Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2000 or
[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
(for the transition period from to )
Commission File No. 000-27429
----------------
EXPEDIA, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1996083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
13810 SE Eastgate Way, Suite 400
Bellevue, Washington 98005
(Address of Principal Executive Offices)
(425) 564-7200
(Registrant's Telephone Number, Including Area Code)
----------------
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 [X] No [_]
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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sale price of the Common Stock on August 31,
2000 as reported on the Nasdaq National Market was approximately $172.6
million. Shares of Common Stock held by each current executive officer and
director and by each person who is known by the registrant to own 5% or more of
the outstanding Common Stock have been excluded from this computation in that
such persons may be deemed to be affiliates of the Company. Share ownership
information of certain persons known by the Company to own greater than 5% of
the outstanding common stock for purposes of the preceding calculation is based
solely on information on Schedule 13D or 13G filed with the Commission and is
as of August 31, 2000. This determination of affiliate status is not a
conclusive determination for other purposes.
The number of shares outstanding of the registrant's Common Stock, par value
$.01 per share as of August 31, 2000, was 48,213,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Expedia, Inc. is incorporating by reference the information required by Part
III of this Annual Report into the proxy statement for our annual meeting of
stockholders to be held on November 9, 2000. We will file this proxy statement
with the Securities and Exchange Commission within 120 days of the fiscal year
end.
Our operations are subject to a number of risks. You may find a discussion
of those risks in a prospectus that we filed with the Securities and Exchange
Commission on August 4, 2000, under the section entitled "Risk Factors."
Expedia, Inc. is also incorporating by reference these Risk Factors into this
Annual Report.
2
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding our expectations, beliefs,
intentions or strategies regarding the future. Forward-looking statements also
include statements regarding the extent and timing of our future revenues and
expenses and customer demand, statements regarding the deployment of our
products and services, and statements regarding our reliance on third parties.
Sections which contain numerous forward-looking statements include:
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" both of which appear later in this Annual Report, as
well as "Risk Factors" which appears in our prospectus filed with the
Securities and Exchange Commission on August 4, 2000.
We have based all of our forward-looking statements on information available
to us on the date of this Annual Report, and we are not obligated to update any
of these forward-looking statements. You should note that our actual results
could differ materially from the forward-looking statements.
PART I
ITEM 1. BUSINESS
Overview
We are a leading provider of branded online travel services for leisure and
small business travelers. We operate our own website, located at
Expedia(R).com, with localized versions in the United Kingdom, Germany and
Canada. We also operate the Travelscape.com(TM), LVRS.com(TM),
VacationSpot.com(R) and Rent-a-Holiday.com websites, and a
Travelscape(R)/LVRS(TM) sales call-center in Las Vegas.
We offer one-stop travel shopping and reservation services, providing
reliable, real-time access to schedule, pricing and availability information
for 450 airlines, 65,000 lodging properties and all major car rental companies.
Our websites enable consumers to make informed choices about their travel
purchases by providing quick and easy access to travel information and content,
24 hours a day, 7 days a week.
Our websites serve as a global travel marketplace, enabling travel service
suppliers to extend their marketing reach online. Through our websites,
suppliers can reach a large, global audience of consumers who are actively
engaged in planning and purchasing travel. Suppliers can pursue a range of
innovative, targeted merchandising and advertising strategies designed to
increase revenues, while at the same time reducing transaction and customer
service costs. We derive our revenues from transactions on our websites and
sales of advertisements on our websites. We also license components of our
technology and editorial content to selected airlines and American Express as a
platform for their websites.
Since launching our online travel service in October 1996, we have
experienced significant growth in our traffic and the amount of travel
purchased through our travel planning services. In the fiscal year ended
June 30, 2000, travel purchases on our websites totaled over $1.3 billion on a
pro forma basis, which includes the full-year results of companies acquired
during the year.
Industry Background
Growth of the Internet and Online Commerce
The Internet is dramatically changing the way in which consumers and
businesses communicate, share information and buy and sell goods and services.
The Internet's broadly distributed and easily accessible environment creates
the ideal foundation for new online marketplaces, which provide increased
search efficiency, comprehensive information and competitive pricing. In an
online environment, consumers have access to information and software tools
that enable them to evaluate and compare product and service offerings,
community forums within which to discuss relevant experiences and preferences
and tools to complete e-commerce transactions. In addition, suppliers can
extend their online marketing reach to a larger
3
base of potential customers and can efficiently target those customers who are
most likely to buy their products and services. The Internet brings
efficiencies to markets characterized by the presence of large numbers of
geographically-dispersed buyers and sellers and purchase decisions involving
large amounts of information from multiple sources. We believe that the
worldwide travel industry, which exemplifies these characteristics, is
especially well suited to benefit from increased Internet and e-commerce
adoption.
The Worldwide Travel Industry
The travel industry is very large in terms of both dollars spent and number
of participants. According to the International Air Transport Association,
airlines carried over 1.3 billion passengers worldwide in 1999. The World
Travel and Tourism Council estimates that spending on travel and tourism
worldwide will reach $3.8 trillion in 2000, growing to $7.0 trillion in 2010.
According to the World Travel and Tourism Council, approximately 58% of the
estimated year 2000 spending is attributable to leisure travel and tourism.
Consumers planning and purchasing a trip generally engage in a predictable
process that begins with consideration of destinations, dates and budgets and
progresses to a series of purchase decisions involving transportation,
accommodations and destination activities. This planning and purchasing process
is inefficient due in large part to the limitations of the infrastructure of
the traditional worldwide travel industry, which causes consumers to spend a
significant amount of time piecing together the information they need to plan
and purchase a trip. One critical reason for this inefficiency is the absence
of a single source of well-organized and in-depth travel information that
addresses all stages of the planning process and incorporates a reliable and
secure purchasing process. As a result, consumers, especially to the extent
they are price sensitive, frequently consult multiple sources, such as
guidebooks, magazines, travel agents, friends, co-workers, and disparate travel
suppliers, to shop for each element of their trip.
Travel suppliers located around the world compete for business from travel
consumers. This supplier community includes hundreds of airlines, thousands of
hotels, dozens of car rental companies, numerous vacation packagers and cruise
lines and hundreds of thousands of destination services merchants such as
restaurants, attractions, and local transportation and tour providers. These
suppliers spend substantial amounts of money to reach and attract potential
purchasers. For example, according to the International Air Transport
Association the airlines spend an average of 13% of their total revenues, or
approximately $14.2 billion dollars for the 1999 calendar year, on promotions
and sales expenses. The fragmented nature of the global consumer travel market
makes it difficult and inefficient for suppliers to target those consumers with
the greatest propensity to purchase travel services. Traditional advertising
channels, such as print, television and radio, do not eliminate inefficiency
because only a limited portion of any traditional advertising audience is
planning a trip at the time the advertisement is run.
Consumers and suppliers have traditionally relied on travel agents as
intermediaries. However, traditional travel agents are often unable to reduce
the inefficiencies of the travel market. We believe that many traditional
travel agents cannot provide consumers with a reliable, personalized source for
comprehensive travel information. Although traditional travel agents generally
have access to comprehensive information on the availability and pricing of
airline seats through computer reservations systems such as Worldspan, Sabre
and Apollo, time and resource constraints frequently make it difficult for
travel agents to provide consumers with the full set of options available in a
given computerized reservation system. Furthermore, due to budgetary or time
constraints, traditional travel agents often have limited access to other
sources of travel information such as consumer ratings, editorial content or
information about destination services. Finally, productivity demands often
restrict the amount of time traditional travel agents can spend with any single
customer to learn about preferences and tailor recommendations. As a result,
many consumers hesitate to rely solely on traditional travel agents and consult
multiple sources to plan and purchase trips.
The traditional travel agency channel also does not provide suppliers with
an efficient distribution network. Computerized reservation systems are
effective in maintaining information about travel inventory, such as
4
airline seats or rental cars that does not require extensive description.
However, these databases are not well-suited to maintaining detailed
information about travel inventory that is difficult to understand and sell in
the absence of more descriptive editorial or visual material, such as hotels,
resorts, cruises and vacation packages. In addition, it is difficult and
inefficient for suppliers to use traditional travel agents as a distribution
channel because the travel agency market is fragmented and the cost of training
and servicing travel agents is high.
Our Opportunity
The emergence of the Internet provides new opportunities for travelers and
suppliers to find one another. Travel has already become the largest online
retail category with United States leisure travelers expected to make an
estimated $12.2 billion in airline ticket purchases and hotel and car rental
reservations through travel websites in 2000, growing to $28.9 billion in 2004,
according to Forrester Research. Travel suppliers are beginning to sell their
inventory directly from their websites, and third-party providers of travel
planning services have emerged online. Some of these third parties attempt to
replicate the traditional travel agency experience on the Internet, some focus
on providing travel-related content and others offer a less comprehensive
travel service as a part of a larger e-commerce effort. Each of these solutions
is incomplete because it does not address fundamental consumer requirements for
comprehensive information and reliable service integrated with a secure and
efficient means to complete a purchase.
A significant opportunity exists for a new online global travel marketplace
that brings consumers and travel suppliers together, enables consumers to find
and act more easily upon a diverse selection of travel information and enables
suppliers to market and distribute their products and services more
efficiently. To be successful, this new travel marketplace must offer consumers
a blend of content, community, commerce and customer service, delivered in a
highly reliable and personalized manner. It must scale to accommodate growth in
users and it must be international in scope and localized by region, creating a
new and efficient channel for local and global travel suppliers to reach
consumers who are actively engaged in travel planning and purchasing.
Our Solution
We have created a leading online marketplace for researching, buying and
selling travel-related services. Our Internet-based travel marketplace offers
consumers a convenient, comprehensive and personalized source of travel
information and services and satisfies the needs of a broad range of travel
suppliers to cost-effectively market and sell their services to a large
audience that is actively engaged in planning and purchasing travel services.
We have built an underlying technology infrastructure that enables buyers and
sellers to transact in a reliable, scalable and secure environment.
A Leading Travel Services Marketplace
Expedia.com, Travelscape.com, LVRS.com, and VacationSpot.com, our travel
websites aimed at the United States consumer market, bring together a large
base of consumers and travel suppliers. According to Media Metrix, this Expedia
family of websites attracted over 8 million unique visitors in the United
States in June 2000. We offer consumers access to over 450 airlines, all major
car rental companies, dozens of vacation and cruise suppliers and to an
increasing number of local destination services providers. With the
acquisitions of Travelscape.com, Inc. and VacationSpot.com, Inc. in March 2000,
we are positioned as the leader in Internet lodging with over 65,000 lodging
properties available on our website. The number of monthly visitors, combined
with the breadth of supply offerings and the level of sales through our
websites, establish Expedia as a leading travel services marketplace.
Compelling Value for Consumers
We believe that consumers value Expedia services because we provide the
control, flexibility and access to information necessary for them to select the
best possible travel options at the most competitive prices. Our Best Fare
Search(TM) technology allows Expedia to price hundreds more itineraries than
the current industry
5
standard. The current implementation of this underlying technology increases
the choices available to customers while also allowing them to make price and
schedule tradeoffs on a flight-by-flight basis, rather than on an itinerary-by-
itinerary basis, which is the current industry standard. We enable consumers to
enhance the travel planning experience with high-quality editorial content. We
offer consumers access to a range of published and negotiated rate offerings.
Our travel marketplace is also designed to be more convenient, comprehensive
and personalized and delivers a higher quality of service than alternative
travel planning and purchase methods. The Expedia family of websites including
our localized international websites offer a unique blend of content,
community, commerce and customer service, enabling consumers to easily
identify, evaluate and purchase travel services in a single location and a
secure, reliable transactional environment.
Compelling Value for Travel Suppliers
Recognizing the limitations of traditional travel solutions for suppliers,
we have worked with our suppliers to design our websites to address their
specific needs on both a local and multinational basis. Through our websites,
suppliers worldwide can reach a large audience of consumers who are actively
engaged in planning and purchasing travel. Suppliers can pursue a range of
innovative, targeted merchandising and advertising strategies designed to
increase revenues while at the same time reducing transaction and customer
service costs. Suppliers can also use remote inventory management tools located
on our ExpediaPartners.com website, to introduce new products, services and
promotions quickly and easily. In addition, we are creating an aggregated,
secure database of customer purchase and shopping patterns that will allow
suppliers to offer more tailored services through our marketplace while
preserving consumer privacy.
Global Reach and Presence
We designed our travel marketplace to be global. Localized versions of our
websites accommodate not only differences in language and culture, but also
differences in travel purchase behavior and supplier inventory preferences.
These localized websites, such as Expedia.co.uk in the United Kingdom and
Expedia.de in Germany, are designed to replicate the success of our Expedia.com
website in addressing the needs of both consumers and suppliers in their
respective markets. For example, because negotiated fares are important to
consumers in the United Kingdom, we developed a custom airfare pricing engine
that allows us to offer unique integration of negotiated fares with published
fares in a single display.
Reliable, Secure and Scalable Technology Platform
We have designed our platform to provide a high level of reliability,
security and scalability. Our multi-layered platform design allows us to
deliver a high-performance website capable of managing high transaction volumes
and ensuring reliable access for our customers and suppliers. We also offer
advanced security features, maintain excess capacity to handle peak traffic
loads in the rapidly expanding online travel market and have built dedicated
distributed storage for critical data such as customer profile information. Our
technology leadership and the scalability of our platform have enabled us to
generate revenue by licensing core parts of our platform to Continental
Airlines, Northwest Airlines and American Express.
Our Strategy
Our objective is to enhance our position as a leading online global travel
marketplace. The key elements of our strategy are as follows:
Continue to Increase Brand Awareness
We are increasing, and will continue to increase brand awareness among
consumers by pursuing an aggressive brand development strategy. Our present
brand-building campaign includes a substantial advertising presence in both
online media and traditional media, such as print, radio and television. We
continue to offer co-branded promotions with selected suppliers and pursue
targeted press coverage. We are also working with third parties to develop a
range of cross-media marketing initiatives including Expedia Radio(TM), Expedia
Travels Magazine(TM) and Expedia Cafe(TM).
6
Expand Merchant Business Activity
Strong supplier relationships are crucial to the success of our business.
Our acquisition of Travelscape.com, Inc. underlines an important shift in our
business model whereby we are moving increasingly towards a merchant business
model, as opposed to the traditional agency business model. In the merchant
business model, Expedia acquires inventory at discounted wholesale prices from
preferred suppliers and then determines the retail price. This model allows us
to offer more competitive prices to our customers while also generating a
higher gross profit per transaction. In contrast, the agency business model is
one in which the supplier fixes the retail price and the agent is paid on a
commission or flat fee basis. Merchant transactions for Expedia include the
sale of negotiated rate hotel rooms, air tickets and packages through the
Expedia.com and Travelscape.com websites and sales through the Flight Price
Matcher(TM) and Hotel Price Matcher(TM) services on the Expedia.com website.
Enhance Technology Platform and Product Functionality
We plan to continue to enhance the underlying infrastructure and
functionality of our websites.
Feature Differentiation. We will continuously update new software features
and editorial content to our websites. We have invested heavily in the
development of the Best Fare Search(TM) (BFS) technology, a "next generation"
fare searching technology and pricing engine that moves Computerized
Reservations System (CRS) mainframe-based itinerary pricing functionality onto
a more scalable and cost effective Windows(R) platform, allowing Expedia to
show customers hundreds more priced itineraries than any other Internet travel
service provider.
In addition to BFS, we are making significant investments in a range of
other technologies. We believe increasing the level of personalization in our
marketplace is critical to providing a rich consumer experience and more
efficient and targeted merchandising and advertising opportunities for
suppliers. We will also continue to develop features that meet the needs of
specific market segments, such as small business travelers. We are improving
the accessibility of our websites through various Internet access channels,
such as wireless hand-held devices.
Our mobile commerce strategy is focused on providing our customers with a
comprehensive set of key travel information across a broad range of devices. We
recently launched our mobile service "Expedia To Go(TM)" which provides
customers with flight status, flight schedules, driving directions, hotel
availability and access to their personal Expedia itineraries on wireless
devices and connected Personal Digital Assistant (PDA). Our technology platform
allows us to exploit new channels of distribution as they develop, whether they
are PDAs, cellular phone browsers or broadband interactive television.
Scalability, Security and Reliability. We have invested heavily in core
infrastructure with the objective of eliminating downtime on our websites, in
order to ensure that we are able to continue to serve our customers reliably as
our operations scale. The operation of our own websites and those of our
licensees has given us extensive experience at handling rapid increases in
transaction volumes.
Expand Internationally
We operate localized websites in the United Kingdom, Germany and Canada. We
selected these countries due to their large travel markets and the rapid growth
of online commerce in these markets. According to the World Travel and Tourism
Council, spending on travel and tourism is expected to be $209 billion in the
United Kingdom, $302 billion in Germany and $111 billion in Canada in 1999,
rising to $380 billion in the United Kingdom, $558 billion in Germany and $212
billion in Canada in 2010. In developing customized websites in our
international markets we will continue to draw on our experience in the United
States with technology, user interface and supplier relationships while
tailoring our international websites to specific characteristics of each local
marketplace.
7
Continue Diversification of our Sources of Revenue
We plan to expand our travel service offerings to include more complex
travel products and destination service offerings. Currently, the majority of
our transaction revenues are derived from airline ticket sales, hotel
reservations and car rentals. We plan to extend our offerings in each of these
core segments and to expand our range of offerings into other segments. Other
new travel services categories may include offering retail travel-related goods
such as luggage and accessories, selling travel insurance and entering into
strategic relationships with third-party providers of ground transportation,
tours and similar services.
As a result of our focus on developing our merchant business, our business
is more diversified than that of our principal online competitors.
Our Travel Planning Services
United States
Customers in the United States can use our travel planning services to
access the wide selection of our online travel services to shop for and book
airline tickets, car rentals and hotel reservations, and to search and book the
offerings of selected vacation packagers, cruise lines, specialty lodging
providers and travel-related retailers.
On our websites, consumers engaging in travel planning can consult extensive
editorial content covering over 350 popular destinations, travel advice and
recommendations from acknowledged industry experts, feature articles on
specific destinations and specialty travel sections geared to the needs of
specific groups such as families and business travelers. Consumers looking for
advice from fellow travelers can take advantage of extensive community
interaction, including bulletin boards and chat rooms. To accommodate the needs
of consumers who are searching for price and availability information, we
complement our core flight, hotel and car rental shopping and purchase
functionality with a number of powerful comparison shopping tools.
After building a specific itinerary, customers can complete the purchase of
airline tickets, hotel rooms or car rentals by entering credit card and address
information. Customers instantly receive email confirmation of the purchase and
are directed via links on our website to explore relevant destination
information and take advantage of our proprietary Expedia Maps(TM). We also
provide a twenty-four hour toll-free customer service center that customers can
call or e-mail for assistance.
Taking advantage of our specially negotiated rates, customers can book
discounted hotel rooms and discounted air and hotel packages at over
1,600 hotels in over 240 cities worldwide. On VacationSpot.com, customers can
browse over 25,000 vacation homes, rental condos, inns and bed & breakfast
properties in more than 4,000 vacation destinations in more than 100 countries
worldwide.
Using our websites, consumers and suppliers engage in a heavy volume of
transactions across multiple systems and networks. We rely on third-party
computer systems and third-party service providers, including the computerized
central reservation systems of the airline, hotel and car rental industries.
The nature and size of the reservation process requires frequent expansion of
our operations, and upgrades of our systems and infrastructure in order to deal
with increasing numbers of customers and travel suppliers. Upgrades are also
required to enable the frequent feature and functionality enhancement which we
will continue to make.
The travel planning services offered by our US websites can be divided into
4 main areas: commerce, content, community and customer service.
Commerce
The Expedia websites offer a broad range of features that provide consumers
with access to purchase information such as reliable price comparisons,
availability and itinerary details, an integrated purchase path and post-
purchase confirmation.
8
Flight, Hotel and Car Wizards. Consumers can search for and compare airline,
rental car and hotel room pricing and availability information and can also
purchase tickets or make reservations by selecting from our published rate and
negotiated rate offerings.
Vacation and Cruise Wizards. These tools search a proprietary database of
vacation and cruise packages. The content of this database is regularly updated
by suppliers using the inventory management tools offered on
ExpediaPartners.com.
Hotel and Flight Price Matcher. Hotel Price Matcher offers consumers the
ability to request specific prices for hotel rooms in popular cities, such as
New York, San Francisco and Las Vegas. Flight Price Matcher offers consumers
the ability to request specific prices for airline tickets. For each, we search
our proprietary database of negotiated hotel rates or airfares for available
rooms or seats that meet the boundary conditions contained in a consumer's
request.
Fare Tracker. This service enables subscribers to specify three routes and
receive updates on special fares and offers via weekly email as well as via a
personalized summary on our website.
My Trips and My Profile. This personalization feature enables consumers to
define a personal travel page which provides easy access to existing travel
itineraries and personal profiles. The My Trips and My Profile feature
encourages consumers to return to our Expedia.com website and build an ongoing
customer relationship with us.
Mileage Miner. Working with a third-party partner, our Expedia.com website
helps consumers manage their frequent flyer programs online.
Content
Consumers can use the editorial content available on the Expedia websites at
the beginning of the travel planning and purchase process for researching
destinations and travel tips. Consumers can also use content after they have
purchased travel as a way to gain more insight before their trip begins. Some
examples of content include:
Expedia.com Destination Guides. Essential information on 450 places, to help
the traveller plan the perfect trip: (when to go, what to bring, how to get
around, what not to miss); plus maps, weather, news and multimedia features.
Expedia Maps. We maintain a proprietary database of street maps of the
United States and highway maps for the rest of the world that we offer as
stand-alone applications and that we integrate with other features such as the
Hotel Wizard.
Specialty Travel Sections. We have launched two new editorial sections
within the Expedia.com website that target such categories as adventure travel,
families and business travel. We intend to launch new editorial sections that
target other consumer groups in response to perceived consumer and advertiser
demand.
Travel Features. We provide travel content that uses multimedia technologies
such as 360-degree photography and video clips. We also offer editorial
features on travel destinations and other special interest travel topics, such
as health information on specific destinations.
Travel News. We provide regularly updated information on fare sales,
changing travel conditions and specific weather and security advisories.
Flight Information. Consumers can use this feature to check the expected
arrival times of flights in progress.
9
Expedia Radio. We work with a licensee that produces a travel-related radio
show, Expedia Radio, that is broadcast to over 2.5 million listeners in over
100 markets in the United States. Visitors to the Expedia.com website can play
Expedia Radio audio content from our website.
Expedia Travels Magazine. In January 2000, we announced a joint agreement
with Ziff-Davis Publishing, the largest computing and Internet magazine
publisher and the sixth largest magazine publisher in the US, to launch a new
consumer travel magazine Expedia Travels. As a natural extension of our
commitment to provide travelers with pertinent and timely information across
all relevant media, the magazine joins Expedia Radio in complementing the
information found on the Expedia.com website. Expedia Travels will be launching
in the fall of 2000 as a bimonthly publication available on the newsstands and
by subscription. The magazine will focus on providing useful and relevant
travel information about destinations, services, suppliers, and products that
are targeted to leisure and business travelers.
Search. Our proprietary search engine allows consumers to generate a quick
list of information relating to a particular destination or travel theme, such
as "Hawaii" or "scuba diving".
Community
One of the best resources for travel recommendations is other travelers,
and, to reflect this, we have developed features to encourage a sense of
community among the millions of consumers who visit the Expedia websites in a
typical month. Some examples of our community services are as follows:
Fare Compare. This benchmarking feature allows consumers to review airfares
that other consumers of our Expedia.com website have found on particular
routes.
Chat Rooms. Visitors to our Expedia.com website can communicate directly
with one another in chat rooms maintained by Microsoft Corporation through its
MSN.com website.
Traveler Bulletin Boards. Travelers can post their questions and answers on
bulletin boards maintained by Microsoft(R) through its MSN.com website and
moderated by travel experts on contract to the Expedia.com website.
Customer Service
We strive to provide superior service to our customers to enhance their
experience and to assist them with travel plans.
Telephone and Email Support. For all of its travel offerings, Expedia
provides a rich agent-based support service. This service is accessible by
email as well as by toll-free, 24 hour a day, seven day a week telephone
support. For purposes of operational flexibility, Expedia has opted to provide
this support infrastructure with a balanced combination of in-house and
outsourced solutions. High volume customer support is split between our call
center in Las Vegas, where we have approximately 200 agents, and our outsourced
partner, which presently employs approximately 275 agents on our behalf. All
supplier support is managed by Expedia employees.
Supplier Functionality
We offer an array of functionality to address the specific needs of our
travel suppliers.
Promotional, Sponsorship and Advertising Inventory. We provide sponsorship
opportunities, advertising banners and other placements throughout the website.
Suppliers participating in the Expedia(R) Travel Network have access to a wide
variety of promotional opportunities, including front-page placement, travel
category targeting, inclusion in our Special Deals database and access to our
Vacation and Cruise Wizard database.
Inventory Management Tools. We enable selected suppliers to upload
information related to vacation and cruise packages into a proprietary database
maintained at ExpediaPartners.com. This inventory is then available on our
website.
10
Email Promotions. We work with suppliers to tailor email-based promotions
for selected segments of our customer base.
International
We offer localized Expedia.com websites in the United Kingdom, Germany and
Canada as well as the Rent-a-Holiday(R) website in Belgium.
Expedia.co.uk
In the United Kingdom, we operate a leading online travel service at
Expedia.co.uk. This marketplace offers a number of features customized to the
needs of consumers and suppliers in the United Kingdom, such as:
Negotiated Fares. We offer fares negotiated with airlines by MTG
Limited UK(Thomas Cook) and integrate both negotiated and published
fares in a single display.
Holiday Shop. This service allows customers in the United Kingdom to
browse vacation package offerings leaving from the United Kingdom.
Localized Customer Service. Expedia.co.uk customer service is
provided by MTG Limited UK (Thomas Cook) in the United Kingdom and is
tailored to the needs of United Kingdom travelers.
Localized Editorial Content. The editorial advice and feature
articles offered on the United Kingdom website are developed with a
British point of view. Though we use content developed for the United
States market where appropriate, our goal is to offer a local product
to the United Kingdom travel market.
United Kingdom Strategic Relationships. We have developed strategic
relationships in the United Kingdom with British Airways and MTG
Limited UK (Thomas Cook). These relationships enable us to expand our
localization features such as negotiated fares, provide local editorial
content and extend our regional distribution channels.
Travel Insurance. We offer travelers the ability to purchase travel
insurance in the United Kingdom through our website.
Expedia.de
In Germany, we operate a leading online travel service at Expedia.de. In
addition to relevant language and currency changes, other features on our
website include:
Package Tours Database. Because package tours are a popular vacation
purchase in Germany, we provide customers with an interface to a third-
party database of packaged tour inventory.
Negotiated Fares. We offer fares negotiated with airlines by
Deutsches Reiseburo and integrate negotiated and published fares in a
single display on our website.
Localized Customer Service. Expedia.de customer service is provided
by Deutsches Reiseburo in Germany and is tailored to the needs of
German travelers.
Localized Editorial Content. The editorial advice and feature
articles offered on our Expedia.de website are developed with a German
point of view. Therefore, most of our feature articles and editorials
are not translations of articles that run on our Expedia.com website
but instead are original German articles.
11
German Strategic Relationships. We have developed strategic
relationships in Germany with Lufthansa, Touristik Union International
and Deutsches Reiseburo, among others.
Travel Insurance. We offer travelers the ability to purchase travel
insurance in Germany through our website.
Expedia.ca
In Canada, we operate the Expedia.ca website, which is similar to the
Expedia.com website, with localized currency and date formats. This website
offers a number of features to address the needs of the Canadian marketplace,
including localized customer service.
Rent-a-Holiday.com
In Europe, we operate the Rent-a-Holiday.com website, which was acquired as
part of our acquisition of VacationSpot.com, Inc. Similar to the
VacationSpot.com website, the Rent-a-Holiday.com website offers unique
properties at vacation destinations worldwide.
Licensing of Expedia Products
We license components of our technology and editorial content to selected
airlines and American Express as a platform for their websites. Licensing our
technology allows us to participate in online bookings whether they are placed
through airline websites and corporate travel agencies or on our websites. We
do not expect this to be a core business of Expedia in the future.
Relationship with Microsoft Corporation
We manage the travel channel on MSN.com and other international Microsoft
sites such as MSN UK and MSN Germany. We also have premium placements on other
Microsoft online properties such as Hotmail and WebTV. Microsoft also supplies
us with technology and systems infrastructure under license agreements. MSN.com
is the third most visited site on the Internet, attracting over 39 million
unique visitors in May 2000 according to Media Metrix.
Technology
We believe that the quality of our technology differentiates our websites
from those of our competitors. Our goal has been to build a reliable, scalable
and secure environment for consumers to plan and purchase travel. Since
inception, we have supported substantial growth in traffic, commerce and
advertising inventory with our present architecture.
Our core booking engine connects to each of the four major computer
reservations systems:Worldspan, Sabre, Apollo and Amadeus, giving our websites
and our licensees the ability to choose which computerized reservation system
to support.
Our Best Fare Search (BFS) technology is a fare searching technology and
pricing engine that moves flight pricing query activity from the mainframes of
computerized reservation systems to servers based on the Windows platform
allowing Expedia to show customers hundreds more priced itineraries than any
other travel service provider. Pricing itineraries is computationally intensive
and traditional CRS mainframe systems are unable to scale in a cost-effective
manner to provide this enhanced level of information to customers. With BFS we
can give our customers much greater visibility into the pricing landscape for a
given itinerary, allowing them to make price and schedule tradeoffs on a leg-
by-leg basis, rather than having to guess which legs will have the best
available fares. These improvements substantially improve our customers'
ability to find
12
the flights that meet their requirements, and substantially improve their
chances of finding the lowest available fare.
Our mobile commerce strategy is focused on providing our customers with a
comprehensive set of key travel information across a broad range of devices. We
recently launched our mobile service "Expedia To Go(TM)" which provides
customers with flight status, flight schedules, driving directions, hotel
availability and access to their personal Expedia itineraries on wireless
devices and connected PDAs. In addition, this service provides users a single,
electronically organized place to find maps, frequent flier numbers, travel
supplier toll free numbers and other key personal travel information. We have
long understood the necessity of developing technology that will adapt to the
changing requirements of the marketplace. Our technology platform allows us to
exploit new channels of distribution as they develop, whether they are PDAs,
cellular phone browsers or broadband interactive television.
We have built a multi-layered system using powerful and expandable Internet
hardware and software. From its inception, we have had distributed
functionality across multiple layers of our platform. One layer handles the
demands of serving webpages. Another layer manages the demands of high-volume
message traffic between our servers and those of our suppliers and
intermediaries. A third layer manages storage of critical data such as customer
profiles, marketing database information and editorial content. Our hardware
consists of multiple Compaq Proliant servers. Our data center is connected to
the Internet through the equivalent of eight T3 connections. Microsoft(R) Back
Office technology, including Windows NT(R), SQL Server and Internet Information
Server, is the foundation for our operating service software. Multiple
redundant servers support each key layer of the architecture to help manage
heavy user traffic. Microsoft hosts substantially all of our systems, software
and hardware.
Consumer Marketing
We believe that important drivers of our business are our ability to attract
visitors to our websites, our ability to convert those visitors into purchasing
customers and our ability to convert first-time purchasers into repeat
customers. We plan to attract new visitors to our websites by continuing our
brand building efforts and promotional advertising, both online and in
traditional television, radio and print media, and by continuing to work with
influential press and industry analysts. Converting visitors into purchasers
entails a combination of broad purchase-related promotions, increased emphasis
on merchandising of available offers and increased efforts to work with our
travel suppliers to offer superior selection and quality of travel inventory.
We convert first-time purchasers to repeat customers by focusing on enhanced
customer satisfaction, new personalization features and through ongoing
investments in customer relationship management technologies.
Sales and Supplier Relations
Our advertising and partner integration sales efforts are directed toward
building relationships that complement Expedia's offerings. This includes both
traditional media placements and private labeled partnerships that integrate
Expedia's look and feel with our partners' product offerings. In this past
year, we have invested in building out our regional sales force and account
management team, as well as installing state-of-the-art ad serving and
reporting technology. Our strategy is to provide a broad array of partner
offerings to our customers, as well as a compelling marketplace for our
partners to showcase their message.
The number one focus of our Supplier Relations team is to build and maintain
long-term strategic relationships with the supplier community. To this end, we
have a dedicated team of Account Executives who work with suppliers to increase
the sales of their products within the Expedia marketplace. It is this team
that is responsible for creating and delivering promotional opportunities to
the supplier community which in turn create value for Expedia customers by
making available exclusive offers which enhance the value associated with
shopping on Expedia. The Supplier Relations team is also responsible for
working with the Expedia Development and Marketing teams to design new products
which meet the specific needs of the supplier
13
community with respect to distributing inventory products to specific
customers. Flight Price Matcher and Hotel Price Matcher are specific examples
of this product design process.
Competition
The online travel services market is rapidly evolving and intensely
competitive, and we expect competition to increase. We compete on the basis of
feature differentiation and usability, customer service, quality of travel
planning content and advice and breadth and value of travel products and
services offered. We make available to our customers a wide range of products
and prices offered by our travel suppliers and by Expedia.
In the United States, we compete primarily with online travel services and
with traditional travel distribution channels. In the online travel services
market, we compete with other entities that maintain commercial websites
providing online travel services, such as Travelocity.com, Hotel Reservations
Network, CheapTickets.com, TravelWeb (operated by Pegasus Solutions, Inc.),
GetThere.com (which recently entered an agreement to be acquired by Sabre
Holdings Corporation), Biztravel.com (operated by Rosenbluth Travel),
TravelNow.com, Worldres.com and Trip.com. We also compete with companies that
offer travel as part of a larger electronic commerce portfolio, such as
Priceline.com and Yahoo. Several traditional travel agencies, including larger
travel agencies such as Carlson Wagonlit Travel, have established, or may
establish in the future, commercial websites offering online travel services.
We also compete with many of these same parties and others in the licensing of
technology to airlines and corporate travel agencies.
In addition, various airline suppliers have announced their intention to
launch two direct-distribution websites. American Airlines, Continental
Airlines, Delta Air Lines, Northwest Airlines and United Air Lines have
announced that they will launch a website, currently named "Orbitz," sometime
in mid-2001. Forester Research reports that Orbitz will be the only website for
consumers to find unpublished weekly special fares on at least 27 airlines.
American Airlines, America West Airlines, Continental Airlines, Northwest
Airlines, United Air Lines and US Airways have announced that they will launch
a website, currently named "Hotwire," sometime in the fall of 2000. Hotwire
states that it intends to operate a site where customers can bid for airline
tickets, similar to Expedia's Flight Price Matcher(TM).
Internationally we compete with a different set of participants in each
market, ranging from traditional travel agents, market-specific websites and
United States competitors with international operations. In the United Kingdom,
local online competitors include LastMinute.com and Ebookers.com. In Germany,
local online competitors include Travelchannel.de and iFAO.
As the market for online travel services grows, we believe that the range of
companies involved in the online travel services industry, including travel
suppliers, traditional travel agencies, travel industry information providers,
online portals and e-commerce providers, will increase their efforts to develop
services that compete with our websites. Many airlines and other travel
suppliers offer travel services directly through their own websites, including
services from other travel suppliers. We are unable to anticipate which
companies will offer competitive services in the future. As the market for
online travel service grows, we believe that companies involved in the travel
services industry will increase their efforts to develop services that compete
with our services.
We cannot assure you that our online operations will compete successfully
with any current or future competitors.
Proprietary Rights
Our intellectual property rights relate to trademarks and domain names
associated with the names "Expedia," "Travelscape," "Las Vegas Reservation
Services," "VacationSpot" and "Rent-a-Holiday" and copyrights and other rights
associated with our websites, our software and other aspects of our business
and technology. We rely on trademark and trade secret protection law, copyright
law and confidentiality and/or
14
license agreements with our employees, customers, partners and others to
protect our proprietary rights. We pursue the regulation of our key trademarks
and service marks in the United States and internationally.
We license the right to use some of Microsoft's retail products and other
technology pursuant to our license agreements with Microsoft. In addition, we
license, on a perpetual and royalty-free basis, patent rights from Microsoft
that relate to our business. See Item 13 "Certain Relationships and Related
Transactions".
We license components of our travel website technology and editorial content
to selected airlines and American Express. In addition, we license trademark
rights to the Expedia brand to a third party who operates Expedia Radio and to
Microsoft for use with some of its software products. We may license other
intellectual property rights to third parties in the future.
Government Regulation
The laws and regulations applicable to the travel industry affect us and our
travel suppliers. We must comply with laws and regulations relating to the sale
of travel services, including those prohibiting unfair and deceptive practices
and requiring us to register as a seller of travel, to comply with disclosure
requirements and to participate in state restitution funds. In addition, many
of our travel suppliers and computer reservation systems providers are heavily
regulated by the United States and other governments. Our services are
indirectly affected by regulatory and legal uncertainties affecting the
businesses of our travel suppliers and computer reservation systems providers.
We must also comply with laws and regulations applicable to businesses
generally and online commerce specifically. Currently, few laws and regulations
apply directly to the Internet and commercial online services. Moreover, there
is currently great uncertainty whether or how existing laws governing issues
such as property ownership, sales and other taxes, libel and personal privacy
apply to the Internet and commercial online services. It is possible that laws
and regulations may be adopted to address these and other issues. Further, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws. New laws or different applications of
existing laws would likely impose additional burdens on companies conducting
business online and may decrease the growth of the Internet or commercial
online services. In turn, this could decrease the demand for our products and
services or increase our cost of doing business.
Federal legislation imposing limitations on the ability of states to impose
taxes on Internet-based sales was enacted in 1998. The Internet Tax Freedom
Act, as this legislation is known, exempts certain types of sales transactions
conducted over the Internet from multiple or discriminatory state and local
taxation through October 21, 2001. It is possible this legislation will not be
renewed when it terminates in October 2001. Failure to renew this legislation
could allow state and local governments to impose taxes on Internet-based
sales, and these taxes could decrease the demand for our products and services
or increase our cost of operations.
Earlier this year the U.S. Department of Transportation (DOT) issued an
Advance Notice of Proposed rulemaking relating to its regulations for computer
reservation systems. By that Notice, the DOT solicited further comments on,
among other things, whether they should extend the regulations to entities such
as Expedia that provide consumers airline information and booking services
through the Internet. We submitted comments in response to this Notice;
however, if the DOT were to regulate Expedia as a CRS it may significant
increase our cost of operations and decrease our ability to negotiate with
airlines for special fares on behalf of our customers.
Employees
As of June 30, 2000, we employed a total of 571 full-time employees. In
addition, we contract for the services of 23 employees of temporary staffing
firms.
15
Our ability to attract and retain highly qualified employees will be
important to our success in maintaining online leadership. We have a policy of
using equity-based compensation programs to reward and motivate significant
contributors among our employees. Competition for qualified personnel in our
industry is intense. Our employees are not presently represented by a labor
union. We have not experienced any work stoppages and consider our relations
with our employees to be good.
ITEM 2. PROPERTIES
We are headquartered in Bellevue, Washington in a leased space consisting of
approximately 77,000 square feet and housing our principal administrative,
sales and marketing, customer service and computer and communications systems
facilities. Our lease for this space expires in February 2005 with an option to
renew for an additional five-year term. Travelscape is headquartered in Las
Vegas, Nevada in a purchased building consisting of approximately 9,100 square
feet and in a leased space consisting of approximately 3,500 square feet. It is
expected that Travelscape will move into significantly larger space in fiscal
2001. We also lease space consisting of approximately 3,800 square feet in
Brussels, Belgium for our Rent-a-Holiday operations. In the United Kingdom and
Germany, we operate out of the Microsoft offices for which Microsoft charges us
a monthly fee.
ITEM 3. LEGAL PROCEEDINGS
On October 13, 1999 and July 14, 2000, Priceline.com Incorporated filed two
separate patent infringement lawsuits against Microsoft and Expedia in the
United States District Court for the District of Connecticut. The lawsuits
allege that our Hotel Price Matcher and Flight Price Matcher services infringe
patents assigned to Priceline.com. The October 13, 1999 lawsuit also alleges
that Microsoft and Expedia engaged in unfair and deceptive acts or practices in
violation of the Connecticut Unfair Trade Practices Act.
We do not believe that the claims made by Priceline.com in either lawsuit
have merit. On April 5, 2000, Microsoft and Expedia filed an Answer to
Priceline.com's October 13, 1999 complaint, asserting a counterclaim that
alleges inequitable conduct in the prosecution of the patent in question, and
seeking a declaration that the patent is invalid, unenforceable or not
infringed. Discovery has recently commenced relating to the October 13, 1999
lawsuit. The parties are working through various pre-trial motions relating to
this case. On September 6, 2000, Microsoft and Expedia filed an Answer to
Priceline.com's July 14, 2000 complaint and asserted a counterclaim that
alleges inequitable conduct on Priceline.com's behalf in the prosecution of the
patent in question, and seeks a declaration that the patent is invalid,
unenforceable or not infringed. Microsoft has also filed a motion to be
dismissed from the lawsuit. Discovery has not commenced in this lawsuit. We are
not presently able to estimate the likelihood of an adverse result or the range
of possible loss relating to either matter.
On October 7, 1999, Reed Elsevier Inc. filed a complaint in the United
States District Court for the District of New Jersey against Microsoft and
Expedia. The suit alleged that Microsoft and Expedia materially breached an
agreement between Microsoft and Reed Elsevier relating to the development by
Microsoft of a hotel directory for the internet and the sale of internet
advertising in that directory. On February 14, 2000, the parties entered into a
confidential settlement agreement and, in accordance therewith, the court
dismissed the complaint with prejudice on March 3, 2000.
On December 27, 1999, Expedia, Inc. filed a federal court action for
trademark infringement in the Central District of California against Xpedior,
Inc., a newly formed subsidiary of Metamor Worldwide. Xpedior filed its Answer
to the complaint on January 14, 2000. The lawsuit alleges that Xpedior's use of
the XPEDIOR trademark constitutes unfair competition, trademark infringement,
and is likely to dilute the brand strength and awareness of the EXPEDIA
trademark. In July 2000, the parties entered into a confidential settlement
agreement.
16
In addition to the matters discussed above, we are subject to various legal
proceedings and claims that arise in the ordinary course of business. We
believe that the resolution of such matters will not have a material impact to
our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted for a vote of Expedia's stockholders during fiscal
2000.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market under the
symbol EXPE since November 10, 1999. The following table sets forth the high
and low closing sale prices for our common stock as reported on the Nasdaq
National Market for the periods indicated:
Year ended June 30, 2000 High Low
------------------------ ------ ------
Quarter ended December 31, 1999 (from November 10, 1999)...... $56.00 $14.00
Quarter ended March 31, 2000.................................. 38.38 19.00
Quarter ended June 30, 2000................................... 21.75 14.00
As of June 30, 2000, there were approximately 315 holders of record of our
common stock and 44,489,000 shares of our common stock outstanding including
33,000,000 owned by Microsoft. Because many of our shares are held by brokers
and other institutions on behalf of shareholders, we are unable to estimate the
total number of beneficial shareholders represented by these record holders.
We have never declared or paid any cash dividends on our capital stock or
other securities. We currently generate losses and do not anticipate paying
cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
We acquired Travelscape.com, Inc. on March 17, 2000 by issuing common stock
and options and warrants to purchase our common stock totaling approximately
3.0 million shares, in exchange for all of the outstanding equity of
Travelscape. The total value of the shares, stock options and warrants
exchanged between Expedia and Travelscape was approximately $96 million.
We also acquired VacationSpot.com, Inc. on March 17, 2000 by issuing common
stock and options to purchase our common stock totaling approximately 2.6
million shares, in exchange for all of the outstanding equity of VacationSpot.
The total value of the shares and stock options exchanged between Expedia and
VacationSpot was approximately $82 million.
On August 25, 2000, we issued 3,071,293 shares of our common stock and
warrants to purchase an additional 602,259 shares of our common stock to TCV
IV, L.P. and TCV IV Strategic Partners, L.P. in exchange for approximately $50
million in cash. On that same date, we issued 602,258 shares of our common
stock and warrants to purchase an additional 120,452 shares of our common stock
to Microsoft in exchange for approximately $10 million in cash.
Use of Proceeds from Sales of Registered Securities
In fiscal 2000, there were two registered offerings of our common stock:
The first, our initial public offering, occurred on November 10, 1999. We
sold 5,890,000 shares of our common stock at $14.00 per share to an
underwriting syndicate managed by Goldman, Sachs & Co. and Morgan Stanley Dean
Witter. As of June 30, 2000, we had used the net proceeds of $76.6 million from
our initial public offering as follows (in millions):
Additions to property and equipment............................... $ 5.2
Funding of net cash used by operations............................ 34.7
At June 30, 2000, we held the residual net proceeds from the initial public
offering as cash and cash equivalents.
18
The second registered offering of our common stock involved the former
shareholders of Travelscape and VacationSpot selling some or all of the common
stock that they received in exchange for their Travelscape or VacationSpot
shares. We registered 900,000 shares of common stock and did not receive any
proceeds from this public offering.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read together with our
financial statements and notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
annual report. The statement of operations data for the years ended June 30,
1998, 1999 and 2000 and the balance sheet data as of June 30, 1999 and 2000 are
derived from our audited financial statements which have been audited by
Deloitte & Touche LLP, independent public accountants, and together with their
report, are included elsewhere in this annual report.
The statement of operations data for the years ended June 30, 1996 and 1997
and the balance sheet data as of June 30, 1996, 1997 and 1998 are derived from
unaudited financial statements not included herein. In the opinion of
management, these statements have been prepared on the same basis as the
audited financial statements and include all adjustments, which includes only
normal recurring adjustments, necessary for a fair presentation of the
information for these periods.
Years ended June 30,
------------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- ---------
(in thousands, except per share data)
Statement of Operations Data:
Agency revenues.............. $ -- $ 1,715 $ 6,866 $ 24,677 $ 59,534
Merchant revenues............ 51,142
Advertising and other
revenues.................... 1,027 6,961 14,022 24,185
------- -------- -------- -------- ---------
Revenues..................... 2,742 13,827 38,699 134,861
Cost of revenues............. 3,279 9,692 15,950 80,378
------- -------- -------- -------- ---------
Gross profit (loss).......... (537) 4,135 22,749 54,483
------- -------- -------- -------- ---------
Operating expenses........... 7,800 28,384 33,613 42,351 96,599
Operating expenses--non
cash........................ 78,552
------- -------- -------- -------- ---------
Total operating expenses... 7,800 28,384 33,613 42,351 175,151
------- -------- -------- -------- ---------
Loss from operations......... (7,800) (28,921) (29,478) (19,602) (120,668)
Net interest income and
other....................... 2,353
------- -------- -------- -------- ---------
Net loss..................... $(7,800) $(28,921) $(29,478) $(19,602) $(118,315)
======= ======== ======== ======== =========
Pro forma basic and diluted
net loss per share.......... $ (0.59) $ (3.11)
======== =========
Weighted average shares used
to compute pro forma basic
and diluted net loss per
common share................ 33,000 38,044
======== =========
Balance Sheet Data:
Cash and cash equivalents.... $ -- $ -- $ -- $ -- $ 60,670
Working capital.............. 658 4,814 1,390 20,122
Total assets................. 601 1,645 8,333 5,756 273,050
Long-term liabilities, net of
current portion............. 5,820 3,851 4,557
Accumulated deficit.......... (8,763) (37,684) (67,162) (86,764)
Retained deficit............. (113,365)
Total stockholders' equity
(owner's net
equity/deficit)............. 601 (721) (92) (1,675) 207,496
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section has been derived from our
financial statements and should be read together with our financial statements
and related notes included elsewhere in this annual report. The discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those expressed or implied in these
forward-looking statements as a result of various factors.
Overview
Prior to October 1, 1999, we conducted business as an operating unit of
Microsoft. Our statements of operations and balance sheets were derived from
the historic books and records of Microsoft and included cost allocations from
Microsoft. We believe that the allocated amounts are reasonable and reflective
of the Company's proportionate share of such expenses and are not materially
different from those that would have been incurred on a stand alone basis. On
October 1, 1999, the effective date of the contribution agreement, Microsoft
contributed assets in exchange for common stock of Expedia, Inc. From that date
forward, our books and records have been maintained separately from
Microsoft's.
Our agency revenues are derived from airline ticket transactions and hotel
and car rental reservations. Airline ticket transactions make up the
substantial majority of these revenues. This revenue represents both
commissions and fees related to the sale of airline tickets. Airline ticket
commissions are determined by individual airlines and billed and collected
through the Airline Reporting Corporation, an industry-administered
clearinghouse. As is customary in the travel industry, travel suppliers are not
obligated to pay any specified commission rate for bookings made through our
websites. We recognize transaction revenues on air transactions when the
reservation is made and secured by a credit card. We recognize transaction
revenues on hotel and car rental reservations either on receipt of commissions
or on notification of entitlement by a third party.
Our merchant revenue is derived from transactions where we are the merchant
of record and determine the ticket price or room rate. Travelscape's agreements
with hotels generates the majority of our total merchant revenues. Our
financial results include Travelscape's operating results from the date of
acquisition, March 17, 2000, forward. In September 1999, we introduced Hotel
Price Matcher and, in December 1999, we introduced Flight Price Matcher, which
also generate merchant revenue. For all merchant transactions the revenue and
related cost of sales are recorded at gross amounts. If the reservation is non-
cancelable, revenue is recorded when the reservation is made. Otherwise,
revenue is deferred until the actual flight or stay occurs.
Additionally, we derive revenues from the sales of advertisements on our
websites. We recognize advertising revenues either on display of each
individual advertisement or ratably over the advertising period, depending on
the terms of the advertising contract. Fees from the licensing of software to
our airline and corporate customers such as Continental Airlines, Northwest
Airlines and American Express are another source of revenue. The fixed portion
of these license fees is recognized ratably over the lives of the contracts.
Transaction-based fees are recognized when the transactions occur.
We launched our websites in Canada in fiscal 1997, in the United Kingdom in
fiscal 1999 and in Germany in fiscal 2000. Rent-a-Holiday.com, based in
Belgium, was acquired as part of the VacationSpot acquisition. As a result of
increased activity from these websites and future websites in other markets we
may enter, we expect international revenues to continue to increase.
Cost of revenues consists of fees paid to our fulfillment vendors for the
costs associated with issuing airline tickets and related customer services,
reserves and related payments to the airlines for tickets purchased with
fraudulent credit cards, fees paid to Worldspan for use of their computer
reservation and information services system, allocated and direct costs for the
operation of our data center and call center, and costs related
20
to insertion of banner and other advertisements. For our merchant of record
transactions, cost of revenues also includes the cost of the hotel room or
airline ticket as charged by the provider along with the credit card merchant
fees.
Our direct product development expenses consist primarily of compensation
for personnel. Our direct sales and marketing expenses consist of advertising,
distribution and public relations expenses as well as personnel-related costs.
Prior to October 1, 1999, we were allocated operating costs incurred by
Microsoft for real estate, legal, treasury, human resources, information
technology and other general services. We believe that these allocations were
not materially different from the costs that we would have incurred as a stand-
alone entity.
In conjunction with the contribution agreement with Microsoft, we entered
into a services agreement with Microsoft on October 1, 1999. Accordingly, we
are no longer being allocated costs from Microsoft. Under the services
agreement, Microsoft has continued to provide us with the types of services
described above. In return, we pay Microsoft fees based on the total cost of
many of the services. The services agreement is for an initial period ending
December 31, 2000 with one-year renewals if the parties agree on fees. The
agreement is cancelable by us upon 30 days written notice and by Microsoft upon
180 days written notice. We have begun developing our own resources in some of
these areas. Certain services have been discontinued. For additional services
that are no longer needed, adjustments to the services agreement fees must be
mutually agreed upon.
We have incurred and expect to continue to incur substantial losses and
negative cash flows on both an annual and interim basis. Additionally, our
revenues are impacted by the seasonality of the travel industry, particularly
leisure travel. These factors could adversely affect our future financial
condition and operating results.
Our fiscal years end on June 30 of each year. References to a fiscal year,
such as fiscal 2000, are to the twelve months ended June 30 of that year.
21
Results of Operations
The following table sets forth our results of operations as a percentage of
revenues.
As a
Percentage of
Revenues
------------------
Years ended
June 30,
------------------
1998 1999 2000
---- ---- ----
Statement of Operations Data:
Agency revenues......................................... 50 % 64 % 44 %
Merchant revenues....................................... 38
Advertising and other revenues.......................... 50 36 18
---- --- ---
Revenues................................................ 100 100 100
Cost of revenues........................................ 70 41 60
---- --- ---
Gross profit (loss)..................................... 30 59 40
---- --- ---
Operating expenses:
Product development................................... 134 55 15
Sales and marketing................................... 78 38 49
General and administrative............................ 31 16 8
Amortization of goodwill and intangibles.............. 13
Recognition of stock-based compensation............... 45
---- --- ---
Total operating expenses............................ 243 109 130
---- --- ---
Loss from operations.................................... (213) (50) (90)
Net interest income and other........................... 2
---- --- ---
Loss before provision for income taxes.................. (213) (50) (88)
Provision for income taxes..............................
---- --- ---
Net loss................................................ (213)% (50)% (88)%
==== === ===
Fiscal 1999 and 2000
Revenues
Years ended June
30,
----------------
1999 2000 Change in %
------- -------- -----------
($ in thousands)
Agency revenues................................ $24,677 $ 59,534 141%
Merchant revenues.............................. 51,142 n/a
Advertising and other revenues................. 14,022 24,185 72%
------- -------- ---
Revenues....................................... $38,699 $134,861 248%
======= ======== ===
Agency revenues experienced strong increases due to large increases in the
volume of transactions on our websites. We began domestic and international
television advertising campaigns in January 2000 and ran a number of promotions
that were successful in enhancing brand awareness and increasing revenue. With
the acquisition of Travelscape in March 2000, a significant portion of our
revenues now come from transactions where we are the merchant of record. In the
quarter ended June 30, 2000, the first full quarter where Travelscape's results
were consolidated, merchant revenue represented over 60% of revenues. Increases
in advertising and other revenue comprised the remainder of the increase in
revenues. The percentage growth in this area is lower than agency revenues
because a significant portion of the license revenue is fixed in nature.
22
Cost of Revenues and Gross Profit
Years ended
June 30,
----------------
1999 2000 Change in %
------- ------- -----------
($ in
thousands)
Cost of revenues.............................. $15,950 $80,378 404%
% of revenues................................. 41% 60%
Gross profit.................................. $22,749 $54,483 139%
% of revenues................................. 59% 40%
The increase in cost of revenues and corresponding decrease in the gross
profit percentage during the year ended June 30, 2000 was due primarily to the
merchant revenue that came with the Travelscape acquisition. Because we act as
the merchant of record in these transactions, the revenue and related cost of
sales are presented at gross amounts, resulting in a lower gross profit
percentage and higher absolute gross profit per transaction compared to agency
transactions. Gross profit in fiscal 2000 also reflects a one-time charge of
$4.1 million related to fraudulent credit card transactions along with an
increase in our normal reserve levels for this expense. We are actively working
to reduce our exposure to this risk, which was a result of the usage of
fraudulent credit cards on our websites. The security and integrity of customer
credit cards in our database was not compromised. Helping to partially offset
the declines in the gross profit percentage mentioned above are increased
transaction volumes, which have created economies of scale, and the growth in
advertising revenue, which has a high profit margin.
Product Development
Years ended
June 30,
----------------
1999 2000 Change in %
------- ------- -----------
($ in
thousands)
Product development............................ $21,180 $20,391 (4)%
% of revenues.................................. 55% 15%
The decrease in development expenses is primarily due to charges from
Microsoft under the services agreement starting on October 1, 1999 being
somewhat lower than the amounts previously allocated from Microsoft prior to
that date for development services. The lower costs combined with significantly
larger revenues result in the decrease in product development costs as a
percentage of revenues.
Sales and Marketing
Years ended
June 30,
----------------
1999 2000 Change in %
------- ------- -----------
($ in
thousands)
Sales and marketing............................ $14,888 $65,701 341%
% of revenues.................................. 38% 49%
The increases in expenses are primarily attributable to increased
promotional activities intended to bring additional customers to our websites.
In addition to radio and paper media advertising, during January through June
2000 we began running television ads both domestically and internationally. We
expect to continue to engage in a wide variety of promotional activities,
adjusting our mix of activities in line with performance.
General and Administrative
Years ended
June 30,
---------------
1999 2000 Change in %
------ ------- -----------
($ in
thousands)
General and administrative...................... $6,283 $10,507 67%
% of revenues................................... 16% 8%
23
Administrative costs increased in absolute terms but decreased as a
percentage of revenues. The services agreement took effect October 1, 1999 and
replaced the allocation of internal costs that had previously been assessed by
Microsoft. Subsequent to October 1, 1999, the majority of permanent Microsoft
employees who were members of the Expedia business unit became employees of
Expedia. We have also hired employees to perform certain functions that were
not necessary prior to our being an independent public company.
Amortization of Goodwill and Intangibles
Years ended
June 30,
-------------
1999 2000 Change in %
---- ------- -----------
($ in
thousands)
Amortization of goodwill and intangibles.......... $ $17,864 n/a
% of revenues..................................... % 13%
Amortization of goodwill and intangibles relates to our acquisitions of
Travelscape and VacationSpot. Amortization was recorded from March 18, 2000 to
June 30, 2000. Refer to Note 5 of our consolidated financial statements for
additional information.
Recognition of Stock-Based Compensation
Years ended
June 30,
-------------
1999 2000 Change in %
---- ------- -----------
($ in
thousands)
Recognition of stock-based compensation........... $ $60,688 n/a
% of revenues..................................... % 45%
On the completion of the initial public offering, all the unvested options
to purchase Microsoft common stock held by Expedia employees were converted to
Expedia options. These stock option issuances were deemed to be new grants and
created non-cash compensation expense for the difference between the option
exercise price and the fair market value of the common stock at the date of
grant. The starting date for amortization coincides with the initial public
offering date of November 10, 1999.
Fiscal 1998 and 1999
Revenues. Our revenues increased 180% from $13.8 million in fiscal 1998 to
$38.7 million in fiscal 1999. Approximately $16.7 million of the increase in
revenues from fiscal 1998 to fiscal 1999 was due to increases in commissions
and related revenues. These increases were primarily attributable to increases
in the number of airline-related transactions. Increases in advertising
revenues accounted for approximately $4.8 million of the increase in revenues
from fiscal 1998 to fiscal 1999.
Cost of Revenues. Cost of revenues increased 65% from $9.7 million in fiscal
1998 to $16.0 million in fiscal 1999. As a percentage of revenues, our cost of
revenues decreased from 70% in fiscal 1998 to 41% in fiscal 1999. This decrease
is due to efficiencies associated with increased transaction volume, the
allocation of fixed costs, such as operation of our data center, over a larger
revenue base and growth in higher margin advertising revenues.
Product Development. Product development costs increased 14% from $18.5
million in fiscal 1998 to $21.2 million in fiscal 1999. The increase in product
development costs from fiscal 1998 to fiscal 1999 resulted primarily from an
increase in product development allocations from Microsoft of $2.5 million.
Product development costs as a percentage of revenues decreased from 134% in
fiscal 1998 to 55% in fiscal 1999, primarily due to increases in our revenue
base in the applicable periods.
Sales and Marketing. Sales and marketing costs increased 38% from $10.8
million in fiscal 1998 to $14.9 million in fiscal 1999. The increase from
fiscal 1998 to fiscal 1999 was attributable to a $4.8 million increase in the
cost of direct promotional activities intended to drive traffic to our
Expedia.com website, and to establish, enhance and maintain the Expedia brand,
partially offset by a decrease in marketing and advertising
24
allocations from Microsoft of $0.6 million. Sales and marketing costs as a
percentage of revenues decreased from 78% in fiscal 1998 to 38% in fiscal 1999,
primarily due to increases in our revenue base in the applicable periods.
General and Administrative. General and administrative costs increased 47%
from $4.3 million in fiscal 1998 to $6.3 million in fiscal 1999. This increase
is primarily related to increases in general and administrative cost
allocations from Microsoft as we expanded our operations. As a percentage of
revenues, general and administrative costs decreased from 31% in fiscal 1998 to
16% in fiscal 1999 as a result of increases in our revenue base.
25
Quarterly Unaudited Results of Operations
The following table sets forth our unaudited quarterly results of
operations, in dollars and as a percentage of revenues, for the periods
presented. The unaudited quarterly results includes the results of operations
of Travelscape.com, Inc. and VacationSpot.com, Inc. from March 18, 2000 and
onwards.
We have prepared this unaudited information on the same basis as the audited
financial statements. This information includes all adjustments, consisting
only of normal recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for the quarters
presented. The operating results in any quarter are not necessarily indicative
of the results that may be expected for any future period and you should not
rely on them as such.
Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30,
1998 1998 1999 1999 1999 1999 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Agency revenues......... $ 3,864 $ 4,865 $ 7,132 $ 8,816 $ 9,646 $ 11,927 $ 17,047 $ 20,917
Merchant revenues....... 199 480 8,142 42,318
Advertising and other
revenues............... 2,193 2,986 4,087 4,756 5,423 5,414 6,678 6,670
------- ------- ------- ------- ------- -------- -------- --------
Revenues................ 6,057 7,851 11,219 13,572 15,268 17,821 31,867 69,905
Cost of revenues........ 3,177 4,132 3,983 4,658 5,364 7,314 20,218 47,482
------- ------- ------- ------- ------- -------- -------- --------
Gross profit............ 2,880 3,719 7,236 8,914 9,904 10,507 11,649 22,423
------- ------- ------- ------- ------- -------- -------- --------
Operating expenses:
Product development.... 4,977 5,083 5,254 5,866 5,393 4,452 4,765 5,781
Sales and marketing.... 2,060 2,516 3,119 7,193 6,732 10,584 21,356 27,029
General and
administrative........ 1,050 1,568 1,571 2,094 2,729 1,946 2,217 3,615
Amortization of
goodwill and
intangibles........... 2,332 15,532
Recognition of stock-
based compensation.... 17,252 29,659 13,777
------- ------- ------- ------- ------- -------- -------- --------
Total operating
expenses............ 8,087 9,167 9,944 15,153 14,854 34,234 60,329 65,734
------- ------- ------- ------- ------- -------- -------- --------
Loss from operations.... (5,207) (5,448) (2,708) (6,239) (4,950) (23,727) (48,680) (43,311)
Net interest income and
other.................. 543 914 895
------- ------- ------- ------- ------- -------- -------- --------
Loss before provision
for income taxes....... (5,207) (5,448) (2,708) (6,239) (4,950) (23,184) (47,766) (42,416)
Provision for income
taxes..................
------- ------- ------- ------- ------- -------- -------- --------
Net loss................ $(5,207) $(5,448) $(2,708) $(6,239) $(4,950) $(23,184) $(47,766) $(42,416)
======= ======= ======= ======= ======= ======== ======== ========
As a Percentage of Revenues
-------------------------------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30,
1998 1998 1999 1999 1999 1999 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
Agency revenues......... 64 % 62 % 64 % 65 % 63 % 67 % 53 % 30 %
Merchant revenues....... 1 3 26 60
Advertising and other
revenues............... 36 38 36 35 36 30 21 10
------- ------- ------- ------- ------- -------- -------- --------
Revenues................ 100 100 100 100 100 100 100 100
Cost of revenues........ 52 53 36 34 35 41 63 68
------- ------- ------- ------- ------- -------- -------- --------
Gross profit............ 48 47 64 66 65 59 37 32
------- ------- ------- ------- ------- -------- -------- --------
Operating expenses:
Product development.... 83 65 47 43 35 25 15 8
Sales and marketing.... 34 32 28 54 44 59 67 39
General and
administrative........ 17 20 14 15 18 11 7 5
Amortization of
goodwill and
intangibles........... 7 22
Recognition of stock-
based compensation.... 97 93 20
------- ------- ------- ------- ------- -------- -------- --------
Total operating
expenses............ 134 117 89 112 97 192 189 94
------- ------- ------- ------- ------- -------- -------- --------
Loss from operations.... (86) (70) (25) (46) (32) (133) (152) (62)
Net interest income and
other.................. 3 3 1
------- ------- ------- ------- ------- -------- -------- --------
Loss before provision
for income taxes....... (86) (70) (25) (46) (32) (130) (149) (61)
Provision for income
taxes..................
------- ------- ------- ------- ------- -------- -------- --------
Net loss................ (86)% (70)% (25)% (46)% (32)% (130)% (149)% (61)%
======= ======= ======= ======= ======= ======== ======== ========
26
Liquidity and Capital Resources
Prior to October 1, 1999, as a division of Microsoft, we financed our
activities through Microsoft. In November 1999, we raised $76.6 million from
our initial public offering. In August 2000, we completed a private placement
of warrants and common stock consisting of $50 million from Technology
Crossover Ventures and $10 million from Microsoft. Proceeds from these sales of
stock have been and will continue to be used to fund operations.
Net cash used in operations of $29.5 million in fiscal 1998 and $17.4
million in fiscal 1999 resulted primarily from net losses of $29.5 million and
$19.6 million, respectively. During the year ended June 30, 2000, net cash used
by operating activities was $30.9 million. Historically, operating and
allocated expenses were recorded as a contribution from owner. As an
independent entity, management of working capital is now our responsibility. As
a result of this and of our acquisition of Travelscape, the levels of accounts
receivable, accounts payable, and accrued expenses are higher than those in the
historical financial statements. So, in addition to the cash portion of our net
losses, changes in operating assets and liabilities affect our operating cash.
During the year ended June 30, 2000, a large increase in accounts payable
and accrued expenses contributed towards a reduction in the amount of cash used
by operating activities. In our growing merchant hotel business, there is a
difference in the timing of the receipt of cash from our customers as compared
to payments to hotels for our customers' transactions. As a result, we
anticipate significant fluctuations in cash requirements and balances.
Net cash used in investing activities of $631,000 in fiscal 1998 and
$650,000 in fiscal 1999 consisted primarily of capital expenditures for
personal computers and servers that support our online travel operations.
Total capital expenditures during the year ended June 30, 2000 were $5.2
million. Of this amount, $2.5 million relates to leasehold improvements and
related costs for renovation of office space in Bellevue, Washington. The
remaining capital expenditures reflect normal expenditure levels consistent
with our growth as a company. We anticipate other significant capital
expenditures during the next twelve months for computers and other system-
related costs associated with our expected growth. We also plan to expand our
facilities both in Bellevue, Las Vegas and outside of the United States to
accommodate our growing needs.
As part of the acquisitions of Travelscape and VacationSpot, we acquired
$18.8 million of cash held by these two entities, net of transaction costs. We
used $7.0 million of this cash to retire notes which were also assumed from the
Travelscape acquisition.
During the year ended June 30, 2000, we advanced $3.9 million to our
fulfillment vendor. This represents a restricted deposit, as the funds will not
be available until the expiration of the underlying services agreement in 2004.
Stock option exercises were a source of $1.6 million of cash. We anticipate
additional stock option exercises going forward.
As of June 30, 2000, we had $60.7 million in cash and cash equivalents. On
August 25, 2000, we received $60.0 million from a private placement of common
stock in exchange for 3,613,551 shares of common stock and 722,711 warrants to
purchase shares of common stock. We received $10.0 million of the private
placement proceeds from Microsoft which represents 602,258 shares of common
stock and 120,452 warrants to purchase shares of common stock. The warrants
have an exercise price of $16.60 per share and expire on August 25, 2005.
We have not held derivative financial instruments at any time. The majority
of the debt we have has fixed interest rates. Accordingly, we have not been
exposed to near-term adverse changes in interest rates or other market prices.
We may however experience such adverse changes if we incur variable-rate debt
or hold derivative financial instruments in the future. Our international
operations expose us to some foreign currency risk. We do not expect any of
these risks to have a material effect on our financial results.
27
Recent Accounting Pronouncements
The American Institute of Certified Public Accountants' Statement of
Position (SOP) 98-1, Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use, as interpreted by the Emerging Issues Task Force
(EITF), must be applied to Web site development costs beginning July 1, 2000.
We are currently evaluating the impact of applying SOP 98-1 to Web site related
development costs, including upgrades and enhancements.
The EITF reached consensus on Issue No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, which establishes indicators to determine the
statement of operations' presentation of revenue. We are currently evaluating
the impact of this consensus, which must be applied by the end of fiscal year
2001. Upon the adoption, if necessary, prior periods will be restated to apply
the impact of this consensus.
The Financial Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, in June 1998, which is effective
for the Company beginning after July 1, 2000. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, the type of hedge
transaction. Since we do not currently hold any derivative instruments, SFAS
No. 133 is not expected to have any impact on the consolidated financial
statements.
In December 1999, the United States Securities and Exchange Commission (SEC)
released Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in
Financial Statements", which must be applied in our fourth fiscal quarter of
2001. SAB 101 provides guidance on revenue recognition and the SEC staff's
views on the application of accounting principles to selected revenue
recognition issues. The Company does not expect that the adoption of SAB 101
will have a material effect on our consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to our consolidated financial statements appears in Part IV of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
a) Executive Officers
Name Age Title
---- --- -----
Richard N. Barton....... 33 President, Chief Executive Officer and Director
Byron D. Bishop......... 36 Senior Vice President, Transportation and Core Technologies
Erik C. Blachford....... 33 Senior Vice President, Marketing
Simon J. Breakwell...... 35 Senior Vice President and Managing Director, Expedia Europe
Mark S. Britton......... 33 Senior Vice President, General Counsel and Secretary
Kathleen K. Dellplain... 41 Senior Vice President, Human Resources
Seth E. Eisner.......... 41 Senior Vice President, Operations and Supplier Services
Gregory E. Slyngstad.... 44 Senior Vice President, Destinations and Lodging
Gregory S. Stanger...... 36 Senior Vice President and Chief Financial Officer
Richard N. Barton founded Expedia in 1994. He has served as a Director of
Expedia since September 1999. Prior to this, he worked for Microsoft from 1991
to 1994 in various product management roles involving Windows and MS-DOS(R).
Prior to joining Microsoft in 1991, he worked as a strategy consultant for
Alliance Consulting Group. Mr. Barton received a B.S. in industrial engineering
from Stanford University.
Byron D. Bishop joined Expedia in 1994 as a founding member, with the
principal focus of building and managing Expedia's product development team.
Mr. Bishop has been a Microsoft employee since 1986. During this time, he
created and managed three other development groups within Microsoft, including
the "Windows for Pen Computing" operating system and Microsoft's first handheld
operating system. Mr. Bishop received a B.S. in computer science and
mathematics from the University of Washington.
Erik C. Blachford joined Expedia in 1995. Previously, he served as General
Manager at Kroll Travel Watch, a travel information services division of Kroll
Associates Inc. from 1994 to 1995. Prior to this, he held various marketing and
new product development positions at Butterfield & Robinson Travel Inc. from
1989 to 1992. Mr. Blachford received a B.A. from Princeton University and an
M.B.A. from Columbia Business School.
Simon J. Breakwell joined Expedia in 1997. Previously, Mr. Breakwell held
various sales positions at British Airways from 1987 to 1993 and various senior
sales management positions from 1993 to 1997. During this period, Mr. Breakwell
managed sales strategy, distribution, sales technology and commercial
agreements with British Airways corporate customers in the United Kingdom. Mr.
Breakwell received an Honors Politics Degree from Portsmouth Polytechnic and an
M.B.A. from Lancaster University.
Mark S. Britton joined Expedia in 1999. Prior to this, he was an attorney
with the Seattle office of Preston Gates & Ellis LLP from 1997 to 1999, being
elected to this firm's partnership in 1999. Mr. Britton served as Senior
Counsel to the Division of Corporation Finance of the SEC from 1994 to 1997.
Mr. Britton practiced corporate and securities law in Washington, D.C. from
1992 to 1994. Mr. Britton received a juris doctorate degree from the National
Law Center, George Washington University, and a B.B.A. from Gonzaga University.
Kathleen K. Dellplain joined Expedia in 1999. Previously, Ms. Dellplain
served as Vice President, Human Resources, for IDX Systems Corporation, a
healthcare information technology company, from 1997 to 1999. Prior to this,
Ms. Dellplain was the Senior Director, Human Resources, for PHAMIS, Inc., from
1990 until its merger with IDX Systems Corporation in 1997. She has over 15
years experience in various human resources management positions in health care
information systems, health care and manufacturing industries. Ms. Dellplain
received a B.B.A. from the University of Hawaii, Honolulu and an M.B.A. from
the University of Washington.
Seth E. Eisner joined Expedia in 1998. Before joining Expedia, Mr. Eisner
spent two and a half years within Microsoft's Information Technology Group,
serving as Director of Development, and later as Corporate
29
Data Manager. Mr. Eisner also managed all technical and business operations for
Sidewalk, Microsoft's Local City Guide from 1997 to 1998. Mr. Eisner joined
Microsoft in 1994. Mr. Eisner's work history includes 18 years of experience
with IT systems and, in particular, construction and deployment of high
performance, real-time transactional systems. Mr. Eisner received a B.S. in
mathematics from Washington University, St Louis.
Gregory E. Slyngstad re-joined Expedia in March 2000, having been General
Manager of Expedia's founding team when it was a wholly-owned subsidiary of
Microsoft Corporation. During his 14 years with Microsoft, he also held
numerous management positions involving Microsoft Word, and served in Japan as
Microsoft's Director of Far East Product Strategy. After leaving Microsoft, Mr.
Slyngstad co-founded VacationSpot.com in October 1997 and served as that
company's Chief Operating Officer until it was acquired by Expedia in March
2000.
Gregory S. Stanger joined Expedia in 1999. Prior to joining Expedia, he
served as Senior Director, Corporate Development at Microsoft from 1998 to
1999. Prior to this, he held various positions in Microsoft's Corporate
Development department from 1993 to 1998, and elsewhere within Microsoft's
Finance Organization from 1991 to 1993. Prior to joining Microsoft, Mr. Stanger
worked as an investment banker with PaineWebber from 1987 to 1989. Mr. Stanger
received a B.A. from Williams College and an M.B.A. from the University of
California at Berkeley.
b) Directors
We have elected to disclose the information required by this Item in the
section entitled "Election of Directors" in our fiscal 2000 Proxy Statement.
See "Documents Incorporated by Reference" at the beginning of this Annual
Report.
ITEM 11. EXECUTIVE COMPENSATION
We have elected to disclose the information required by this Item in our
fiscal 2000 Proxy Statement. See "Documents Incorporated by Reference" at the
beginning of this Annual Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We have elected to disclose the information required by this Item in our
fiscal 2000 Proxy Statement. See "Documents Incorporated by Reference" at the
beginning of this Annual Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have elected to disclose the information required by this Item in our
fiscal 2000 Proxy Statement. See "Documents Incorporated by Reference" at the
beginning of this Annual Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) (1) FINANCIAL STATEMENTS
The following Consolidated Financial Statements and Independent Auditors'
Report are incorporated by reference to pages F-1 through F-20 of this Form 10-
K:
The consolidated balance sheets for the years ended June 30, 2000 and 1999,
and the consolidated statements of operations, statements of changes in
stockholders' equity and cash flows for each of the three years ended June 30,
2000, together with the notes thereto.
a) (2) SCHEDULES
None
30
a) (3) EXHIBITS
3.1 Articles of Incorporation of the Registrant+
3.2 Articles of Amendment to Articles of Incorporation dated September 22,
1999+
3.2.1 Articles of Amendment to Articles of Incorporation dated October 25,
1999++
3.3 Bylaws of the Registrant+
4.1 Form of the Registrant's Common Stock Certificate+
10.1 Contribution Agreement between Expedia, Inc. and Microsoft Corporation,
effective October 1, 1999+
10.2 Services Agreement between Expedia, Inc. and Microsoft Corporation,
effective October 1, 1999+
10.3 License Agreement between Expedia, Inc. and Microsoft Corporation,
effective October 1, 1999+
10.4 Map Server License Agreement between Expedia, Inc. and Microsoft
Corporation, effective October 1, 1999+
10.5 Carriage and Cross Promotion Agreement between Expedia, Inc. and
Microsoft Corporation, effective October 1, 1999+
10.6 Tax Allocation Agreement between Expedia, Inc. and Microsoft
Corporation, effective October 1, 1999+
10.7 Shareholder Agreement between Expedia, Inc. and Microsoft Corporation,
effective October 1, 1999+
10.8 CRS Marketing, Services and Development Agreement between Microsoft
Corporation and Worldspan, L.P., dated December 15, 1995 and last
amended on April 1, 1999+***
10.9 Service Agreement between Microsoft Corporation and World Travel
Partners, L.P., dated October 9, 1996 and amended on April 1, 1999+***
10.10 1999 Stock Option Plan+
10.11 1999 Employee Stock Purchase Plan+
10.12 1999 Directors' Stock Option Plan+
10.13 Employment Agreement between Expedia, Inc. and Richard N. Barton+
10.14 Agreement and Plan of Reorganization by and among Expedia, Inc., Travel
Enterprises, Inc., Travelscape, and certain principal stockholders of
Travelscape, dated January 31, 2000 and as amended on March 13, 2000
and March 15, 2000++++
10.15 Agreement and Plan of Reorganization by and among Expedia, Inc.,
VacationSub, Inc., VacationSpot, and the principal stockholders of
VacationSpot, dated January 30, 2000++++
10.16 Common Stock Purchase Agreement between Expedia, Inc., TCV IV, L.P. and
TCV IV Strategic Partners, L.P., dated June 25, 2000**
10.17 Common Stock Purchase Agreement between Expedia, Inc. and Microsoft
Corporation, dated June 25, 2000**
21.1 List of Subsidiaries
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
27.1 Financial Data Schedule
- --------
+ Previously filed as an exhibit to Expedia's Form S-1 filed September 23,
1999
++ Previously filed as an exhibit to Expedia's Form S-1/A filed October 26,
1999
++++ Previously filed as an exhibit to Expedia's Form 8-K filed April 3, 2000
** Previously filed as an exhibit to Expedia's Form 8-K filed September 15,
2000
*** Confidential treatment granted for portions of this agreement pursuant to
Rule 406 of the Securities Act
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned; thereunto duly authorized, in the city of
Bellevue, State of Washington, on September 28, 2000.
EXPEDIA, INC.
/s/ Richard N. Barton
By: _________________________________
Richard N. Barton
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on September 28, 2000.
Signature Title
--------- -----
/s/ Richard N. Barton President, Chief Executive Officer and
___________________________________________ Director
Richard N. Barton
/s/ Gregory S. Stanger Senior Vice President and Chief Financial
___________________________________________ Officer (principal financial and
Gregory S. Stanger accounting officer)
/s/ Gregory B. Maffei Chairman of the Board of Directors
___________________________________________
Gregory B. Maffei
/s/ Brad Chase Director
___________________________________________
Brad Chase
/s/ Gerald Grinstein Director
___________________________________________
Gerald Grinstein
/s/ Jay C. Hoag Director
___________________________________________
Jay C. Hoag
/s/ Laurie McDonald Jonsson Director
___________________________________________
Laurie McDonald Jonsson
/s/ Richard D. Nanula Director
___________________________________________
Richard D. Nanula
32
EXPEDIA, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................ F-2
Consolidated Statements of Operations and Comprehensive Loss............ F-3
Consolidated Balance Sheets............................................. F-4
Consolidated Statements of Changes in Stockholders' Equity.............. F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
Expedia, Inc.
Bellevue, Washington
We have audited the accompanying consolidated b