole County). 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 Missouris Merchandising Practices
Act, conversion, unjust enrichment, breach of fiduciary duties,
constructive trust, and declaratory judgment. The complaint
seeks injunctive relief and damages in an unspecified amount. On
November 5, 2007, the defendants filed a motion to
dismiss the plaintiffs lawsuit.
City of Oakland, California Litigation. On
June 29, 2007, the City of Oakland filed an individual
lawsuit in federal court against a number of internet travel
companies, including Hotels.com, Hotwire and Expedia. City of
Oakland v. Hotels.com, L.P., et al., C-07-3432 (United
States District Court, Northern District of California). 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. The complaint seeks injunctive relief and
damages in an unspecified amount, including punitive damages and
restitution. On September 18, 2007, the defendants filed a
motion to dismiss the lawsuit. On November 6, 2007, the
court granted the defendants motion to dismiss for failure
to exhaust administrative remedies. The Plaintiff filed a notice
of appeal on December 6, 2007.
City of Madison, Wisconsin Litigation. On
November 30, 2007, the City of Madison, Wisconsin filed an
individual lawsuit in state court against a number of internet
travel companies, including Expedia, Hotels.com, and Hotwire.
City of Madison v. Expedia, Inc., et al., 07 CV 4488
(Circuit Court of Dane County, Wisconsin). 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 seek a declaratory judgment as well as an
award of costs and attorneys fees. On January 23,
2008, defendants filed a motion to dismiss the lawsuit.
Mecklenburg County Litigation. On
January 10, 2008, the County of Mecklenberg, North Carolina
filed an individual lawsuit in state court against a number of
internet travel companies, including Expedia, Hotels.com, and
Hotwire. County of Mecklenburg v. Hotels.com L.P., et
al., (General Court of Justice, Superior Court Division,
Mecklenburg County, North Carolina). The complaint alleges that
the defendants have failed to pay to the County hotel
accommodations taxes as required by municipal ordinance. The
complaint purports to assert claims for violation of the local
ordinance, as well as claims for declaratory judgment,
injunction, conversion, constructive trust, accounting, unfair
and deceptive trade practices and agency. The deadline for
defendants to respond to the lawsuit is March 24, 2008.
The Company believes that the claims in all of the lawsuits
relating to hotel occupancy taxes lack merit and will continue
to defend vigorously against them.
29
Worldspan Litigation. On July 26, 2006,
Expedia filed a lawsuit against Worldspan, L.P. in state court
in Washington seeking a declaratory judgment, and other relief,
regarding the rights and obligations of Expedia and Worldspan
under the parties June 2001 Amended and Restated
Development Agreement and the parties CRS Marketing,
Services and Development Agreement and all amendments thereto.
See Expedia. Inc. v. Worldspan, L.P., (King County
Superior Court). Worldspan answered the lawsuit on
August 15, 2006, denying the allegations. On
September 4, 2007, the parties entered into a stipulation
to stay the lawsuit until December 10, 2007. The parties
are currently preparing final settlement documents for this
matter.
|
|
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 2007.
|
|
Part II. Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock has been quoted on 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 15, 2008,
there were approximately 5,577 holders of record of our common
stock and the closing price of our common stock was $25.59 on
NASDAQ. As of February 15, 2008, there were five holders of
record of our Class B common stock, each of which is an
affiliate of Liberty.
The following table sets forth the
intra-day
high and low prices per share for our common stock during the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
35.28
|
|
|
$
|
27.48
|
|
Third Quarter
|
|
|
32.57
|
|
|
|
25.45
|
|
Second Quarter
|
|
|
29.85
|
|
|
|
22.44
|
|
First Quarter
|
|
|
23.34
|
|
|
|
19.97
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
21.29
|
|
|
$
|
15.55
|
|
Third Quarter
|
|
|
17.28
|
|
|
|
12.87
|
|
Second Quarter
|
|
|
20.55
|
|
|
|
13.36
|
|
First Quarter
|
|
|
27.55
|
|
|
|
17.42
|
|
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, challenges to our business model and other factors
that the Board of Directors may deem relevant. In addition, our
Credit Agreement limits our ability to pay cash dividends under
certain circumstances.
Unregistered
Sales of Equity Securities
During the quarter ended December 31, 2007, 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.
30
Issuer
Purchases of Equity Securities
We did not make any purchases of our outstanding common stock
during the three months ended December 31, 2007. Between
January 1, 2007 and September 30, 2007, we repurchased
55 million shares of our common stock tendered through two
separate tender offers for a total cost of $1.385 billion,
representing an average price of $25.18 per share excluding
transaction costs.
During 2006 our Board of Directors authorized the repurchase of
up to 20 million outstanding shares of our common stock.
There is no fixed termination date for this authorization to
repurchase. As of February 15, 2008, we had not made any
share repurchases under this authorization.
Performance
Comparison Graph
The graph below compares the
29-month
cumulative total return, assuming the reinvestment of dividends,
on Expedia common stock with that of the NASDAQ Composite Index,
the RDG (Research Data Group) Internet Composite Index and the
S&P 500 Index. This graph assumes $100 was invested on
August 9, 2005 in Expedia common stock, and on
July 31, 2005 in each of the NASDAQ Composite Index
companies, the RDG Internet Composite Index companies and the
companies in the S&P 500 Index. The stock price performance
shown in the graph is not necessarily indicative of future price
performance.
|
|
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 information set forth below is not necessarily
indicative of future results and should be read in conjunction
with the consolidated financial statements and related notes and
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Our 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.
Beginning January 1, 2004, as part of the integration of
our businesses, Hotels.com conformed its merchant hotel business
practices to those of our other businesses. As a result, we
prospectively commenced reporting revenue for Hotels.com on a
net basis. In our selected financial data below, the revenue
amounts prior to January 1, 2004 report Hotels.com merchant
hotel business revenue on a gross basis. The change in reporting
did not affect operating income or net income.
31
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003(1)
|
|
|
Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,665,332
|
|
|
$
|
2,237,586
|
|
|
$
|
2,119,455
|
|
|
$
|
1,843,013
|
|
|
$
|
2,339,813
|
|
Operating income
|
|
|
529,069
|
|
|
|
351,329
|
|
|
|
397,052
|
|
|
|
240,473
|
|
|
|
243,518
|
|
Net income
|
|
|
295,864
|
|
|
|
244,934
|
|
|
|
228,730
|
|
|
|
163,473
|
|
|
|
111,407
|
|
Net earnings per share available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.00
|
|
|
$
|
0.72
|
|
|
$
|
0.68
|
|
|
$
|
0.49
|
|
|
$
|
0.33
|
|
Diluted
|
|
|
0.94
|
|
|
|
0.70
|
|
|
|
0.65
|
|
|
|
0.48
|
|
|
|
0.33
|
|
Shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
296,640
|
|
|
|
338,047
|
|
|
|
336,819
|
|
|
|
335,540
|
|
|
|
335,540
|
|
Diluted
|
|
|
314,233
|
|
|
|
352,181
|
|
|
|
349,530
|
|
|
|
340,549
|
|
|
|
340,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
$
|
(728,697
|
)
|
|
$
|
(224,770
|
)
|
|
$
|
(847,981
|
)
|
|
$
|
1,263,678
|
|
|
$
|
854,838
|
|
Total assets
|
|
|
8,295,422
|
|
|
|
8,264,317
|
|
|
|
7,756,892
|
|
|
|
9,537,187
|
|
|
|
8,755,270
|
|
Minority interest
|
|
|
61,935
|
|
|
|
61,756
|
|
|
|
71,774
|
|
|
|
18,435
|
|
|
|
|
|
Long-term debt
|
|
|
1,085,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,818,081
|
|
|
|
5,904,290
|
|
|
|
5,733,763
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total invested equity
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8,152,629
|
|
|
|
7,554,301
|
|
|
|
|
(1) |
|
Includes Hotels.com revenue amounts on a gross basis. Beginning
January 1, 2004, we prospectively commenced reporting
revenue for Hotels.com on a net basis. |
|
|
Part II. Item 7.
|
Managements
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, offline retail travel agents
and travel service providers. 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 product and service companies. We also offer travel and
non-travel advertisers access to a potential source of
incremental traffic and transactions through our various media
and advertising offerings on both the TripAdvisor Media Network
and on our transaction-based websites. 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, including offline and online travel
agencies, as well as suppliers of travel products and services,
has been characterized by rapid and significant change.
The U.S. airline sector in particular has experienced
significant turmoil, with oil prices hitting all-time highs, the
shift of capacity to low-cost carriers (LCCs)
offering no frills flights at discounted prices and
32
the entry and subsequent emergence of several of the largest
traditional carriers from the protection of Chapter 11
bankruptcy proceedings.
The traditional carriers need to rationalize their high
fixed cost structures to better compete in this environment has
caused them to curtail their domestic capacities, thereby
increasing their load factors and enabling them to more easily
pass along fare increases. Competitive pressures have also
caused them to consider consolidation opportunities to better
share fixed costs and reduce redundant flight routes. While
these attempts have historically been unsuccessful either due to
antitrust concerns or reluctance among target companies to
consummate mergers, more recent discussions have apparently
progressed to very advanced stages for a number of carriers.
Should one or more of these combinations prove successful, it
could result in further capacity reductions and airfare
increases.
Higher load factors are positive for Expedia from a demand
standpoint, but negative if they lead to reduced availability of
merchant air capacity and fare increases. Fare increases are
generally negative for Expedias business, as they may
negatively impact traveler demand, and our remuneration is tied
principally to ticket volumes, not ticket prices. Fare increases
were especially pronounced in late 2007, and have continued into
early 2008.
Carriers have aggressively pursued cost reductions in every
aspect of their operations, including distribution costs.
Airlines have successfully negotiated lower (and in some cases,
eliminated) travel agent commissions and overrides, and focused
on increasing direct distribution through their lower cost,
proprietary websites. In addition, in 2006 carriers succeeded in
reducing payments to global distribution system
(GDS) intermediaries as those contracts expired. The
GDSs in turn have passed on these reductions to large travel
agents, including Expedia, which historically received a
meaningful portion of their air remuneration from GDS providers.
As a result of these decreased costs of distribution and high
load factors, Expedias revenue per air ticket has
decreased more than 10% in each of 2005, 2006 and 2007, and air
revenue now constitutes less than 15% of the Companys
overall revenue base. However, Expedia anticipates greater
stability in the non-booking fee portion of its air remuneration
beginning in 2008 as it has signed long-term agreements with
nine of the top ten domestic carriers and has anniversaried the
GDS reductions which took place in 2006.
In addition to the challenges presented by higher load factors,
increased fares and lower remuneration per air ticket, most
larger carriers participating in the Expedia marketplace have
reduced their share of total air seat capacity. At the same time
larger LCCs such as Southwest in the U.S. and RyanAir and
EasyJet in Europe have increased their relative capacity, but
have not generally participated in the Expedia marketplace.
These trends have impacted our ability to obtain supply in our
agency and merchant air businesses.
The hotel sector has until recently been characterized by robust
demand and constrained supply, resulting in increasing occupancy
rates and average daily rates (ADRs). More recently,
supply has begun to outstrip demand, and industry experts
anticipate this trend will accelerate in 2008. In addition,
hotels have begun to see their occupancy rates leveling off, and
in some cases decreasing, with ADRs growing at a slower rate,
or, in some markets, decreasing. While lower occupancies have
historically increased Expedias supply of merchant hotel
rooms, and a lower rate of ADR growth can positively impact
underlying demand, lower ADRs also decrease our revenue per room
night as our remuneration varies proportionally with the room
price.
Increased usage and familiarity with the internet has driven
rapid growth in online penetration of travel expenditures.
According to PhoCusWright, an independent travel, tourism and
hospitality research firm, in 2007 35% of worldwide leisure,
unmanaged and corporate travel expenditures occurred online,
with 51% in the United States, compared with 32% of European
travel and 15% in the Asia Pacific region. These penetration
rates have increased considerably over the past few years, and
are expected to continue growing. This significant growth has
attracted many competitors to online travel. This competition
has intensified in recent years, and the industry is expected to
remain highly competitive for the foreseeable future.
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, and now accounting for more than 60% of all online
travel expenditures in the United States according to
PhoCusWright.
33
Differentiation among the various website offerings has narrowed
dramatically in the past several years, and the travel landscape
has grown extremely competitive, with the need for competitors
to generally differentiate their offerings on features other
than price. It has also led to the development of alternative
business models and methods of payment for travelers and
suppliers. Overall competition has led to aggressive marketing
spend by the travel suppliers and intermediaries, and a
meaningful reduction in Expedias overall marketing
efficiencies.
Strategy
Expedia plays a fundamental role in facilitating travel, whether
for leisure or business, by seeking to build the worlds
largest and most intelligent travel marketplace. We accomplish
this by securing superior supply quality and price
competitiveness; matching supply and demand as intelligently as
possible; inspiring and empowering our travelers to find and
build the right trip; expanding our global demand footprint
aggressively; and achieving excellence in our people,
technology, and processes to make quality, consistency, and
efficiency the foundation of our marketplace.
A discussion of the critical assets that we leverage in
achieving our business strategy follows:
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 ranging from single item bookings 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 destinations.
Technology and Continuous Innovation. Expedia
has an established tradition of innovation, from
Expedia.coms inception as a division of Microsoft to our
introduction of more recent innovations such as
Expedia.coms TravelAds sponsored search product for hotel
advertisers, Hotwiress Airfare Savings Hub,
Hotels.coms slider tools for improving search results and
the TripAdvisor Media Networks offering of leading travel
applications for download on Facebook.com.
We intend to continue to aggressively innovate on behalf of our
travelers and suppliers, including our current efforts to build
a scaleable, service-oriented technology platform for our
travelers, which will extend across our portfolio of brands. We
expect this to result in improved flexibility and allow faster
innovation. This transition should allow us to improve site
merchandising, browse and search functionalities, improve search
index optimization and add significant personalization features.
This transition is occurring in a phased approach, with a
portion of our worldwide points of sale continuing to migrate to
the new platform in 2008.
For our suppliers, we have developed proprietary technology that
streamlines the interaction between some of our websites and
hotel central reservation systems, making it easier for hotels
to manage reservations made through our brands. We began
offering more streamlined application programming interfaces for
certain of our lodging partners in 2007 to enable faster and
simpler integration of real-time hotel content and intend to
continue investing in tools to make supplier integration easier,
more seamless and cost effective.
Global Reach. We currently operate our points
of sale in both the U.S. and internationally, including
Expedia-branded sites in the United States, Australia, Austria,
Canada, Denmark, France, Germany, Ireland, Italy, Japan, the
Netherlands, New Zealand, Norway, Spain, Sweden and the United
Kingdom. Our Hotels.com and TripAdvisor brands also maintain
both U.S. points of sale and additional points of sale
outside the United States. We also offer Chinese travelers an
array of products and services through our majority ownership in
eLong. In 2007, our European segment gross bookings and revenue
accounted for approximately 21% of worldwide gross bookings and
23% of worldwide revenue.
We intend to continue investing in and growing our existing
international points of sale. We anticipate launching points of
sale in additional countries where we find large travel markets
and rapid growth of online commerce, such as India.
34
ECT currently supports operations in the United States, Belgium,
Canada, China, France, Germany, Italy, Spain and the United
Kingdom. We believe the corporate travel sector represents a
large opportunity for Expedia, and we believe we offer a
compelling technology solution to businesses seeking to control
travel costs and improve their employees travel
experiences. We intend to continue investing in and expanding
the geographic footprint of our ECT business.
In expanding our global reach, we leverage significant
investments in technology, operations, brand building, supplier
relationships and other initiatives that we have made since the
launch of Expedia.com in 1996. We intend to continue leveraging
this investment when launching additional points of sale in new
countries, introducing website features, adding supplier
products and services, or offering proprietary and
user-generated content for travelers.
Breadth of Product & Content
Offerings. We believe we offer a comprehensive
array of innovative travel products, services and content
resources to travelers. We plan to continue improving and
growing these offerings, as well as expand them to our worldwide
points of sale over time.
Most of our revenue comes from transactions involving the
booking of hotel reservations and the sale of airline tickets,
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
product offerings. We are also working to increase the mix of
advertising and media revenue from both the expansion of our
TripAdvisor Media Network, as well as increased advertising
revenue from our worldwide websites which have historically been
focused on transaction revenue, such as Expedia.com and
Hotels.com.
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 typically 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 several
weeks or longer. As a result, revenue is typically the lowest in
the first quarter and highest in the third quarter. The
continued growth of our international operations or a change in
our product mix may influence the typical trend of our
seasonality in the future.
Critical
Accounting Policies and Estimates
Critical accounting policies and estimates are those that we
believe are important in the preparation of our consolidated
financial statements because they require that we use judgment
and estimates in applying those policies. We prepare our
consolidated financial statements and accompanying notes in
accordance with generally accepted accounting principles in the
United States (GAAP). 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 as well as 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 an 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.
|
35
For more information on each of these policies, see
Note 2 Significant Accounting Policies, in 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 to be billed by suppliers. In certain instances
when a supplier invoices us for less than the cost we accrued,
we generally 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 and contract terms. Actual revenue could
be greater or less than the amounts estimated due to changes in
hotel billing practices or changes in traveler behavior.
Marketing
Promotions
We periodically provide incentive offers to our customers to
encourage booking of travel products and services, which include
inducement offers. Inducement offers include discounts granted
at the time of a current purchase to be applied against a future
qualifying purchase. We treat inducement offers as a reduction
to revenue based on estimated future redemption rates. We
allocate the discount amount between the current purchase and
the potential future purchase based on our expected relative
value of the transactions. We estimate our redemption rates
using our historical experience for similar inducement offers,
and the amounts we record as a reduction to revenue on current
purchases could vary significantly based on the redemption
estimates used.
Recoverability
of Goodwill and Indefinite and Definite-Lived Intangible
Assets
Goodwill. We assess goodwill for impairment
annually as of October 1, or more frequently, if events and
circumstances indicate impairment may have occurred. 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 units 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. 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 estimates in the discounted cash flows model
include: our weighted average cost of capital; long-term rate of
growth and profitability of our business; working capital
effects; 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 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;
|
|
|
|
Both models are the most common valuation methodologies used
within the travel and internet industries; and
|
|
|
|
The blended use of both models compensates for the inherent
risks associated with each model if used on a stand-alone basis.
|
36
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 trade name and trademarks,
using the relief-from-royalty method. This method assumes that
the trade name 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 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. We review
the carrying value of long-lived assets to be used in operations
whenever events or changes in circumstances indicate that the
carrying amount of the assets might not be recoverable. Factors
that would necessitate an impairment assessment include a
significant adverse change in the extent or manner in which an
asset is used, a significant adverse change in legal factors or
the business climate that could affect the value of the asset,
or a significant decline in the observable market value of an
asset, among others. If such facts indicate a potential
impairment, an impairment loss would only be recorded if the
assets carrying amount is not recoverable through its
undiscounted cash flows. Any impairment would be measured as the
difference between the assets carrying amount and
estimated fair value, determined using appropriate valuation
methodologies which would typically include an estimate of
discounted cash flows. Our impairment 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 enacted tax rates
expected to 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 believe is more
likely than not to be realized. 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
materially vary from these estimates.
We record liabilities to address uncertain tax positions we have
taken in previously filed tax returns or that we expect to take
in a future tax return. The determination for required
liabilities is based upon an analysis of each individual tax
position, taking into consideration whether it is more likely
than not that our tax position, based on technical merits, will
be sustained upon examination. For those positions for which we
conclude it is more likely than not it will be sustained, we
recognize the largest amount of tax benefit that is greater than
50 percent likely of being realized upon ultimate
settlement with the taxing authority. The difference between the
amount recognized and the total tax position is recorded as a
liability. The ultimate resolution of these tax positions may be
greater or less than the liabilities recorded. We adopted
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, in the first
quarter of 2007.
37
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.
Generally, hotels charge taxes based on the room rate paid to
the hotel and remit these taxes to the various tax authorities.
When a customer books a room through one of our travel services,
we collect a tax recovery charge from the customer which we pay
to the hotel. 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 or have levied assessments
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 for the potential settlement of
issues related to hotel occupancy taxes 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. Many of the fundamental statutes and regulations
that impose these taxes were established before the growth of
the internet and
e-commerce.
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
continue to work with the relevant tax authorities and
legislators to clarify our obligations under new and emerging
laws and regulations. We will continue to monitor the issue
closely and provide additional disclosure, as well as adjust the
level of reserves, as developments warrant. Additionally,
certain of our businesses are involved in occupancy tax related
litigation which is discussed in Part I, Item 3, Legal
Proceedings.
Stock-Based
Compensation
We record stock-based compensation expense net of estimated
forfeitures. In determining the estimated forfeiture rates for
stock-based awards, we periodically conduct an assessment of the
actual number of equity awards 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 estimate 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 significant changes in estimates related to our
forfeiture rate. See Note 9 Stock-Based Awards
and Other Equity Instruments in the notes to the consolidated
financial statements for further discussion.
38
New
Accounting Pronouncements
For a discussion of new accounting pronouncements, see
Note 2 Significant Accounting Policies, in the
notes to consolidated financial statements.
Segments
We have two reportable segments: North America and Europe. We
determined our segments based on how our chief operating
decision makers manage our business, make operating decisions
and evaluate operating performance.
Our North America segment provides a full range of travel
and/or
advertising services to customers primarily located in the
United States, Canada and Mexico. This segment operates through
a variety of brands including Expedia.com, Hotels.com,
Hotwire.com and TripAdvisor.
Our Europe segment provides travel services primarily through
localized Expedia websites in Austria, Denmark, France, Germany,
Ireland, Italy, the Netherlands, Norway, Spain, Sweden and the
United Kingdom, as well as localized versions of Hotels.com in
various European countries.
Corporate and Other includes ECT, Expedia Asia Pacific and
unallocated corporate functions and expenses. ECT provides
travel products and services to corporate customers in North
America and Europe. Expedia Asia Pacific provides online travel
information and reservation services primarily through eLong in
China, localized Expedia websites in Australia, Japan and New
Zealand, as well as localized versions of Hotels.com in various
Asian countries.
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
represent the total retail value of transactions booked for both
agency and merchant transactions, recorded at the time of
booking reflecting the total price due for travel by travelers,
including taxes, fees and other charges, and are generally
reduced for cancellations and refunds.
Gross
Bookings and Revenue Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Gross bookings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
13,937,381
|
|
|
$
|
12,736,765
|
|
|
|
N/A
|
|
|
|
9
|
%
|
|
|
N/A
|
|
Europe
|
|
|
4,223,192
|
|
|
|
3,000,719
|
|
|
|
N/A
|
|
|
|
41
|
%
|
|
|
N/A
|
|
Corporate and Other
|
|
|
1,822,769
|
|
|
|
1,423,098
|
|
|
|
N/A
|
|
|
|
28
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross bookings
|
|
$
|
19,983,342
|
|
|
$
|
17,160,582
|
|
|
$
|
15,551,504
|
|
|
|
16
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
13.6
|
%
|
|
|
13.1
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
14.4
|
%
|
|
|
15.1
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
8.8
|
%
|
|
|
8.3
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Total revenue margin
|
|
|
13.3
|
%
|
|
|
13.0
|
%
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
Gross bookings increased $2.8 billion, or 16%, in 2007
compared to 2006, and $1.6 billion, or 10%, in 2006
compared to 2005. In 2007, North America gross bookings
increased 9% and Europe gross bookings increased 41% compared to
2006. In 2006, domestic gross bookings increased 6% and
international gross bookings increased 26% compared to 2005. The
increases in 2007 and 2006 were primarily due to increases in
transaction volumes and travel product prices.
39
Revenue margin, which is defined as revenue as a percentage of
gross bookings, increased 30 basis points in 2007 compared
to 2006. In 2007, revenue margin increased 53 basis points
in our North America segment. The increase in worldwide and
North America revenue margin in 2007 was primarily due to an
increased mix of advertising and media revenue partially offset
by a decline in revenue per air ticket. Revenue margin decreased
69 basis points in our Europe segment in 2007 as compared
to 2006 primarily due to lower air commissions and booking fees
as well as lower revenue resulting from more competitive hotel
pricing. Revenue margin decreased 59 basis points in 2006
compared to 2005. The decrease was primarily due to a decrease
in air revenue per ticket, coupled with an increase in average
worldwide airfares of 9% for 2006 compared to 2005, as our
remuneration generally does not vary with the price of the
ticket.
Results
of Operations
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,897,995
|
|
|
$
|
1,666,804
|
|
|
|
N/A
|
|
|
|
14
|
%
|
|
|
N/A
|
|
Europe
|
|
|
606,997
|
|
|
|
452,012
|
|
|
|
N/A
|
|
|
|
34
|
%
|
|
|
N/A
|
|
Corporate and Other
|
|
|
160,340
|
|
|
|
118,770
|
|
|
|
N/A
|
|
|
|
35
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,665,332
|
|
|
$
|
2,237,586
|
|
|
$
|
2,119,455
|
|
|
|
19
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007, the increase in revenue was primarily due to increases
in worldwide merchant hotel revenue and, to a lesser extent,
advertising and media revenue.
Worldwide merchant hotel revenue increased 19% in 2007 compared
to 2006. The increase was primarily due to a 12% increase in
room nights stayed, including rooms delivered as a component of
vacation packages as well as a 6% increase in revenue per room
night. Revenue per room night increased due to a 6% increase in
worldwide ADRs partially offset by a 13 basis point decline
in hotel raw margin (defined as hotel net revenue as a
percentage of hotel gross revenue).
Worldwide air revenue decreased 2% in 2007 compared to 2006 due
to a 12% decrease in revenue per air ticket partially offset by
an increase of 12% in air tickets sold. The decrease in revenue
per air ticket primarily reflects decreased compensation from
air carriers and GDS providers, and to a lesser extent, reduced
air service fees versus the prior year period.
Package revenue grew 7% in 2007 compared to the prior year
primarily due to higher European package bookings.
The remaining worldwide revenue other than merchant hotel and
air discussed above, which includes advertising and media,
agency hotel, car rental, destination services, and cruises,
increased by 38% in 2007 compared to 2006 primarily due to an
increase in advertising and media revenue as well as car rental
revenues.
In 2006, the increase in revenue was primarily driven by
increased worldwide merchant hotel revenue, partially offset by
a decline in our domestic air revenue. In 2006, domestic revenue
growth remained flat and international revenue increased by 24%
compared to 2005.
Worldwide merchant hotel revenue increased 13% in 2006 compared
to 2005 primarily due to a 10% increase in room nights stayed,
including rooms delivered as a component of vacation packages,
as well as a 2% increase in revenue per room night. Revenue per
room night increased due to a 6% increase in worldwide ADRs,
partially offset by a 100 basis point decrease in hotel raw
margins (defined as hotel net revenue as a percentage of hotel
gross revenue). Our merchant hotel raw margins decreased in 2006
and 2005 as hotel room suppliers have taken advantage of higher
occupancies and the efficacy of their own online distribution to
negotiate more favorable terms.
40
Worldwide air revenue decreased 14% in 2006 compared to 2005 due
to a 13% decrease in revenue per air ticket and a 2% decrease in
air tickets sold. The decrease in revenue per air ticket
reflects decreased compensation from air carriers and GDS
providers. The decrease in air tickets sold reflects the
reduction in relative capacity of carriers participating in our
marketplace and continued challenges in obtaining merchant air
inventory in light of record industry load factors. Lesser
availability of merchant air inventory also impacted our
packages revenue, which grew only 1% in 2006 compared to 2005.
Other revenue which includes advertising and media, agency
hotel, car rental, destination services, and cruises, increased
by 7% in 2006 compared to 2005 primarily due to an increase in
advertising and media revenue.
Cost
of Revenue and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
562,401
|
|
|
$
|
502,638
|
|
|
$
|
480,219
|
|
|
|
12
|
%
|
|
|
5
|
%
|
% of revenue
|
|
|
21
|
%
|
|
|
22
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
2,102,931
|
|
|
$
|
1,734,948
|
|
|
$
|
1,639,236
|
|
|
|
21
|
%
|
|
|
6
|
%
|
% of revenue
|
|
|
79
|
%
|
|
|
78
|
%
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
Cost of revenue primarily consists of (1) costs of our data
and call centers, including telesales, (2) credit card
merchant fees, (3) fees paid to fulfillment vendors for
processing airline tickets and related customer services,
(4) costs paid to suppliers for certain destination
inventory, (5) reserves and related payments to airlines
for tickets purchased with fraudulent credit cards and
(6) stock-based compensation.
The cost of revenue increase in 2007 compared to 2006 and in
2006 compared to 2005 was primarily due to higher costs
associated with the increase in transaction volumes.
The year-over-year increases in gross profit are primarily due
to increased revenue and, to a lesser extent, an increase in
gross margin. Gross margin increased 136 basis points in
2007 as compared to 2006 primarily due to an increased mix of
advertising and media revenue as well as cost savings from our
various efficiency initiatives. Gross margin increased in 2006
as compared to 2005 primarily due to the increased mix of
merchant hotel revenue.
Selling
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
$
|
992,560
|
|
|
$
|
786,195
|
|
|
$
|
715,624
|
|
|
|
26
|
%
|
|
|
10
|
%
|
% of revenue
|
|
|
37
|
%
|
|
|
35
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
Selling and marketing expense relates to direct advertising
expense, including television, radio and print spending, as well
as traffic generation from internet portals, search engines, and
our private label and affiliate programs. The remainder of the
expense relates to indirect costs, including stock-based
compensation costs and market manager staffing in our Partner
Services Group (PSG), Expedia Corporate Travel,
Expedia Local Expert and TripAdvisor Media Network.
In 2007, the increase in selling and marketing was primarily due
to increased direct online search and brand spend across our
worldwide points of sale, as well as higher personnel costs.
In 2006, the increase in selling and marketing expenses was
primarily due to growth in indirect PSG and destination services
staffing costs. Direct selling and marketing expense grew 7% in
2006.
We expect selling and marketing expense to be higher as a
percentage of revenue in 2008 as we continue to support our
established brands and geographies, grow our earlier stage
international markets, increase our use of brand spend as
markets reach scale, anticipate continued keyword inflation,
invest in our global
41
advertising and media businesses and expand our corporate travel
sales, destination services and market management teams.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
321,250
|
|
|
$
|
289,649
|
|
|
$
|
257,389
|
|
|
|
11
|
%
|
|
|
13
|
%
|
% of revenue
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
General and administrative expense consists primarily of
(1) personnel-related costs for support functions that
include our executive leadership, finance, legal, tax,
technology and human resource functions, (2) stock-based
compensation costs and (3) fees for external professional
services including legal, tax and accounting.
In 2007, the increase in general and administrative expense was
primarily due to higher personnel costs related to expansion of
our corporate information technology functions, our European
businesses and TripAdvisor Media Network as well as higher
incentive compensation expense, higher legal expenses and higher
payroll taxes related to stock option exercises. We expect
general and administrative expense as a percentage of revenue in
2008 to remain relatively similar to 2007.
In 2006, the increase in general and administrative expense was
primarily due to an increase in our headcount and accompanying
compensation resulting from our being a stand-alone public
company for the full year as well as increased legal expenses,
partially offset by a decrease in stock-based compensation
expense. Stock-based compensation expense decreased in 2006
compared to 2005 primarily due to stock options that completed
their vesting cycles.
Technology
and Content
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Technology and content
|
|
$
|
182,483
|
|
|
$
|
140,371
|
|
|
$
|
130,507
|
|
|
|
30
|
%
|
|
|
8
|
%
|
% of revenue
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
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,
including stock-based compensation.
The
year-over-year
expense increases in 2007 and 2006 were primarily due to growth
in personnel-related expenses in our software development and
engineering teams as we continued to increase our level of
website innovation. The increase in 2007 was also due to
increased amortization of capitalized software development
costs, a significant amount of which relates to projects that
were placed into service beginning in the fourth quarter of
2006. For additional information about our policy related to
capitalized software costs, see Note 2
Significant Accounting Policies.
Given our historical and ongoing investments in our enterprise
data warehouse, new platform, geographic expansion, data
centers, redundancy, call center technology, site merchandising,
content management, site monitoring, networking, corporate
travel, supplier integration and other initiatives, we expect
technology and content expense to increase in absolute dollars
and as a percentage of revenue in 2008 as compared to 2007.
Amortization
of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
$
|
77,569
|
|
|
$
|
110,766
|
|
|
$
|
126,067
|
|
|
|
(30
|
)%
|
|
|
(12
|
)%
|
% of revenue
|
|
|
3
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
42
In 2007 and 2006, amortization of intangible assets expense
decreased compared to 2006 and 2005 primarily due to the
completion of amortization related to certain technology and
supplier intangible assets, partially offset by amortization
related to new business acquisitions.
For additional information about our acquisitions, see
Note 3 Acquisitions and Other Investments, in
the notes to consolidated financial statements.
Impairment
of Intangible Asset
In 2006, we recognized an impairment charge of
$47.0 million in relation to Hotwires
indefinite-lived trade name intangible asset. There was no such
charge in 2007 or 2005.
Amortization
of Non-Cash Distribution and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Amortization of non-cash distribution and marketing
|
|
$
|
|
|
|
$
|
9,638
|
|
|
$
|
12,597
|
|
|
|
(100
|
)%
|
|
|
(23
|
)%
|
% of revenue
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
Amortization of non-cash distribution and marketing expense
consists mainly of advertising from Universal Television
contributed to us by IAC at Spin-Off with an original value of
$17.1 million. We used this advertising without any cash
cost, and during 2006 had fully utilized all media time.
Operating
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
529,069
|
|
|
$
|
351,329
|
|
|
$
|
397,052
|
|
|
|
51
|
%
|
|
|
(12
|
)%
|
% of revenue
|
|
|
20
|
%
|
|
|
16
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
In 2007, the increase in operating income was primarily due to
an increase in gross profit, the impairment charge of
$47.0 million in 2006 and a decrease in amortization of
intangibles and amortization of non-cash distribution and
marketing, partially offset by growth in sales and marketing
expense and technology and content expense.
In 2006, the decrease in operating income was primarily due to
the impairment charge of $47.0 million and higher selling
and marketing and general and administrative expenses. These
increases were partially offset by an increase in gross profit,
lower amortization expense related to intangible assets and
lower stock-based compensation.
In 2005, we recorded stock-based compensation expense of
$91.7 million primarily related to stock options and RSUs.
Our 2005 stock-based compensation expense includes a benefit of
$44.7 million related to changes in estimated forfeiture
rates for stock options and RSUs and capitalization of software
development costs, partially offset by a modification charge on
stock option awards related to the Spin-Off. In 2005, we
completed assessments of the estimated forfeiture rates
including analyses of the actual number of instruments that had
forfeited to date compared to prior estimates and an evaluation
of future estimated forfeitures. For additional information, see
Note 9 Stock-Based Awards and Other Equity
Instruments in the notes to consolidated financial statements.
43
Operating
Income Before Amortization (OIBA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
OIBA
|
|
$
|
669,487
|
|
|
$
|
599,018
|
|
|
$
|
627,441
|
|
|
|
12
|
%
|
|
|
(5
|
)%
|
% of revenue
|
|
|
25
|
%
|
|
|
27
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
In 2007, the increase in OIBA was primarily due to an increase
in gross profit, partially offset by growth in sales and
marketing expenses and technology and content expenses. OIBA as
a percentage of revenue decreased primarily due to growth in
sales and marketing expenses as a percentage of revenue,
partially offset by an increase in gross margin.
In 2006, the decrease in OIBA was primarily due to higher
operating expenses, partially offset by higher revenue and the
improvement in gross margin.
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 intangible assets
and goodwill and intangible asset impairment, if applicable and
(4) certain one-time items, if applicable.
OIBA is the primary operating metric used by which management
evaluates the performance of our 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 to 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-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, such as stock-based
compensation; and
|
|
|
|
It provides greater insight into management decision making at
Expedia, as OIBA is our primary internal metric for evaluating
the performance of our business.
|
OIBA has certain limitations in that it does not take into
account the impact of certain expenses to our consolidated
statements of income, including stock-based compensation,
non-cash payments to partners, acquisition-related accounting
and certain one-time items, if applicable. Due to the high
variability and difficulty in predicting certain items that
affect net income, such as tax rates, stock price and interest
rates, we are unable to provide a reconciliation to net income
on a forward-looking basis without unreasonable efforts.
44
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, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
OIBA
|
|
$
|
669,487
|
|
|
$
|
599,018
|
|
|
$
|
627,441
|
|
Amortization of intangible assets
|
|
|
(77,569
|
)
|
|
|
(110,766
|
)
|
|
|
(126,067
|
)
|
Impairment of intangible asset
|
|
|
|
|
|
|
(47,000
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
(62,849
|
)
|
|
|
(80,285
|
)
|
|
|
(91,725
|
)
|
Amortization of non-cash distribution and marketing
|
|
|
|
|
|
|
(9,638
|
)
|
|
|
(12,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
529,069
|
|
|
|
351,329
|
|
|
|
397,052
|
|
Interest income, net
|
|
|
(13,478
|
)
|
|
|
14,799
|
|
|
|
48,673
|
|
Write-off of long-term investment
|
|
|
|
|
|
|
|
|
|
|
(23,426
|
)
|
Other, net
|
|
|
(18,607
|
)
|
|
|
18,770
|
|
|
|
(8,428
|
)
|
Provision for income taxes
|
|
|
(203,114
|
)
|
|
|
(139,451
|
)
|
|
|
(185,977
|
)
|
Minority interest in (income) loss of consolidated subsidiaries,
net
|
|
|
1,994
|
|
|
|
(513
|
)
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
295,864
|
|
|
$
|
244,934
|
|
|
$
|
228,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest income from IAC/InterActiveCorp
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40,089
|
|
|
|
N/A
|
|
|
|
(100
|
)%
|
Other interest income
|
|
|
39,418
|
|
|
|
32,065
|
|
|
|
10,690
|
|
|
|
23
|
%
|
|
|
200
|
%
|
Prior to the Spin-Off, the intercompany receivable balances were
subject to a cash management arrangement with IAC. Since we
extinguished our intercompany receivable balances with IAC at
Spin-Off with a non-cash distribution to IAC, we no longer
receive interest income from IAC.
The year-over-year increases in other interest income were
primarily due to higher average cash and cash equivalent
balances.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(52,896
|
)
|
|
$
|
(17,266
|
)
|
|
$
|
(2,106
|
)
|
|
|
206
|
%
|
|
|
720
|
%
|
Interest expense increased in 2007 as compared to 2006 primarily
due to higher average debt balances resulting from the
$500.0 million senior unsecured notes (the
Notes) issuance in August 2006 and a
$500.0 million draw on our revolving credit facility in
August 2007 to fund a portion of the tender offer completed in
the third quarter of 2007. At December 31, 2007 and 2006
our long-term indebtedness totaled $1.085 billion and
$500.0 million.
In 2006, interest expense increased compared to 2005 due to
interest expense related to the Notes.
45
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
$23.4 million. In 2006, we sold our investment for de
minimis consideration.
Other,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Other, net
|
|
$
|
(18,607
|
)
|
|
$
|
18,770
|
|
|
$
|
(8,428
|
)
|
|
|
(199
|
)%
|
|
|
N/A
|
|
In 2007, other, net primarily includes net foreign exchange rate
losses of $22.0 million resulting principally from the
fluctuation of exchange rates on foreign denominated assets and
liabilities of U.S. dollar functional currency
subsidiaries, net losses of $5.7 million from fair value
changes in and the settlement of derivative instruments related
to the Ask Jeeves Notes and certain stock warrants, as well as
$2.6 million of losses from unconsolidated equity
affiliates, partially offset by a gain of $12.1 million
relating to federal excise tax refunds.
In 2006, other, net primarily includes net foreign exchange rate
gains of $10.4 million resulting principally from the
fluctuation of exchange rates on foreign denominated assets and
liabilities of U.S. dollar functional subsidiaries as well
as net gains of $8.1 million from the fair value changes in
and the settlement of derivative instruments related to the Ask
Jeeves Notes and certain stock warrants.
In 2005, other, net primarily includes an unrealized loss of
$6.0 million in the fair value changes in derivative
instruments related to the Ask Jeeves Notes and certain stock
warrants.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
203,114
|
|
|
$
|
139,451
|
|
|
$
|
185,977
|
|
|
|
46
|
%
|
|
|
(25
|
)%
|
Effective tax rate
|
|
|
40.9
|
%
|
|
|
36.2
|
%
|
|
|
44.9
|
%
|
|
|
|
|
|
|
|
|
In 2007, our effective tax rate was higher than the 35%
statutory rate primarily due to state income taxes, taxes
related to our foreign operations and non-deductible losses
related to our derivative liabilities. The 2007 effective rate
increased in 2007 as compared to 2006 primarily due to higher
state taxes, including increases to state tax rates, and
non-deductible losses related to our derivative liabilities
compared with a gain in 2006.
In 2006, our effective tax rate was higher than the 35%
statutory rate primarily due to state income taxes and valuation
allowance on certain foreign losses, partially offset by
non-taxable gains related to our derivative liabilities. The
2006 effective rate decreased as compared to 2005 due to higher
non-deductible stock-based compensation, non-deductible losses
related to our derivative liabilities in 2005 compared with a
gain in 2006 and higher state income taxes in 2005.
In 2005, 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, our effective tax rate was affected by non-deductible
stock-based compensation expense, unrealized losses related to
our derivative liabilities and a loss from the write-off of our
long-term investment.
Segment
Operating Results
In the first quarter of 2006, we began reporting two segments;
North America and Europe. The change from a single reportable
segment was a result of the reorganization of our business. We
determined our
46
segments based on how our chief operating decision makers manage
our business, make operating decisions and evaluate operating
performance. Our primary operating metric for evaluating segment
performance is OIBA (defined above). We have not reported
segment information for the year ended December 31, 2005,
as it is not practicable to do so. For additional information
about our segment results, see Note 16 Segment
Information, in the notes to consolidated financial statements.
Financial
Position, Liquidity and Capital Resources
Our principal sources of liquidity are cash flows generated from
operations, our cash and cash equivalents balances which were
$617.4 million and $853.3 million at December 31,
2007 and 2006, which included $158.2 million and
$153.3 million of cash at eLong, whose results are
consolidated into our financial statements due to our
controlling voting and economic ownership position; and our
$1.0 billion revolving credit facility, of which
$362.7 million was available as of December 31, 2007.
This represents the total $1.0 billion facility less
$585.0 million of outstanding borrowings and
$52.3 million of outstanding stand-by letters of credit
(LOC). Outstanding credit facility borrowings bear
interest based on our financial leverage; based on our
December 31, 2007 financial statements, the interest rate
would equate to a base rate plus 75 basis points. We may
choose (1) the greater of the Prime rate or the Federal
Funds Rate plus 50 basis points or (2) various
durations of LIBOR as our base rate. As of February 15,
2008, the base rate was one-month LIBOR of 3.125%, and is due to
reprice on March 17, 2008. As of February 15, 2008,
$85.0 million of the borrowings outstanding at
December 31, 2007 under the credit facility had been repaid.
Under the merchant model, 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 generally within two weeks
after completing the transaction for air travel and, for all
other merchant bookings, which is primarily our merchant hotel
business, after the travelers use and subsequent billing
from the supplier. Therefore, generally we receive cash from the
traveler prior to paying our supplier, and this operating cycle
represents a working capital source of cash to us. As long as
the merchant hotel business continues to grow and our business
model does not significantly change, we expect that changes in
working capital will positively impact operating cash flows. If
this business declines relative to our other businesses, or if
there are changes to the model or booking patterns which
compress the time between receipts of cash from travelers to
payments to suppliers, our working capital benefits could be
reduced, as was the case to a certain degree in 2006 as we
increased the efficiency of our supplier payment process.
Seasonal fluctuations in our merchant hotel bookings affect the
timing of our annual 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,
merchant hotel growth rates or changes to the model or booking
patterns as discussed above may affect working capital, which
might counteract or intensify the anticipated seasonal
fluctuations.
As of December 31, 2007, we had a deficit in our working
capital of $728.7 million, compared to a deficit of
$224.8 million as of December 31, 2006. The increase
in deficit is primarily a result of the completion of two tender
offers during 2007, partially offset by the generation of
working capital from operations.
We anticipate continued investment in the development and
expansion of our operations. These investments include but are
not limited to improvements to infrastructure, which include our
enterprise data warehouse, servers, networking equipment and
software, release improvements to our software code and
continuing efforts to build a scaleable, service-oriented
technology platform that will extend across our portfolio of
brands. We migrated a portion of Expedia.com to the new platform
during 2007 and we expect additional points of sale to migrate
to the new platform during 2008. We will also relocate many of
our global offices, including our corporate headquarters, to
larger facilities in 2008 to accomodate the growth of our
business. These moves will result in significant investments to
improve the new facilities. Total capital expenditures are
expected to be $140 million to $150 million. Our
future capital requirements may include capital needs for
acquisitions or expenditures in support of our business
strategy. In the event we have
47
acquisitions, this may reduce our cash balance
and/or
increase our debt. Legal risks and challenges to our business
strategy may also negatively affect our cash balance.
Our cash flows are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
$ Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs 2006
|
|
|
2006 vs 2005
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
712,069
|
|
|
$
|
617,440
|
|
|
$
|
859,187
|
|
|
$
|
94,629
|
|
|
$
|
(241,747
|
)
|
Investing activities
|
|
|
(179,506
|
)
|
|
|
(113,500
|
)
|
|
|
(801,343
|
)
|
|
|
(66,006
|
)
|
|
|
687,843
|
|
Financing activities
|
|
|
(789,979
|
)
|
|
|
9,772
|
|
|
|
106,507
|
|
|
|
(799,751
|
)
|
|
|
(96,735
|
)
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
|
|
21,528
|
|
|
|
42,146
|
|
|
|
(8,603
|
)
|
|
|
(20,618
|
)
|
|
|
50,749
|
|
In 2007, net cash provided by operating activities increased by
$94.6 million primarily due to an increase in changes in
operating assets and liabilities and an increase in cash flows
from operating income, partially offset by an increase in
interest payments in the current period. In 2006, net cash
provided by operating activities decreased by
$241.7 million primarily due to an increase in tax payments
and a decrease in cash flows from operating income as well as a
reduced benefit from working capital. We made tax payments of
$126.1 million, an increase of $115.7 million over
2005, reducing cash provided by operations due primarily to
IACs payment of taxes on behalf of Expedia prior to our
becoming an independent public company after which point we
became responsible for our tax obligations.
In 2007, cash used in investing activities increased by
$66.0 million primarily due to a $27.1 million
increase in cash paid for acquisitions and a $31.7 million
increase in long-term investments and deposits mainly related to
our 50% investment in a travel company. These increases were
offset by a decrease of $6.0 million in capital
expenditures. Excluded from 2007 capital expenditures is
approximately $13.1 million in capital equipment that we
received but for which we had not yet paid as of
December 31, 2007. Cash used in investing activities
decreased by $687.8 million in 2006 primarily due to the
absence of transfers to IAC of $757.2 million, partially
offset by net cash paid for acquisitions of $32.5 million
and a $40.3 million increase in capital expenditures in
part due to capitalized software costs incurred for the
development of our enterprise data warehouse and other
improvements to our technology infrastructure.
Cash used in financing activities in 2007 primarily included
cash paid to acquire shares in the first and third quarter
tender offers pursuant to which we acquired 30 million
tendered shares of our common stock at a purchase price of
$22.00 per share and 25 million tendered shares of our
common stock at $29.00 per share, for a total cost of
$1.385 billion plus fees and expenses relating to the
tender offers. In addition, we paid withholding taxes for stock
option exercises of $121.2 million on behalf of our
Chairman and Senior Executive in exchange for surrendering a
portion of his vested shares which were concurrently cancelled.
These were offset in part by $585.0 million in net
borrowings on the revolving credit facility used primarily to
fund a portion of the third quarter tender offer,
$55.0 million in proceeds from stock option exercises and
$95.7 million in excess tax benefits on equity awards, of
which approximately $92.3 million related to the excess tax
benefit associated with the stock options exercised by our
Chairman and Senior Executive.
Cash provided by financing activities in 2006 was primarily due
to the net proceeds of $495.3 million from the Notes
issuance in 2006 and $35.3 million in proceeds from stock
option exercises, partially offset by $295.7 million of
treasury stock activity primarily related to cash paid to
acquire shares in the second and third quarters pursuant to
which we acquired in open market trades 20 million shares
of our common stock at an average per share price of $14.42 for
a total cost of $288.0 million and the $230.0 million
repayment of our revolving credit facility, which was initially
borrowed in 2005.
Cash provided by financing activities in 2005 was primarily due
to net credit facility borrowings of $230.0 million and
proceeds from the exercise of stock options of
$29.1 million, partially offset by withholding taxes for
stock option exercises of $86.6 million that we paid on
behalf of our Chairman and
48
Senior Executive in exchange for surrendering a portion of his
vested shares to treasury or to be cancelled and distributions
to IAC of $52.8 million.
During the third quarter of 2006, we issued $500.0 million
Notes for net proceeds of $495.3 million. The Notes are due
August 2018 and bear a fixed interest rate of 7.456% with
interest payable semi-annually in February and August of each
year, which began in February 2007. The Notes are repayable in
whole or in part on August 15, 2013, at the option of the
Note holders, and are redeemable in whole or in part at any time
at our option. As of December 31, 2007, we were in
compliance with all related covenants.
The effect of foreign exchange on our cash balances denominated
in foreign currency in 2007 showed a net decrease of
$20.6 million. Our foreign currency cash balances continued
to benefit from foreign currency appreciation, but to a lesser
extent than 2006 due to a different mix of currencies held and
relatively less appreciation in certain of the primary foreign
currencies in which we transact. The effect of foreign exchange
on our cash balances denominated in foreign currency in 2006
showed a net increase of $50.7 million from 2005 due to the
benefit of foreign currency appreciation during that time period
versus our reporting currency, as well as the increase in our
foreign denominated cash balances.
We currently have authorization, for which there is no fixed
termination date, from our Board of Directors to repurchase up
to 20 million outstanding shares of our common stock; no
such repurchases have been made under this authorization.
We also have a shelf registration statement filed with the SEC
under which Expedia, Inc. may offer from time to time debt
securities, guarantees of debt securities, preferred stock,
common stock or warrants. The shelf registration statement
expires on October 15, 2010.
In our opinion, available cash, funds from operations and
available borrowings will provide sufficient capital resources
to meet our foreseeable liquidity needs.
Contractual
Obligations and Commercial Commitments
Our contractual obligations and commercial commitments are as
follows:
|
|
|
|
|
Our Notes include interest payments through maturity in 2018
based on the stated fixed rate of 7.456%.
|
|
|
|
As we expect borrowings under our credit facility to vary, only
repayment of principal outstanding at December 31, 2007 is
included. Interest expense and fees related to our credit
facility were $13.8 million in 2007.
|
|
|
|
We have obligations related to the Ask Jeeves Notes. As a result
of the Spin-Off, when holders of IACs 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 pay cash in
equal value, in lieu of issuing such shares, at our option. The
Ask Jeeves Notes are due June 1, 2008; upon maturity of
these notes, our obligation to satisfy demands for conversion
ceases.
|
|
|
|
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 2018.
|
|
|
|
Our purchase obligations represent the minimum obligations we
have under agreements with certain of our vendors and marketing
partners. These minimum obligations are less than our projected
use for those periods. Payments may be more than the minimum
obligations based on actual use. In addition, if certain
obligations are met by our counterparties, our obligations will
increase.
|
|
|
|
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 stand-by LOCs and guarantees. We use our stand-by
LOCs to secure payment for hotel room transactions to particular
hotel properties. The outstanding balance of our stand-by LOCs
directly reduces the amount available to us from our revolving
credit facility. In addition, we provide a
|
49
|
|
|
|
|
guarantee to the aviation authority of one country to protect
against potential non-delivery of our packaged travel services
sold within that country. This country holds all travel agents
and tour companies to the same standard. The letter of credit
amounts in the following table represent the amount of
commitment expiration per period.
|
The following table presents our material contractual
obligations and commercial commitments as of December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1 to 3 Years
|
|
|
3 to 5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Long-term debt
|
|
$
|
910,080
|
|
|
$
|
37,280
|
|
|
$
|
74,560
|
|
|
$
|
74,560
|
|
|
$
|
723,680
|
|
Credit facility
|
|
|
585,000
|
|
|
|
|
|
|
|
585,000
|
|
|
|
|
|
|
|
|
|
Obligation related to Ask Jeeves Notes
|
|
|
14,600
|
|
|
|
14,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
245,190
|
|
|
|
31,033
|
|
|
|
61,299
|
|
|
|
55,593
|
|
|
|
97,265
|
|
Purchase obligations
|
|
|
32,307
|
|
|
|
26,437
|
|
|
|
5,870
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
|
106,668
|
|
|
|
106,358
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
Letters of credit
|
|
|
52,339
|
|
|
|
51,716
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
FIN 48 liabilities(1)
|
|
|
1,454
|
|
|
|
1,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,947,638
|
|
|
$
|
268,878
|
|
|
$
|
727,662
|
|
|
$
|
130,153
|
|
|
$
|
820,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents unrecognized tax benefits under FIN 48, but
excludes $172.1 million of such unrecognized tax benefits
for which we cannot make a reasonably reliable estimate of the
amount and period of payment. |
Other than the items described above, we do not have any
off-balance sheet arrangements as of December 31, 2007.
Certain
Relationships and Related Party Transactions
For a discussion of certain relationships and related party
transactions, see Note 15 Related Party
Transactions, in the notes to consolidated financial statements.
|
|
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 Notes, our revolving credit
facility, derivative instruments, cash and cash equivalents,
accounts receivable, intercompany receivables, merchant accounts
payable and deferred merchant bookings denominated in foreign
currencies. 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 August 2006, we issued $500.0 million Notes with a fixed
rate of 7.456%. As a result, if market interest rates decline,
our required payments will exceed those based on market rates.
The fair value of our Notes was approximately $517 million
as of December 31, 2007 based on the quoted market price. A
50 basis point increase or decrease in interest rates would
decrease or increase the fair value of our Notes by
approximately $19 million.
In July 2005, we entered into a $1.0 billion revolving
credit facility. The revolving credit facility bears interest
based on market interest rates plus a spread, which is
determined based on our financial leverage. The weighted average
interest rate was 5.70% as of December 31, 2007. As a
result, we will be susceptible to
50
fluctuations in interest rates if, consistent with our practice
to date, we do not hedge the interest rate exposure arising from
any borrowings under our revolving credit facility. As of
December 31, 2007, our outstanding borrowing under the
revolving credit facility was $585.0 million. No borrowings
were outstanding under the revolving credit facility as of
December 31, 2006. A hypothetical 10% increase in market
rates would increase our interest expense by $3.3 million.
We did not experience any significant impact from changes in
interest rates for the years ended December 31, 2007 or
2006.
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.
Changes in exchange rates between the U.S. dollar and these
other currencies will result in transaction gains or losses,
which we recognize in our consolidated statements of income. To
the extent practicable, we minimize this exposure by maintaining
natural hedges between our current assets and current
liabilities in similarly denominated foreign currencies.
Future net transaction gains and losses are inherently difficult
to predict as they are reliant on how the multiple currencies in
which we transact fluctuate in relation to the U.S. dollar,
the relative composition and denomination of current assets and
liabilities each period, and our ability to maintain natural
hedges against such exposures. As an example, if the foreign
currencies in which we hold net asset balances were to all
weaken 10% against the U.S. dollar and foreign currencies
in which we hold net liability balances were to all strengthen
10% against the U.S. dollar, we would recognize foreign
exchange losses of approximately $6.3 million based on the
net asset or liability balances of our foreign denominated cash
and cash equivalents, accounts receivable, deferred merchant
bookings and merchant payable balances as of December 31,
2007. As the net composition of these balances fluctuate
frequently, even daily, as do foreign exchange rates, the
example loss could be compounded or reduced significantly within
a given period.
During 2007, 2006 and 2005 we recorded net foreign exchange rate
losses of $22.0 million, net foreign exchange rate gains of
$10.4 million and net foreign exchange rate losses of
$0.6 million. 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; we periodically review our
strategy for hedging foreign exchange risks. Our goal in
managing our foreign exchange risk is to reduce to the extent
practicable 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 certain intercompany loans denominated in currencies other
than the lending subsidiaries functional currency. For
additional information about our cross-currency swaps, see
Note 7 Derivative Instruments, in the notes to
consolidated financial statements.
Equity
Price Risk
We do not maintain any minority investments in equity securities
as part of our marketable securities investment strategy. Thus,
our equity price risk primarily relates to fluctuations in our
stock price, which affects our derivative liabilities related to
outstanding Ask Jeeves Notes. We base the fair value of these
derivative instruments primarily on the changes in the market
price of our common stock.
51
In 2007, certain of these notes were converted at fair value for
$6.6 million of common stock, or 0.3 million shares.
As additional notes are converted, the value of the derivative
liability will be reduced and our equity price risk will
decrease accordingly. The conversion of the Ask Jeeves Notes
during 2007 reduced our obligation to issue our common stock
from 0.8 million shares as of December 31, 2006, to
0.5 million shares as of December 31, 2007.
As of December 31, 2007, each $1.00 fluctuation in our
common stock will result in approximately $0.5 million of
change in the aggregate fair value of our Ask Jeeves Notes
derivative liability. An increase in our common stock price will
result in a charge to our consolidated statements of income and
a decrease in our common stock price will result in a credit.
The Ask Jeeves Notes are due June 1, 2008; upon maturity of
these notes, our obligation to satisfy demands for conversion
ceases.
For additional information about the Ask Jeeves Notes, see
Note 7 Derivative Instruments, in the notes to
consolidated financial statements.
|
|
Part II. Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
The Consolidated Financial Statements and Schedule 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 Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Part II. Item 9A.
|
Controls
and Procedures
|
Changes
in Internal Control over Financial Reporting.
There were no changes to our internal control over financial
reporting that occurred during the quarter ended
December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
Evaluation
of Disclosure Controls and Procedures.
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 Chief
Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rule 13a-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.
Managements
Report on Internal Control over Financial
Reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rule 13a-15(f)
of the Exchange Act. Internal control over financial reporting
is a process to provide reasonable assurance regarding the
reliability of our financial reporting for external purposes in
accordance with accounting principles generally accepted in the
United States of America. Management conducted an evaluation of
the effectiveness of our internal control over financial
reporting based on the criteria for effective control over
financial reporting described in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
evaluation, management has concluded that, as of
December 31, 2007, the Companys internal control over
financial reporting was effective. Management has reviewed its
assessment with the Audit Committee. Ernst & Young,
LLP, an independent registered public accounting firm, has
audited the effectiveness of our internal control over financial
reporting as of December 31, 2007, as stated in their
report which is included below.
52
Limitations
on Controls.
Management does not expect that our disclosure controls and
procedures or our internal control over financial reporting will
prevent or detect all error and fraud. Any control system, no
matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no
evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the
Company have been detected.
Report
of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting
The Board of Directors and Stockholders
Expedia, Inc.
We have audited Expedia, Inc.s internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Expedia,
Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Expedia, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
2007 consolidated financial statements of Expedia, Inc. and our
report dated February 20, 2008 expressed an unqualified
opinion thereon.
Seattle, Washington
February 20, 2008
53
|
|
Part II. Item 9B.
|
Other
Information
|
None.
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 2008 annual meeting of
stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after the end of our
fiscal year ended December 31, 2007.
|
|
|
|
Item 12
|
Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
|
|
|
Part IV. Item 15.
|
Exhibits,
Consolidated Financial Statements and Financial Statement
Schedules
|
(a)(1) Consolidated Financial Statements
We have filed the consolidated financial statements listed in
the Index to Consolidated Financial Statements, Schedules and
Exhibits on
page F-1
as a part of this report.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted because they
are not applicable, not material or the required information is
shown in the consolidated financial statements or the notes
thereto.
(a)(3) Exhibits
The exhibits listed below are filed as part of this Annual
Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
|
Incorporated by Reference
|
No.
|
|
Exhibit Description
|
|
Herewith
|
|
Form
|
|
SEC File No.
|
|
Exhibit
|
|
Filing Date
|
|
|
2
|
.1
|
|
Separation Agreement by and between Expedia, Inc. and
IAC/InterActiveCorp, dated as of August 9, 2005
|
|
|
|
10-Q
|
|
000-51447
|
|
2.1
|
|
11/14/2005
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Expedia,
Inc.
|
|
|
|
8-K
|
|
000-51447
|
|
3.1
|
|
08/15/2005
|
|
3
|
.2
|
|
Certificate of Designations of Expedia, Inc. Series A
Cumulative Convertible Preferred Stock
|
|
|
|
8-K
|
|
000-51447
|
|
3.2
|
|
08/15/2005
|
|
3
|
.3
|
|
Amended and Restated Bylaws of Expedia, Inc.
|
|
|
|
8-K
|
|
000-51447
|
|
3.3
|
|
08/15/2005
|
|
4
|
.1
|
|
Equity Warrant Agreement for Warrants to Purchase up to
14,590,514 Shares of Common Stock expiring February 4,
2009, between Expedia, Inc. and The Bank of New York, as Equity
Warrant Agent, dated as of August 9, 2005
|
|
|
|
8-A/A
|
|
000-51447
|
|
4.2
|
|
08/22/2005
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
|
Incorporated by Reference
|
No.
|
|
Exhibit Description
|
|
Herewith
|
|
Form
|
|
SEC File No.
|
|
Exhibit
|
|
Filing Date
|
|
|
4
|
.2
|
|
Stockholder Equity Warrant Agreement for Warrants to Purchase up
to 11,450,182 Shares of Common Stock, between Expedia, Inc.
and Mellon Investor Services LLC, as Equity Warrant Agent, dated
as of August 9, 2005
|
|
|
|
8-A/A
|
|
000-51447
|
|
4.3
|
|
08/22/2005
|
|
4
|
.3
|
|
Optionholder Equity Warrant Agreement for Warrants to Purchase
up to 1,558,651 Shares of Common Stock, between Expedia,
Inc. and Mellon Investor Services LLC, as Equity Warrant Agent,
dated as of August 9, 2005
|
|
|
|
8-A/A
|
|
000-51447
|
|
4.4
|
|
08/22/2005
|
|
4
|
.4
|
|
Indenture, dated as of August 21, 2006, among Expedia,
Inc., as Issuer, the Subsidiary Guarantors from time to time
parties thereto, and The Bank of New York
Trust Company, N.A., as Trustee, relating to Expedia,
Inc.s 7.456% Senior Notes due 2018
|
|
|
|
10-Q
|
|
000-51447
|
|
4.1
|
|
11/14/2006
|
|
4
|
.5
|
|
First Supplemental Indenture, dated as of January 19, 2007,
among Expedia, Inc., the Subsidiary Guarantors party thereto and
The Bank of New York Trust Company, N.A., as Trustee
|
|
|
|
S-4
|
|
333-140195
|
|
4.2
|
|
01/25/2007
|
|
4
|
.6
|
|
Registration Rights Agreement dated August 21, 2006 by and
among Expedia, Inc., the Subsidiary Guarantors listed therein,
and J.P. Morgan Securities Inc. and Lehman Brothers Inc.,
as representatives of the initial purchasers of Expedia,
Inc.s 7.456% Senior Notes due 2018
|
|
|
|
10-Q
|
|
000-51447
|
|
4.2
|
|
11/14/2006
|
|
10
|
.1
|
|
Governance Agreement, by and among Expedia, Inc., Liberty Media
Corporation and Barry Diller, dated as of August 9, 2005
|
|
|
|
10-Q
|
|
000-51447
|
|
10.6
|
|
11/14/2005
|
|
10
|
.2
|
|
First Amendment to Governance Agreement, dated as of
June 19, 2007, among Expedia, Inc., Liberty Media
Corporation and Barry Diller
|
|
|
|
8-K
|
|
000-51447
|
|
10.1
|
|
06/19/2007
|
|
10
|
.3
|
|
Stockholders Agreement, by and between Liberty Media Corporation
and Barry Diller, dated as of August 9, 2005
|
|
|
|
10-Q
|
|
000-51447
|
|
10.7
|
|
11/14/2005
|
|
10
|
.4
|
|
Tax Sharing Agreement by and between Expedia, Inc. and
IAC/InterActiveCorp, dated as of August 9, 2005
|
|
|
|
10-Q
|
|
000-51447
|
|
10.10
|
|
11/14/2005
|
|
10
|
.5
|
|
Employee Matters Agreement by and between Expedia, Inc. and
IAC/InterActiveCorp, dated as of August 9, 2005
|
|
|
|
10-Q
|
|
000-51447
|
|
10.11
|
|
11/14/2005
|
|
10
|
.6
|
|
Transition Services Agreement by and between Expedia, Inc. and
IAC/InterActiveCorp, dated as of August 9, 2005
|
|
|
|
10-Q
|
|
000-51447
|
|
10.12
|
|
11/14/2005
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
|
Incorporated by Reference
|
No.
|
|
Exhibit Description
|
|
Herewith
|
|
Form
|
|
SEC File No.
|
|
Exhibit
|
|
Filing Date
|
|
|
10
|
.7
|
|
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 (Credit Agreement)
|
|
|
|
8-K
|
|
333-124303-01
|
|
10.1
|
|
07/14/2005
|
|
10
|
.8
|
|
First Amendment to Credit Agreement, dated as of
December 7, 2006
|
|
|
|
SC TO
|
|
005-80935
|
|
(b)(2)
|
|
12/11/2006
|
|
10
|
.9
|
|
Second Amendment to Credit Agreement, dated as of
December 18, 2006
|
|
|
|
SC TO/A
|
|
005-80935
|
|
(b)(3)
|
|
12/22/2006
|
|
10
|
.10
|
|
Third Amendment to Credit Agreement, dated as of August 7,
2007
|
|
|
|
8-K
|
|
000-51447
|
|
10.1
|
|
08/08/2007
|
|
10
|
.11
|
|
Office Building Lease by and between Tower 333 LLC, a Delaware
limited liability company, and Expedia, Inc., a Washington
corporation, dated June 25, 2007
|
|
|
|
10-Q
|
|
000-51447
|
|
10.1
|
|
08/03/2007
|
|
10
|
.12*
|
|
Expedia, Inc. 2005 Stock and Annual Incentive Plan
|
|
|
|
S-8
|
|
333-127324
|
|
4.6
|
|
08/09/2005
|
|
10
|
.13*
|
|
Expedia, Inc. Non-Employee Director Deferred Compensation Plan
|
|
|
|
S-4/A
|
|
333-124303-01
|
|
10.6
|
|
06/13/2005
|
|
10
|
.14*
|
|
Form of Restricted Stock Unit Agreement (domestic employees)
|
|
|
|
10-Q
|
|
000-51447
|
|
10.24
|
|
11/14/2006
|
|
10
|
.15*
|
|
Form of Restricted Stock Unit Agreement (directors)
|
|
|
|
10-Q
|
|
000-51447
|
|
10.9
|
|
11/14/2005
|
|
10
|
.16*
|
|
Summary of Expedia, Inc. Non-Employee Director Compensation
Arrangements
|
|
|
|
10-Q
|
|
000-51447
|
|
10.1
|
|
05/09/2007
|
|
10
|
.17*
|
|
Expedia, Inc. Executive Deferred Compensation Plan, effective as
of August 9, 2005
|
|
|
|
8-K
|
|
000-51447
|
|
10.1
|
|
12/20/2005
|
|
10
|
.18*
|
|
Expedia Restricted Stock Unit Agreement between Dara
Khosrowshahi and Expedia, Inc., dated March 7, 2006
|
|
|
|
10-K
|
|
000-51447
|
|
10.16
|
|
03/31/2006
|
|
10
|
.19*
|
|
Separation Agreement between Keenan M. Conder and Expedia, Inc.,
dated July 19, 2006
|
|
|
|
10-Q
|
|
000-51447
|
|
10.17
|
|
08/11/2006
|
|
10
|
.20*
|
|
Separation Agreement between William R. Ruckelshaus and Expedia,
Inc., dated August 8, 2006
|
|
|
|
10-Q
|
|
000-51447
|
|
10.17
|
|
08/11/2006
|
|
10
|
.21*
|
|
Employment Agreement between Michael B. Adler and Expedia, Inc.,
effective as of May 16, 2006
|
|
|
|
10-Q
|
|
000-51447
|
|
10.19
|
|
11/14/2006
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Filed
|
|
Incorporated by Reference
|
No.
|
|
Exhibit Description
|
|
Herewith
|
|
Form
|
|
SEC File No.
|
|
Exhibit
|
|
Filing Date
|
|
|
10
|
.22*
|
|
Expedia, Inc. Restricted Stock Unit Agreement between Expedia,
Inc. and Michael B. Adler, effective as of May 16, 2006
|
|
|
|
10-Q
|
|
000-51447
|
|
10.20
|
|
11/14/2006
|
|
10
|
.23*
|
|
Employment Agreement by and between Burke Norton and Expedia,
Inc., effective October 25, 2006
|
|
|
|
10-Q
|
|
000-51447
|
|
10.21
|
|
11/14/2006
|
|
10
|
.24*
|
|
Expedia, Inc. Restricted Stock Unit Agreement (First Agreement)
between Expedia, Inc. and Burke Norton, dated as of
October 25, 2006
|
|
|
|
10-Q
|
|
000-51447
|
|
10.22
|
|
11/14/2006
|
|
10
|
.25*
|
|
Expedia, Inc. Restricted Stock Unit Agreement (Second Agreement)
between Expedia, Inc. and Burke Norton, dated as of
October 25, 2006
|
|
|
|
10-Q
|
|
000-51447
|
|
10.23
|
|
11/14/2006
|
|
10
|
.26*
|
|
Separation Agreement between Paul Onnen and Expedia, Inc., dated
August 30, 2007
|
|
|
|
10-Q
|
|
000-51447
|
|
10.1
|
|
11/08/2007
|
|
10
|
.27*
|
|
Stock Option Agreement between IAC/InterActiveCorp and Barry
Diller, dated as of June 7, 2005
|
|
|
|
10-Q**
|
|
000-20570
|
|
10.8
|
|
11/09/2005
|
|
10
|
.28*
|
|
IAC/InterActiveCorp 2005 Stock and Annual Incentive Plan
|
|
|
|
S-4/A**
|
|
333-124303
|
|
Annex J
|
|
06/17/2005
|
|
10
|
.29*
|
|
Employment Agreement by and between Pierre Samec and Expedia,
Inc., effective August 7, 2007
|
|
X
|
|
|
|
|
|
|
|
|
|
21
|
|
|
Subsidiaries of the Registrant
|
|
X
|
|
|
|
|
|
|
|
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
X
|
|
|
|
|
|
|
|
|
|
31
|
.1
|
|
Certifications of the Chairman and Senior Executive Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
31
|
.2
|
|
Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
31
|
.3
|
|
Certification of the Chief Financial Officer pursuant
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
32
|
.1
|
|
Certification of the Chairman and Senior Executive pursuant
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
32
|
.2
|
|
Certification of the Chief Executive Officer pursuant
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
32
|
.3
|
|
Certification of the Chief Financial Officer pursuant
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Indicates a management contract or compensatory plan or
arrangement. |
|
** |
|
Indicates reference to filing of IAC/InterActiveCorp |
57
Signatures
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.
Expedia, Inc.
|
|
|
|
By:
|
/s/ DARA
KHOSROWSHAHI
|
Dara Khosrowshahi
Chief Executive Officer
February 21, 2008
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
February 21, 2008.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ DARA
KHOSROWSHAHI
Dara
Khosrowshahi
|
|
Chief Executive Officer, President and Director
(Principal Executive Officer)
|
|
|
|
/s/ MICHAEL
B. ADLER
Michael
B. Adler
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
/s/ PATRICIA
L. ZUCCOTTI
Patricia
L. Zuccotti
|
|
Chief Accounting Officer and Controller
(Principal Accounting Officer)
|
|
|
|
/s/ BARRY
DILLER
Barry
Diller
|
|
Director (Chairman of the Board)
|
|
|
|
/s/ VICTOR
A. KAUFMAN
Victor
A. Kaufman
|
|
Director (Vice Chairman)
|
|
|
|
/s/ A.
GEORGE BATTLE
A.
George Battle
|
|
Director
|
|
|
|
/s/ SIMON
J. BREAKWELL
Simon
J. Breakwell
|
|
Director
|
|
|
|
/s/ JONATHAN
L. DOLGEN
Jonathan
L. Dolgen
|
|
Director
|
|
|
|
/s/ WILLIAM
R. FITZGERALD
William
R. Fitzgerald
|
|
Director
|
|
|
|
/s/ CRAIG
A. JACOBSON
Craig
A. Jacobson
|
|
Director
|
58
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ PETER
M. KERN
Peter
M. Kern
|
|
Director
|
|
|
|
/s/ JOHN
C. MALONE
John
C. Malone
|
|
Director
|
59
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES AND
EXHIBITS
|
|
|
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
|
|
Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
|
|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Expedia, Inc.
We have audited the accompanying consolidated balance sheets of
Expedia, Inc. as of December 31, 2007 and 2006, and the
related consolidated statements of income, changes in
stockholders equity and comprehensive income, and cash
flows for each of the three years in the period ended
December 31, 2007. These financial statements are the
responsibility of the Companys 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide 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, 2007
and 2006, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted Financial Accounting Standards
Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, effective
January 1, 2007; and the Company adopted Statement of
Financial Accounting Standard No. 123 (revised 2004),
Share-Based Payment, effective January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Expedia, Inc.s internal control over financial reporting
as of December 31, 2007, based on criteria established in
Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 20, 2008 expressed an
unqualified opinion thereon.
Seattle, Washington
February 20, 2008
F-2
Consolidated
Financial Statements
EXPEDIA,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue
|
|
$
|
2,665,332
|
|
|
$
|
2,237,586
|
|
|
$
|
2,119,455
|
|
Cost of revenue(1)
|
|
|
562,401
|
|
|
|
502,638
|
|
|
|
480,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,102,931
|
|
|
|
1,734,948
|
|
|
|
1,639,236
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing(1)
|
|
|
992,560
|
|
|
|
786,195
|
|
|
|
715,624
|
|
General and administrative(1)
|
|
|
321,250
|
|
|
|
289,649
|
|
|
|
257,389
|
|
Technology and content(1)
|
|
|
182,483
|
|
|
|
140,371
|
|
|
|
130,507
|
|
Amortization of intangible assets
|
|
|
77,569
|
|
|
|
110,766
|
|
|
|
126,067
|
|
Impairment of intangible asset
|
|
|
|
|
|
|
47,000
|
|
|
|
|
|
Amortization of non-cash distribution and marketing
|
|
|
|
|
|
|
9,638
|
|
|
|
12,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
529,069
|
|
|
|
351,329
|
|
|
|
397,052
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income
|
|
|
39,418
|
|
|
|
32,065
|
|
|
|
10,690
|
|
Interest income from IAC/InterActiveCorp
|
|
|
|
|
|
|
|
|
|
|
40,089
|
|
Interest expense
|
|
|
(52,896
|
)
|
|
|
(17,266
|
)
|
|
|
(2,106
|
)
|
Write-off of long-term investment
|
|
|
|
|
|
|
|
|
|
|
(23,426
|
)
|
Other, net
|
|
|
(18,607
|
)
|
|
|
18,770
|
|
|
|
(8,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(32,085
|
)
|
|
|
33,569
|
|
|
|
16,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
496,984
|
|
|
|
384,898
|
|
|
|
413,871
|
|
Provision for income taxes
|
|
|
(203,114
|
)
|
|
|
(139,451
|
)
|
|
|
(185,977
|
)
|
Minority interest in (income) loss of consolidated subsidiaries,
net
|
|
|
1,994
|
|
|
|
(513
|
)
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
295,864
|
|
|
$
|
244,934
|
|
|
$
|
228,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.00
|
|
|
$
|
0.72
|
|
|
$
|
0.68
|
|
Diluted
|
|
|
0.94
|
|
|
|
0.70
|
|
|
|
0.65
|
|
Shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
296,640
|
|
|
|
338,047
|
|
|
|
336,819
|
|
Diluted
|
|
|
314,233
|
|
|
|
352,181
|
|
|
|
349,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
2,893
|
|
|
$
|
8,399
|
|
|
$
|
9,503
|
|
Selling and marketing
|
|
|
12,472
|
|
|
|
15,893
|
|
|
|
18,121
|
|
General and administrative
|
|
|
31,851
|
|
|
|
36,877
|
|
|
|
45,874
|
|
Technology and content
|
|
|
15,633
|
|
|
|
19,116
|
|
|
|
18,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
62,849
|
|
|
$
|
80,285
|
|
|
$
|
91,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
EXPEDIA,
INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share
|
|
|
|
and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
617,386
|
|
|
$
|
853,274
|
|
Restricted cash and cash equivalents
|
|
|
16,655
|
|
|
|
11,093
|
|
Accounts receivable, net of allowance of $6,081 and $4,874
|
|
|
268,008
|
|
|
|
211,430
|
|
Prepaid merchant bookings
|
|
|
66,778
|
|
|
|
39,772
|
|
Income taxes receivable
|
|
|
5,395
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
71,433
|
|
|
|
62,249
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,045,655
|
|
|
|
1,177,818
|
|
Property and equipment, net
|
|
|
179,490
|
|
|
|
137,144
|
|
Long-term investments and other assets
|
|
|
93,182
|
|
|
|
59,289
|
|
Intangible assets, net
|
|
|
970,757
|
|
|
|
1,028,774
|
|
Goodwill
|
|
|
6,006,338
|
|
|
|
5,861,292
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
8,295,422
|
|
|
$
|
8,264,317
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, merchant
|
|
$
|
704,044
|
|
|
$
|
600,192
|
|
Accounts payable, other
|
|
|
148,233
|
|
|
|
120,545
|
|
Accrued expenses
|
|
|
288,712
|
|
|
|
171,799
|
|
Deferred merchant bookings
|
|
|
609,117
|
|
|
|
466,474
|
|
Deferred revenue
|
|
|
11,957
|
|
|
|
10,317
|
|
Income taxes payable
|
|
|
|
|
|
|
30,902
|
|
Other current liabilities
|
|
|
12,289
|
|
|
|
2,359
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,774,352
|
|
|
|
1,402,588
|
|
Long-term debt
|
|
|
500,000
|
|
|
|
500,000
|
|
Credit facility
|
|
|
585,000
|
|
|
|
|
|
Deferred income taxes, net
|
|
|
351,168
|
|
|
|
361,967
|
|
Other long-term liabilities
|
|
|
204,886
|
|
|
|
33,716
|
|
Minority interest
|
|
|
61,935
|
|
|
|
61,756
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock $.001 par value
|
|
|
|
|
|
|
|
|
Authorized shares: 100,000,000
|
|
|
|
|
|
|
|
|
Series A shares issued and outstanding: 751 and 846
|
|
|
|
|
|
|
|
|
Common stock $.001 par value
|
|
|
337
|
|
|
|
328
|
|
Authorized shares: 1,600,000,000
|
|
|
|
|
|
|
|
|
Shares issued: 337,056,760 and 328,066,276
|
|
|
|
|
|
|
|
|
Shares outstanding: 259,489,102 and 305,901,048
|
|
|
|
|
|
|
|
|
Class B common stock $.001 par value
|
|
|
26
|
|
|
|
26
|
|
Authorized shares: 400,000,000
|
|
|
|
|
|
|
|
|
Shares issued and outstanding: 25,599,998 and 25,599,998
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
5,902,582
|
|
|
|
5,903,200
|
|
Treasury stock Common stock, at cost
|
|
|
(1,718,833
|
)
|
|
|
(321,155
|
)
|
Shares: 77,567,658 and 22,165,228
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
602,204
|
|
|
|
309,912
|
|
Accumulated other comprehensive income
|
|
|
31,765
|
|
|
|
11,979
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,818,081
|
|
|
|
5,904,290
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
8,295,422
|
|
|
$
|
8,264,317
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
EXPEDIA,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Invested
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Equity
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
Balance as of December 31, 2004
|
|
$
|
8,118,961
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
33,668
|
|
|
$
|
8,152,629
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income prior to Spin-Off
|
|
|
163,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,752
|
|
Net income after Spin-Off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,978
|
|
|
|
|
|
|
|
64,978
|
|
Net loss on derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,619
|
)
|
|
|
(1,619
|
)
|
Reversal of unrealized gains on available for sale security upon
business acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,182
|
)
|
|
|
(27,182
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,465
|
)
|
|
|
(6,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to IAC/InterActiveCorp, net upon Spin-Off
|
|
|
(2,496,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,496,569
|
)
|
Capitalization at Spin-Off
|
|
|
(5,786,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,786,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock, common stock and Class B
common stock at Spin-Off
|
|
|
|
|
|
|
315,140,609
|
|
|
|
315
|
|
|
|
25,599,998
|
|
|
|
26
|
|
|
|
(341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial recognition of derivative liability at Spin-Off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,600
|
)
|
Settlement of derivative liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,800
|
|
Proceeds from exercise of equity instruments
|
|
|
|
|
|
|
8,043,968
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
29,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,060
|
|
Withholding taxes for stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,536
|
)
|
|
|
1,167,800
|
|
|
|
(25,020
|
)
|
|
|
|
|
|
|
|
|
|
|
(86,556
|
)
|
Treasury stock activity related to vesting of equity instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,291
|
|
|
|
(444
|
)
|
|
|
|
|
|
|
|
|
|
|
(444
|
)
|
Stock-based compensation expense post Spin-Off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
|
|
|
|
323,184,577
|
|
|
|
323
|
|
|
|
25,599,998
|
|
|
|
26
|
|
|
|
5,695,498
|
|
|
|
1,205,091
|
|
|
|
(25,464
|
)
|
|
|
64,978
|
|
|
|
(1,598
|
)
|
|
|
5,733,763
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,934
|
|
|
|
|
|
|
|
244,934
|
|
Net loss on derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,119
|
)
|
|
|
(1,119
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,696
|
|
|
|
14,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
258,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of derivative liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,832
|
|
Proceeds from exercise of equity instruments
|
|
|
|
|
|
|
4,881,699
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
34,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,288
|
|
Spin-Off related tax adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,139
|
|
Tax deficiencies on equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,296
|
)
|
Capital contribution from sale of business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,524
|
|
Treasury stock activity related to vesting of equity instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
960,137
|
|
|
|
(7,292
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,292
|
)
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000,000
|
|
|
|
(288,399
|
)
|
|
|
|
|
|
|
|
|
|
|
(288,399
|
)
|
Modification of cash-based equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,930
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
|
|
|
|
328,066,276
|
|
|
|
328
|
|
|
|
25,599,998
|
|
|
|
26
|
|
|
|
5,903,200
|
|
|
|
22,165,228
|
|
|
|
(321,155
|
)
|
|
|
309,912
|
|
|
|
11,979
|
|
|
|
5,904,290
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,864
|
|
|
|
|
|
|
|
295,864
|
|
Net loss on derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,018
|
|
|
|
3,018
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,768
|
|
|
|
16,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,572
|
)
|
|
|
|
|
|
|
(3,572
|
)
|
Settlement of derivative liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,579
|
|
Proceeds from exercise of equity instruments
|
|
|
|
|
|
|
8,990,484
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
54,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,852
|
|
Withholding taxes for stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121,208
|
)
|
Tax deficiencies on equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(459
|
)
|
Treasury stock activity related to vesting of equity instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
402,427
|
|
|
|
(9,389
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,389
|
)
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,000,003
|
|
|
|
(1,388,289
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,388,289
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,333
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
|
|
|
|
337,056,760
|
|
|
$
|
337
|
|
|
|
25,599,998
|
|
|
$
|
26
|
|
|
$
|
5,902,582
|
|
|
|
77,567,658
|
|
|
$
|
(1,718,833
|
)
|
|
$
|
602,204
|
|
|
$
|
31,765
|
|
|
$
|
4,818,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have 751 and 846 shares of preferred stock
outstanding as of December 31, 2007 and 2006.
See notes to consolidated financial statements.
F-5
EXPEDIA,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
295,864
|
|
|
$
|
244,934
|
|
|
$
|
228,730
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
59,526
|
|
|
|
48,779
|
|
|
|
50,445
|
|
Amortization of intangible assets, non-cash distribution and
marketing and stock-based compensation
|
|
|
140,418
|
|
|
|
200,689
|
|
|
|
230,389
|
|
Deferred income taxes
|
|
|
(1,583
|
)
|
|
|
(10,652
|
)
|
|
|
68,198
|
|
Unrealized (gain) loss on derivative instruments, net
|
|
|
5,748
|
|
|
|
(8,137
|
)
|
|
|
6,042
|
|
Equity in (income) loss of unconsolidated affiliates
|
|
|
2,614
|
|
|
|
(2,541
|
)
|
|
|
(1,668
|
)
|
Minority interest in income (loss) of consolidated subsidiaries,
net
|
|
|
(1,994
|
)
|
|
|
513
|
|
|
|
(836
|
)
|
Write-off of long-term investment
|
|
|
|
|
|
|
|
|
|
|
23,426
|
|
Impairment of intangible asset
|
|
|
|
|
|
|
47,000
|
|
|
|
|
|
Foreign exchange (gain) loss on cash and cash equivalents, net
|
|
|
(12,524
|
)
|
|
|
(37,182
|
)
|
|
|
9,292
|
|
Other
|
|
|
3,801
|
|
|
|
1,100
|
|
|
|
1,161
|
|
Changes in operating assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(44,363
|
)
|
|
|
(32,148
|
)
|
|
|
(21,833
|
)
|
Prepaid merchant bookings and prepaid expenses
|
|
|
(32,378
|
)
|
|
|
(20,694
|
)
|
|
|
(22,492
|
)
|
Accounts payable, other, accrued expenses and other current
liabilities
|
|
|
51,702
|
|
|
|
59,858
|
|
|
|
156,931
|
|
Accounts payable, merchant
|
|
|
101,068
|
|
|
|
63,246
|
|
|
|
84,636
|
|
Deferred merchant bookings
|
|
|
142,608
|
|
|
|
59,450
|
|
|
|
45,051
|
|
Deferred revenue
|
|
|
1,562
|
|
|
|
3,225
|
|
|
|
1,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
712,069
|
|
|
|
617,440
|
|
|
|
859,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(86,658
|
)
|
|
|
(92,631
|
)
|
|
|
(52,315
|
)
|
Acquisitions, net of cash acquired
|
|
|
(59,622
|
)
|
|
|
(32,518
|
)
|
|
|
10,547
|
|
Proceeds from sale of business to a related party
|
|
|
|
|
|
|
13,163
|
|
|
|
|
|
Increase in long-term investments and deposits
|
|
|
(33,226
|
)
|
|
|
(1,514
|
)
|
|
|
(369
|
)
|
Purchase of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
Proceeds from sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Transfers to IAC/InterActiveCorp, net
|
|
|
|
|
|
|
|
|
|
|
(757,206
|
)
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
(2,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(179,506
|
)
|
|
|
(113,500
|
)
|
|
|
(801,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility borrowings
|
|
|
755,000
|
|
|
|
|
|
|
|
230,000
|
|
Credit facility repayments
|
|
|
(170,000
|
)
|
|
|
(230,000
|
)
|
|
|
|
|
Proceeds from issuance of long-term debt, net of issuance costs
|
|
|
|
|
|
|
495,346
|
|
|
|
|
|
Changes in restricted cash and cash equivalents
|
|
|
(6,494
|
)
|
|
|
4,578
|
|
|
|
(9,495
|
)
|
Proceeds from exercise of equity awards
|
|
|
55,038
|
|
|
|
35,258
|
|
|
|
29,060
|
|
Excess tax benefit on equity awards
|
|
|
95,702
|
|
|
|
1,317
|
|
|
|
|
|
Withholding taxes for stock option exercises
|
|
|
(121,208
|
)
|
|
|
|
|
|
|
(86,556
|
)
|
Treasury stock activity
|
|
|
(1,397,173
|
)
|
|
|
(295,691
|
)
|
|
|
|
|
Distribution to IAC/InterActiveCorp, net
|
|
|
|
|
|
|
|
|
|
|
(52,844
|
)
|
Other, net
|
|
|
(844
|
)
|
|
|
(1,036
|
)
|
|
|
(3,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(789,979
|
)
|
|
|
9,772
|
|
|
|
106,507
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
21,528
|
|
|
|
42,146
|
|
|
|
(8,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(235,888
|
)
|
|
|
555,858
|
|
|
|
155,748
|
|
Cash and cash equivalents at beginning of year
|
|
|
853,274
|
|
|
|
297,416
|
|
|
|
141,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
617,386
|
|
|
$
|
853,274
|
|
|
$
|
297,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
49,266
|
|
|
$
|
4,287
|
|
|
$
|
248
|
|
Income tax payments, net
|
|
|
78,345
|
|
|
|
126,126
|
|
|
|
10,384
|
|
See notes to consolidated financial statements.
F-6
Expedia,
Inc.
Notes to
Consolidated Financial Statements
|
|
NOTE 1
|
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
and abroad. These travel products and services are offered
through a diversified portfolio of brands including:
Expedia.com®,
Hotels.com®,
Hotwire.comtm,
our private label programs (Worldwide Travel Exchange and
Interactive Affiliate Network), Classic Vacations,
Expedia®
Corporate Travel (ECT),
eLongtm,
Inc. (eLong) and
TripAdvisor®.
In addition, many of these brands have related international
points of sale. 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 IACs 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. 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 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 or cash ($50 per
share plus accrued and unpaid dividends).
Basis
of Presentation
The accompanying consolidated financial statements include
Expedia, Inc., our wholly-owned subsidiaries, and entities we
control, or in which we have a variable interest and are the
primary beneficiary of expected cash profits or losses. 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, changes in stockholders
equity and comprehensive income, and cash flows on a combined
basis 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 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.
F-7
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
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 several
weeks or longer. As a result, revenue is typically the lowest in
the first quarter and highest in the third quarter.
|
|
NOTE 2
|
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 entitys 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 includes the minority
interest share of net income or loss from eLong.
In addition, we hold variable interests in certain affiliated
entities of eLong in order to meet the laws and regulations of
China, which restricts foreign investment in the air-ticketing,
travel agency, internet content provision and advertising
businesses. Through a series of agreements with affiliated
Chinese entities, eLong is the primary beneficiary of expected
cash losses or profits by contractual right. As such, although
we do not own capital stock of the Chinese affiliates, we
consolidate their results.
We have eliminated significant intercompany transactions and
accounts in our consolidated financial statements.
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. The significant estimates
underlying our consolidated financial statements include revenue
recognition, recoverability of long-lived and intangible assets
and goodwill, income taxes, potential settlements related to
occupancy taxes, stock-based compensation and accounting for
derivative instruments.
Reclassifications
We have reclassified prior period financial statements to
conform to the current period presentation.
Revenue
Recognition
We recognize revenue when it is earned and realizable based on
the following criteria: persuasive evidence that an arrangement
exists, services have been rendered, the price is fixed or
determinable and collectibility is reasonably assured.
We also evaluate the presentation of revenue on a gross versus a
net basis through application of Emerging Issues Task Force No.
(EITF)
99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent. 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,
F-8
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
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. 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. The guidance clearly indicates
that the evaluations of these factors, which at times can be
contradictory, are subject to significant judgment and
subjectivity. 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.
For our primary revenue models, discussed below, we have
determined net presentation is appropriate for the majority of
revenue transactions.
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.
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 nonrefundable,
nonchangeable 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.
Amounts received from customers are presented net of amounts
paid to suppliers. In certain instances when a supplier invoices
us for less than the cost we accrued, we generally 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 and
contract terms.
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.
Merchant Air. Generally, we determine the
ticket price for merchant air transactions. We pay the cost of
the airline ticket generally 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
F-9
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
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.
Cash
and Cash Equivalents
Our cash and cash equivalents include cash and liquid financial
instruments with 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
customers 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 is three to five
years for computer equipment, capitalized software development
and 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.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset
Retirement Obligations, we establish assets and liabilities
for the present value of estimated future costs to return
certain of our leased facilities to their original condition.
Such assets are depreciated over the lease period into operating
expense, and the recorded liabilities are accreted to the future
value of the estimated restoration costs.
Goodwill
and Indefinite-Lived Intangible Assets
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 is amortized, for impairment
annually as of October 1 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 the reporting unit to the carrying value. If
the carrying value of the reporting unit exceeds the fair value,
the goodwill of the reporting
F-10
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
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 units goodwill over its implied fair value
should such a circumstance arise.
In the evaluation of indefinite-lived intangible assets, an
impairment charge is recorded for the excess of 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 blended analysis of the present value of estimated
future discounted cash flows and market valuation approach,
which compares 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 assets,
which primarily consist of trade name and trademarks, using the
relief-from-royalty method. This method assumes that the trade
name 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
Intangible assets with definite lives and other long-lived
assets are carried at cost and are amortized on a straight-line
basis over their estimated useful lives of two to ten years. We
review the carrying value of long-lived assets to be used in
operations whenever events or changes in circumstances indicate
that the carrying amount of the assets might not be recoverable.
Factors that would necessitate an impairment assessment include
a significant adverse change in the extent or manner in which an
asset is used, a significant adverse change in legal factors or
the business climate that could affect the value of the asset,
or a significant decline in the observable market value of an
asset, among others. If such facts indicate a potential
impairment, an impairment loss would only be recorded if the
assets carrying amount is not recoverable through its
undiscounted cash flows. Any impairment would be measured as the
difference between the assets carrying amount and
estimated fair value, determined using appropriate valuation
methodologies which would typically include an estimate of
discounted cash flows.
Assets held for sale, to the extent we have any, are reported at
the lower of cost or fair value less costs to sell.
Investments
We record investments, which are non-marketable, 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. Such an evaluation resulted in the
write-off of an investment in 2005. See Note 13
Other Income (Expense).
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 enacted tax rates
expected to be in effect when we realize the underlying
F-11
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
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 believe
is more likely than not to be realized. 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 materially vary from these estimates.
On January 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 gives guidance
related to the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return,
and requires that we recognize in our financial statements the
impact of a tax position, if that position is more likely than
not to be sustained upon an examination, based on the technical
merits of the position.
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. Generally, hotels charge
taxes based on the room rate paid to the hotel and remit these
taxes to the various tax authorities. When a customer books a
room through one of our travel services, we collect a tax
recovery charge from the customer which we pay to the hotel. 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 or have levied assessments 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 for the potential settlement
of issues related to hotel occupancy taxes.
Presentation
of Taxes in the Income Statement
We present taxes that we collect from customers and remit to
government authorities on a net basis in our consolidated
statements of income.
Derivative
Instruments
Derivative instruments are carried at fair value on our
consolidated balance sheets.
We have designated cross currency swap agreements as cash flow
hedges of certain inter-company loan agreements denominated in
currencies other than the lending subsidiaries functional
currency (the hedged items). The hedges have been
determined to be highly effective, at designation and on an
ongoing basis. As such, we record the total change in the fair
value of the hedges in other comprehensive income
(OCI) each period, and concurrently reclassify a
portion of the gain or loss to other, net to perfectly offset
gains or losses related to transactional remeasurement of the
hedged items.
We report the change in the fair value of derivative instruments
that do not qualify for hedge accounting treatment in other, net
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 7 Derivative Instruments.
F-12
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
Foreign
Currency Translation and Transaction Gains and
Losses
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 OCI. Due to the nature of our operations and our
corporate structure, we also have subsidiaries that have
significant transactions in foreign currencies other than their
functional currency. We record transaction gains and losses in
our consolidated statements of income related to the recurring
remeasurement and settlement of such transactions. To the extent
practicable, we attempt to minimize this exposure by maintaining
natural hedges between our current assets and current
liabilities of similarly denominated foreign currencies.
Debt
Issuance Costs
We defer costs we incur to issue debt and amortize these costs
to interest expense over the term of the debt or, when the debt
can be redeemed at the option of the holders, over the term of
the redemption option.
Marketing
Promotions
We periodically provide incentive offers to our customers to
encourage booking of travel products and services. Generally,
our incentive offers are as follows:
Current Discount Offers. These promotions
include dollar off discounts to be applied against current
purchases. We record the discounts as reduction in revenue at
the date we record the corresponding revenue transaction.
Inducement Offers. These promotions include
discounts granted at the time of a current purchase to be
applied against a future qualifying purchase. We treat
inducement offers as a reduction to revenue based on estimated
future redemption rates. We allocate the discount amount between
the current purchase and the potential future purchase based on
our expected relative value of the transactions. We estimate our
redemption rates using our historical experience for similar
inducement offers.
Concession Offers. These promotions include
discounts to be applied against a future purchase to maintain
customer satisfaction. Upon issuance, we record these concession
offers as a reduction to revenue based on estimated future
redemption rates. We estimate our redemption rates using our
historical experience for concession offers.
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 the advertisement is shown. For the years
ended December 31, 2007, 2006, and 2005, our advertising
expense was $538.9 million, $427.2 million and
$425.2 million. As of December 31, 2007 and 2006, we
had $7.7 million and $12.6 million of prepaid
marketing expenses included in prepaid expenses and other
current assets on our consolidated balance sheets.
Stock-Based
Compensation
Effective January 1, 2006, we began accounting for
stock-based compensation under the modified prospective method
provisions of SFAS No. 123(R), Share-Based
Payment, and related guidance. Under SFAS 123(R), we
continue to measure and amortize the fair value for all
share-based payments consistent with our past practice under
SFAS 123, Accounting for Stock-Based Compensation,
and SFAS No. 148, Accounting
F-13
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
for Stock-Based Compensation Transition and
Disclosure. As a result, the adoption of SFAS 123(R)
did not have a material impact on our financial position.
We measure and amortize the fair value of restricted stock
units, stock options and warrants as follows:
Restricted Stock Units. Restricted stock units
(RSU) are stock awards that are granted to employees
entitling the holder to shares of common stock as the award
vests, typically over a five-year period. We measure the value
of RSUs at fair value based on the number of shares granted and
the quoted price of our common stock at the date of grant. We
amortize the fair value, net of estimated forfeitures, as
stock-based compensation expense over the vesting term on a
straight-line basis. We record RSUs that may be settled by the
holder in cash, rather than shares, as a liability and we
remeasure these instruments at fair value at the end of each
reporting period. Upon settlement of these awards, our total
compensation expense recorded over the vesting period of the
awards will equal the settlement amount, which is based on our
stock price on the settlement date.
Performance-based RSUs vest upon achievement of certain
company-based performance conditions. On the date of grant, we
assess whether it is probable that the performance targets will
be achieved, and if assessed as probable, we determine the fair
value of the performance-based award based on the fair value of
our common stock at that time. We record compensation expense
for these awards over the estimated performance period using the
accelerated method under Financial Accounting Standards Board
(FASB) Interpretation No. (FIN) 28,
Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans an interpretation of
Accounting Principles Board Opinion No. 15 and 25. At
each reporting period, we reassess the probability of achieving
the performance targets and the performance period required to
meet those targets. The estimation of whether the performance
targets will be achieved and of the performance period required
to achieve the targets requires judgment, and to the extent
actual results or updated estimates differ from our current
estimates, the cumulative effect on current and prior periods of
those changes will be recorded in the period estimates are
revised, or the change in estimate will be applied prospectively
depending on whether the change affects the estimate of total
compensation cost to be recognized or merely affects the period
over which compensation cost is to be recognized. The ultimate
number of shares issued and the related compensation expense
recognized will be based on a comparison of the final
performance metrics to the specified targets.
Stock Options and Warrants. We measure the
value of stock options and warrants issued or modified,
including unvested options assumed in acquisitions, on the grant
date (or modification or acquisition dates, if applicable) at
fair value, using the Black-Scholes option valuation model. We
amortize the fair value, net of estimated forfeitures, over the
remaining vesting term on a straight-line basis.
Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by employees who
receive these awards, and subsequent events are not indicative
of the reasonableness of our original estimates of fair value.
In determining the estimated forfeiture rates for stock-based
awards, we periodically conduct an assessment of the actual
number of equity awards 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
estimate 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 9 Stock-Based Awards and Other Equity
Instruments.
We have calculated an additional paid-in capital
(APIC) pool pursuant to the provisions of
SFAS 123(R). The APIC pool represents the excess tax
benefits related to stock-based compensation that are available
to absorb future tax deficiencies. We include only those excess
tax benefits that have been realized in accordance with
SFAS No. 109, Accounting for Income Taxes. If
the amount of future tax deficiencies is greater than the
available APIC pool, we will record the excess as income tax
expense in our consolidated statements of
F-14
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
income. In 2007 and 2006, we recorded tax deficiencies of
$3.9 million and $11.6 million against the APIC pool;
as a result, such deficiencies did not affect our results of
operations. Excess tax benefits or tax deficiencies are a factor
in the calculation of diluted shares used in computing dilutive
earnings per share. The adoption of SFAS 123(R) did not
have a material impact on our dilutive shares.
Prior to our adoption of SFAS 123(R), we recorded cash
retained as a result of tax benefit deductions relating to
stock-based compensation in operating activities in our
consolidated statements of cash flows, along with other tax cash
flows, in accordance with the provisions of the EITF
No. 00-15,
Classification in the Statement of Cash Flows of the Income
Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option. SFAS 123(R)
supersedes
EITF 00-15,
amends SFAS No. 95, Statement of Cash Flows,
and requires that, upon adoption, we present the tax benefit
deductions relating to excess stock-based compensation
deductions as a financing activity in our consolidated
statements of cash flows. In 2007 and 2006, we reported
$95.7 million and $1.3 million of tax benefit
deductions as a financing activity that previously would have
been reported as an operating activity.
Earnings
Per Share
We compute basic earnings per share 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 12
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. The accounts receivable are
short-term in nature and are generally settled shortly after the
sale. We maintain the carrying amounts of the derivative
liabilities created in the Spin-Off at fair value, which
fluctuates primarily based on changes in the price of our common
stock. The fair values of our cross-currency swaps are
determined based on the present value of net future cash
payments and receipts, and fluctuate based on changes in market
interest rates and the Euro/U.S. dollar exchange rate.
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 also rely on global
distribution system partners and third-party service providers
for certain fulfillment services, including one third-party
service provider for which we accounted for approximately 47% of
its total revenue for the year ended December 31, 2006 and
approximately 40% of its total revenue for the nine months ended
September 30, 2007.
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. Our cash and
cash equivalents are primarily composed of interest bearing bank
account balances and AAA/Aaa-rated money market funds
denominated in U.S. dollars, Euros and British Pound
Sterling.
F-15
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
Contingent
Liabilities
We have a number of regulatory and legal matters outstanding, as
discussed further in Note 14 Commitments and
Contingencies. Periodically, we review the status of all
significant outstanding matters to assess the potential
financial exposure. When (i) it is probable that an asset
has been impaired or a liability has been incurred and
(ii) the amount of the loss can be reasonably estimated, we
record the estimated loss in our consolidated statements of
income. We provide disclosure in the notes to the consolidated
financial statements for loss contingencies that do not meet
both these conditions if there is a reasonable possibility that
a loss may have been incurred that would be material to the
financial statements. 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 which can be
highly subjective. The final outcome of these matters could vary
significantly from the amounts included in the accompanying
consolidated financial statements.
New
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS 157 applies when another standard
requires or permits assets or liabilities to be measured at fair
value. Accordingly, SFAS 157 does not require any new fair
value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007, except as it relates to
nonfinancial assets and liabilities, for which the effective
date may be delayed. We do not expect the adoption of
SFAS 157 to have a material impact on our consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of
SFAS Statement No. 115
(SFAS 159), which is effective for fiscal
years beginning after November 15, 2007. SFAS 159
permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified
election dates as defined in the standard. Subsequent unrealized
gains and losses on items for which the fair value option has
been elected will be reported in earnings. As we do not intend
to elect fair value treatment for qualifying instruments that
exist as of the effective date, we do not expect the adoption of
this Statement to have a material impact on our consolidated
financial statements. We may elect to measure qualifying
instruments at fair value in the future.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations (SFAS 141R), which
replaces SFAS 141. SFAS 141R applies to all
transactions or other events in which an entity obtains control
of one or more businesses and requires that all assets and
liabilities of an acquired business as well as any
noncontrolling interest in the acquiree be recorded at their
fair values at the acquisition date. Contingent consideration
arrangements will be recognized at their acquisition date fair
values, with subsequent changes in fair value generally
reflected in earnings. Pre-acquisition contingencies will also
typically be recognized at their acquisition date fair values.
In subsequent periods, contingent liabilities will be measured
at the higher of their acquisition date fair values or the
estimated amounts to be realized. The Statement is effective for
business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period
beginning on or after December 15, 2008. We are in the
process of evaluating the impact of the adoption of
SFAS 141R on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Accounting and Reporting on Non-controlling Interest in
Consolidated Financial Statements, an amendment of ARB 51
(SFAS 160), which is effective for fiscal
years beginning after December 15, 2008.
SFAS 160 states that accounting and reporting for
minority interests will be recharacterized as noncontrolling
interests and classified as a component of equity. The
calculation of earnings per share will continue to be based on
income amounts attributable to the parent. FAS 160 applies
to all entities that prepare consolidated financial statements,
except not-for-profit organizations, but will affect only those
entities that have an outstanding noncontrolling interest in one
or more
F-16
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
subsidiaries or that deconsolidate a subsidiary. Upon adoption
of SFAS 160, we will recharacterize our minority interest
as a noncontrolling interest and classify it as a component of
equity in our consolidated financial statements.
|
|
NOTE 3
|
Acquisitions and Other Investments
|
In 2007, we acquired three travel-related companies. The
purchase price of these and other acquisition related costs
totaled $151.8 million, $59.6 million of which we paid
in cash and $92.2 million of which was accrued at
December 31, 2007 as a result of the financial performance
of one of the acquired companies during 2007. The accrued
purchase consideration represents $92.2 million of
$100 million total additional purchase price that can be
achieved based on the annual results of 2007 or 2008, or the two
periods combined, and is expected to be paid in the first half
of 2008. As a result of these acquisitions, we recorded
$126.4 million in goodwill and $17.6 million of
intangible assets with definite lives. The results of operations
of each of the acquired businesses have been included in our
consolidated results from each transaction closing date forward;
their effect on consolidated net revenue and operating income
during 2007 was not significant.
During 2007 we also acquired a 50% ownership interest in a
travel company for $26.0 million in cash. We include this
investment in Long-term investments and other assets and account
for it under the equity-method. The investment agreement
contains certain rights, whereby we may acquire and the investee
may sell to us the additional shares of the company, at fair
value or at established multiples of future earnings at our
discretion, at various times through 2013. We have also entered
into a commitment to provide the investee a $10 million
revolving operating line of credit and a credit facility for up
to $20 million. As of the end of 2008, any amounts due
under the credit facility are convertible, at our option, into
shares of the company at a premium to the then fair market
value. Less than $1 million was drawn against the revolving
operating line of credit and no amounts were drawn against the
credit facility as of December 31, 2007.
eLong. In August 2004, we purchased a 30%
ownership interest in eLong, a Cayman Island company traded on
the NASDAQ under the symbol LONG, whose principal
business is the operation of an internet-based travel business
in China, for approximately $59.0 million in cash, and were
concurrently issued a warrant to allow us to acquire additional
shares, with an exercise price of approximately $6.21 per share
of common stock, or $108.0 million.
In January 2005, we exercised the warrant resulting in an
aggregate purchase price of $170.6 million including our
initial investment and the exercise of the warrant and related
transaction costs, resulting in a total ownership position of
59% and voting rights of approximately 96%. From August 2004 to
the warrant exercise date the investment was accounted for under
the equity method, and from the warrant exercise date forward we
have consolidated the operating results of eLong. As of
December 31, 2007, our ownership interest in eLong was 56%.
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. In 2006, we purchased the
remaining 4.9% minority ownership in TripAdvisor for
$18.3 million in cash.
F-17
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
NOTE 4
|
Property
and Equipment, Net
|
Our property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Capitalized software development
|
|
$
|
230,168
|
|
|
$
|
176,751
|
|
Computer equipment
|
|
|
74,569
|
|
|
|
61,203
|
|
Furniture and other equipment
|
|
|
40,706
|
|
|
|
33,676
|
|
Leasehold improvements
|
|
|
30,746
|
|
|
|
24,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
376,189
|
|
|
|
296,061
|
|
Less: accumulated depreciation
|
|
|
(250,094
|
)
|
|
|
(195,126
|
)
|
Projects in progress
|
|
|
53,395
|
|
|
|
36,209
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
179,490
|
|
|
$
|
137,144
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006, our recorded capitalized
software development costs, net of accumulated amortization,
were $113.4 million and $92.4 million. For the years
ended December 31, 2007, 2006 and 2005, we recorded
amortization of capitalized software development costs of
$35.9 million, $28.3 million and $38.6 million,
most of which is included in technology and content expenses.
|
|
NOTE 5
|
Goodwill
and Intangible Assets, Net
|
The following table presents our goodwill and intangible assets
as of December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Goodwill
|
|
$
|
6,006,338
|
|
|
$
|
5,861,292
|
|
Intangible assets with indefinite lives
|
|
|
867,246
|
|
|
|
866,523
|
|
Intangible assets with definite lives, net
|
|
|
103,511
|
|
|
|
162,251
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,977,095
|
|
|
$
|
6,890,066
|
|
|
|
|
|
|
|
|
|
|
We perform our annual assessment of possible impairment of
goodwill and indefinite-lived intangible assets as of
October 1, or more frequently if events and circumstances
indicate that impairment may have occurred. We performed our
annual impairment assessment for goodwill and intangible assets
as of October 1, 2007 and had no impairments.
Our indefinite-lived intangible assets relate principally to
trade names and trademarks acquired in various acquisitions.
Based on lower than expected year-to-date revenue growth, we
determined that our indefinite-lived trade name intangible asset
related to Hotwire might be impaired during the third quarter of
2006. Accordingly, we performed a valuation of that asset and
determined that its carrying amount exceeded its fair value and
recognized an impairment charge of $47.0 million in
Impairment of intangible asset in our consolidated statements of
income. We based our measurement of fair value of the trade name
intangible asset using the relief-from-royalty method. This
method assumes that a trade name has value to the extent that
its owner is relieved of the obligation to pay royalties for the
benefits received therefrom.
F-18
Expedia,
Inc.
Notes to Consolidated Financial
Statements (Continued)
The following table presents the changes in goodwill:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Beginning Balance as of January 1
|
|
$
|
5,861,292
|
|
|
$
|
5,859,730
|
|
Additions
|
|
|
140,629
|
|
|
|
12,483
|
|
Deductions
|
|
|
(9,402
|
)
|
|
|
(28,702
|
)
|
Foreign exchange translation
|
|
|
13,819
|
|
|
|
17,781
|
|
|
|
|
|
|
|
|
|
|
Ending Balance as of December 31
|
|
$
|
6,006,338
|
|
|
$
|
5,861,292
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006, approximately 81% and 80%
of our goodwill was assigned to our North American segment and
approximately 17% to our European segment at each balance sheet
date.
In 2007, the additions to goodwill relate primarily to our
acquisitions as described in Note 3
Acquisitions and Other Investments as well as the basis
adjustments resulting from the implementation of FIN 48. In
2006, the additions to goodwill relate primarily to the
remaining purchase of TripAdvisor shares and other miscellaneous
business acquisitions. The deductions from goodwill for both
2007 and 2006 primarily 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.
The following table presents the components of our intangible
assets with definite lives as of December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Average
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Average
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Life
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Life
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In years)
|
|
|
Distribution agreements
|
|
$
|
177,426
|
|
|
$
|
(154,091
|
)
|
|
$
|
23,335
|
|
|
|
5.5
|
|
|
$
|
177,426
|
|
|
$
|
(132,643
|
)
|
|
$
|
44,783
|
|
|
|
5.5
|
|
Supplier relationship
|
|
|
212,514
|
|
|
|
(206,464
|
)
|
|
|
6,050
|
|
|
|
4.2
|
|
|
|
212,101
|
|
|
|
(186,399
|
)
|
|
|
25,702
|
|
|
|
4.2
|
|
Technology
|
|
|
203,028
|
|
|
|
(183,082
|
)
|
|
|
19,946
|
|
|
|
4.5
|
|
|
|
196,197
|
|
|
|
(157,186
|
)
|
|
|
39,011
|
|
|
|
4.5
|
|
Customer lists
|
|
|
26,549
|
|
|
|
(20,723
|
)
|
|
|
5,826
|
|
|
|
4.6
|
|
|
|
25,396
|
|
|
|
(19,175
|
)
|
|
|
6,221
|
|
|
|
4.7
|
|
Affiliate agreements
|
|
|
33,049
|
|
|
|
(14,899
|
)
|
|
|
18,150
|
|
|
|
10.0
|
|
|
|
33,049
|
|
|
|
(11,594
|
)
|
|
|
21,455
|
|
|
|
10.0
|
|
Domain names
|
|
|
10,940
|
|
|
|
(5,729
|
)
|
|
|
5,211
|
|
|
|
5.7
|
|
|
|
10,871
|
|
|
|
(3,812
|
)
|
|
|
7,059
|
|
|
|
5.7
|
|
Other
|
|
|
61,809
|
|
|
|
(36,816
|
)
|
|
|
24,993
|
|
|
|
6.0
|
|
|
|
49,052
|
|
|
|
(31,032
|
)
|
|
|
18,020
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
725,315
|
|
|
$
|
(621,804
|
)
|
|
$
|
103,511
|
|
|
|
5.0
|
|
|
$
|
704,092
|
|
|
$
|
(541,841
|
)
|
|
$
|
|