Liberty Expedia Holdings, Inc.
Liberty Expedia Holdings, Inc. (Form: 10-Q, Received: 05/03/2017 17:00:00)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

OR

 

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to                

Commission File Number 001-37938

 

LIBERTY EXPEDIA HOLDINGS, INC.

 

(Exact name of Registrant as specified in its charter)

 

State of Delaware

    

81-1838757

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

12300 Liberty Boulevard
Englewood, Colorado

 

80112

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (720) 875-5800

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒    No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

Large accelerated filer ☐

   

Accelerated filer ☐

   

Non-accelerated filer ☒
(do not check if smaller
reporting company)

   

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐    No ☒

 

The number of outstanding shares of Liberty Expedia Holdings, Inc. common stock as of April 17, 2017 was:

 

 

 

 

 

 

 

 

Series A

 

Series B

 

Liberty Expedia Holdings, Inc. Common Stock

 

54,316,667

 

2,847,876

 

 

 

 

 

 

 


 

Table of Contents

Table of Contents

 

 

 

LIBERTY EXPEDIA HOLDINGS, INC. Condensed Consolidated Balance Sheets (unaudited)  

I-2

LIBERTY EXPEDIA HOLDINGS, INC. Condensed Consolidated Statements of Operations (unaudited)  

I-3

LIBERTY EXPEDIA HOLDINGS, INC. Condensed Consolidated Statements of Comprehensive Earnings (Loss) (unaudited)  

I-4

LIBERTY EXPEDIA HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (unaudited)  

I-5

LIBERTY EXPEDIA HOLDINGS, INC. Condensed Consolidated Statement of Equity (unaudited)  

I-6

LIBERTY EXPEDIA HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (unaudited)  

I-7

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations  

I-29

Item 3. Quantitative and Qualitative Disclosures about Market Risk  

I-39

Item 4. Controls and Procedures  

I-41

 

 

Part II - Other Information  

 

Item 1. Legal Proceedings  

II-1

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  

II-1

Item 6. Exhibits  

II-1

 

 

SIGNATURES  

II-2

EXHIBIT INDEX  

II-3

 

 

I-1


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Balance Sheets

 

(unaudited)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2017

 

2016

 

 

 

amounts in millions

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,564

 

1,851

 

Accounts receivable, net

 

 

1,582

 

1,345

 

Short-term marketable securities

 

 

851

 

72

 

Prepaid expenses

 

 

228

 

201

 

Other current assets

 

 

179

 

66

 

Total current assets

 

 

5,404

 

3,535

 

Property and equipment, at cost

 

 

960

 

898

 

Accumulated depreciation

 

 

(109)

 

(54)

 

 

 

 

851

 

844

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

Goodwill

 

 

16,701

 

16,617

 

Tradename

 

 

6,139

 

6,123

 

 

 

 

22,840

 

22,740

 

Intangible assets subject to amortization, net

 

 

6,014

 

6,363

 

Other assets, net

 

 

511

 

500

 

Total assets

 

$

35,620

 

33,982

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

   

 

Current liabilities:

 

 

 

 

 

 

Accounts payable, merchant

 

$

1,424

 

1,509

 

Accounts payable, other

 

 

699

 

589

 

Accrued liabilities

 

 

1,058

 

1,114

 

Deferred merchant bookings

 

 

4,425

 

2,590

 

Deferred revenue

 

 

358

 

248

 

Other current liabilities

 

 

72

 

43

 

Total current liabilities

 

 

8,036

 

6,093

 

Long-term debt and capital lease obligations, net (note 6)

 

 

3,772

 

3,788

 

Deferred income tax liabilities

 

 

3,386

 

3,477

 

Other long term liabilities

 

 

338

 

332

 

Total liabilities

 

 

15,532

 

13,690

 

Equity

 

 

 

 

 

 

Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued

 

 

 —

 

 —

 

Series A common stock, $.01 par value. Authorized 160,000,000 shares; issued and outstanding 54,316,600 and 54,114,882 at March 31, 2017 and December 31, 2016, respectively

 

 

 1

 

 1

 

Series B common stock, $.01 par value. Authorized 6,000,000 shares; issued and outstanding 2,847,876 and 2,847,971 at March 31, 2017 and December 31, 2016, respectively

 

 

 —

 

 —

 

Additional paid-in capital

 

 

414

 

423

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

(18)

 

(32)

 

Retained earnings

 

 

2,313

 

2,371

 

Total stockholders' equity

 

 

2,710

 

2,763

 

Noncontrolling interests in equity of subsidiaries

 

 

17,378

 

17,529

 

Total equity

 

 

20,088

 

20,292

 

Commitments and contingencies (note 8)

 

 

 

 

 

 

Total liabilities and equity

 

$

35,620

 

33,982

 

 

See accompanying notes to condensed consolidated financial statements.

I-2


 

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LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statements Of Operations

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

amounts in millions,

 

 

 

except per share amounts

 

Service revenue

 

$

2,139

 

 —

 

Product revenue

 

 

91

 

116

 

Total revenue, net

 

 

2,230

 

116

 

Cost of service revenue

 

 

400

 

 —

 

Cost of goods sold (exclusive of depreciation shown separately below)

 

 

65

 

88

 

Gross profit

 

 

1,765

 

28

 

Operating costs and expenses:

 

 

 

 

 

 

Operating expense, including stock-based compensation (note 7)

 

 

 6

 

 9

 

Selling and marketing, including stock-based compensation (note 7)

 

 

1,276

 

 7

 

Technology and content, including stock-based compensation (note 7)

 

 

228

 

 —

 

General and administrative, including stock-based compensation (note 7)

 

 

172

 

 4

 

Depreciation and amortization

 

 

529

 

 5

 

Legal reserves, occupancy tax and other

 

 

21

 

 —

 

Restructuring and related reorganization charges

 

 

 2

 

 —

 

 

 

 

2,234

 

25

 

Operating income (loss)

 

 

(469)

 

 3

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

 

(29)

 

 —

 

Share of earnings (losses) of Expedia, Inc. (note 3)

 

 

 —

 

(24)

 

Other, net

 

 

(13)

 

(4)

 

 

 

 

(42)

 

(28)

 

Earnings (loss) before income taxes

 

 

(511)

 

(25)

 

Income tax (expense) benefit

 

 

154

 

11

 

Net earnings (loss)

 

 

(357)

 

(14)

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

(299)

 

 —

 

Net earnings (loss) attributable to Liberty Expedia Holdings, Inc. shareholders

 

$

(58)

 

(14)

 

Basic net earnings (loss) attributable to Series A and Series B Liberty Expedia Holdings, Inc. shareholders per common share (note 2)

 

$

(1.02)

 

(0.25)

 

Diluted net earnings (loss) attributable to Series A and Series B Liberty Expedia Holdings, Inc. shareholders per common share (note 2)

 

$

(1.02)

 

(0.25)

 

 

See accompanying notes to condensed consolidated financial statements.

I-3


 

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LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statements Of Comprehensive Earnings (Loss)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

amounts in millions

 

Net earnings (loss)

 

$

(357)

 

(14)

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

Currency translation adjustments and other

 

 

95

 

 —

 

Other comprehensive earnings (loss)

 

 

95

 

 —

 

Comprehensive earnings (loss)

 

 

(262)

 

(14)

 

Less comprehensive earnings (loss) attributable to the noncontrolling interest

 

 

(218)

 

 —

 

Comprehensive earnings (loss) attributable to Liberty Expedia Holdings, Inc. shareholders

 

$

(44)

 

(14)

 

 

See accompanying notes to condensed consolidated financial statements.

I-4


 

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LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statements Of Cash Flows

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

amounts in millions

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

(357)

 

(14)

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

529

 

 5

 

Stock-based compensation

 

 

77

 

(1)

 

Cash payments for stock-based compensation

 

 

 —

 

(2)

 

Share of (earnings) losses of Expedia

 

 

 —

 

24

 

Cash receipts from returns on investment in Expedia

 

 

 —

 

 6

 

Realized (gain) loss on foreign currency forwards

 

 

 7

 

 —

 

Deferred income tax expense (benefit)

 

 

(93)

 

(12)

 

Other noncash charges (credits), net

 

 

(17)

 

 4

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

(279)

 

 2

 

Payables and other liabilities

 

 

1,810

 

 4

 

Net cash provided (used) by operating activities

 

 

1,677

 

16

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expended for property and equipment

 

 

(170)

 

(4)

 

Purchases of short-term marketable securities

 

 

(780)

 

 —

 

Sales of short-term marketable securities

 

 

 7

 

 —

 

Net settlement of foreign currency forward contracts

 

 

(7)

 

 —

 

Other, net

 

 

(2)

 

 —

 

Net cash provided (used) by investing activities

 

 

(952)

 

(4)

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

92

 

108

 

Repayments of debt

 

 

(97)

 

(116)

 

Shares issued by subsidiary

 

 

58

 

 —

 

Shares repurchased by subsidiary

 

 

(45)

 

 —

 

Dividends paid by subsidiary

 

 

(36)

 

 —

 

Proceeds from exercise of equity awards and employee stock purchase plan

 

 

 4

 

 —

 

Taxes paid in lieu of shares issued for stock-based compensation

 

 

(5)

 

 —

 

Contribution from (distribution to) parent, net

 

 

 —

 

(6)

 

Other financing activities, net

 

 

(14)

 

 —

 

Net cash provided (used) by financing activities

 

 

(43)

 

(14)

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

31

 

 —

 

Net increase (decrease) in cash and cash equivalents

 

 

713

 

(2)

 

Cash and cash equivalents at beginning of period

 

 

1,851

 

 2

 

Cash and cash equivalents at end of period

 

$

2,564

 

 —

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-5


 

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LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statement Of Equity

 

(unaudited)

 

Three months ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

other

 

 

 

 

 

 

 

 

 

Preferred

 

Common stock

 

paid-in

 

comprehensive

 

Retained

 

Noncontrolling

 

 

 

 

    

stock

    

Series A

    

Series B

    

capital

    

earnings (loss)

    

earnings

    

interests

    

Total equity

 

 

 

amounts in millions

 

Balance at January 1, 2017

 

$

 —

 

 1

 

 —

 

423

 

(32)

 

2,371

 

17,529

 

20,292

 

Net earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(58)

 

(299)

 

(357)

 

Other comprehensive earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

14

 

 —

 

81

 

95

 

Stock-based compensation

 

 

 —

 

 —

 

 —

 

12

 

 —

 

 —

 

66

 

78

 

Proceeds from exercise of Liberty Expedia  Holdings, Inc. equity instruments

 

 

 —

 

 —

 

 —

 

 4

 

 —

 

 —

 

 —

 

 4

 

Proceeds from exercise of Expedia equity instruments and employee stock purchase plan

 

 

 —

 

 —

 

 —

 

(25)

 

 —

 

 —

 

83

 

58

 

Minimum withholding taxes on net share settlements of stock-based compensation

 

 

 —

 

 —

 

 —

 

(5)

 

 —

 

 —

 

 —

 

(5)

 

Shares repurchased by subsidiary

 

 

 —

 

 —

 

 —

 

 4

 

 —

 

 —

 

(49)

 

(45)

 

Dividends paid by subsidiary

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(36)

 

(36)

 

Change in ownership of noncontrolling interest

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 3

 

 3

 

Other

 

 

 —

 

 —

 

 —

 

 1

 

 —

 

 —

 

 —

 

 1

 

Balance at March 31, 2017

 

$

 —

 

 1

 

 —

 

414

 

(18)

 

2,313

 

17,378

 

20,088

 

 

See accompanying notes to condensed consolidated financial statements.

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

(1) Basis of Presentation

 

During November 2015, the board of directors of Liberty Interactive Corporation ("Liberty Interactive") authorized management to pursue a plan to distribute to holders of its Liberty Ventures common stock shares of a newly formed entity, Liberty Expedia Holdings, Inc. ("Expedia Holdings" or the "Company" as discussed below) ("Expedia Holdings Split-Off"). Following the Expedia Holdings Split-Off, Expedia Holdings is comprised of, among other things, Liberty Interactive's former ownership interest in Expedia, Inc. ("Expedia"), as well as Liberty Interactive's former wholly-owned subsidiary Bodybuilding.com, LLC. Bodybuilding.com, LLC became a wholly owned subsidiary of Liberty Interactive in October 2015 when Liberty Interactive purchased the remaining ownership interest in Bodybuilding.com, LLC. In 2016, Bodybuilding.com, LLC underwent a corporate restructuring, which resulted in Bodybuilding.com, LLC becoming a wholly-owned subsidiary of Vitalize, LLC (“Vitalize”). Subsequent to the restructuring, Vitalize is a wholly-owned subsidiary of the Company.

 

The Expedia Holdings Split-Off was accomplished by the redemption by Liberty Interactive on a per share basis of (i) 0.4 of each outstanding share of Liberty Interactive’s Series A Liberty Ventures common stock as of 5:00 p.m., New York City time, on November 4, 2016 (such date and time, the “Redemption Date”) for 0.4 of a share of Expedia Holdings’ Series A common stock, and (ii) 0.4 of each outstanding share of Liberty Interactive’s Series B Liberty Ventures common stock as of the Redemption Date for 0.4 of a share of Expedia Holdings’ Series B common stock, with cash paid in lieu of any fractional shares of Liberty Interactive’s Series A and Series B Liberty Ventures common stock and Expedia Holdings’ Series A and Series B common stock. Following the Expedia Holdings Split-Off, Expedia Holdings and Liberty Interactive operate as separate, publicly traded companies. The Expedia Holdings Split-Off was intended to be tax-free to Liberty Interactive and stockholders of Liberty Ventures.  In February 2017, the Internal Revenue Service (the “IRS”) completed its review of the Expedia Holdings Split-Off and informed Liberty Interactive that it agreed with the nontaxable characterization of the transactions. Liberty Interactive received an Issue Resolution Agreement from the IRS documenting this conclusion.

The accompanying condensed consolidated financial statements represent the consolidation of the historical financial information of Vitalize and Expedia, an equity method affiliate until the date of the Expedia Holdings Split-Off. Although the combination of Vitalize and Expedia was reported as a combined company until the date of the Expedia Holdings Split-Off, these financial statements present all periods as consolidated by the Company. These financial statements refer to the consolidation of the aforementioned subsidiaries as "Expedia Holdings," "the Company," "us," "we" and "our" in the notes to the condensed consolidated financial statements. The Expedia Holdings Split-Off is accounted for at historical cost due to the pro rata nature of the distribution to holders of Liberty Ventures common stock. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.

The accompanying (a) condensed consolidated balance sheet as of December 31, 2016, which has been derived from audited financial statements, and (b) the interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and the instructions on Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Expedia Holdings did not control the decision making process or business management practices of Expedia prior to the Expedia Holdings Split-Off. Accordingly, the Company historically relied on management of this affiliate to provide it with accurate financial information prepared in accordance with GAAP that the Company used in the application of the equity method. In addition, prior to the consolidation of Expedia, Expedia Holdings relied on audit reports that are provided by the affiliate's independent auditors on the financial statements of such affiliate. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliate that would have a material effect on Expedia Holding's consolidated financial statements.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company considers (i) fair value measurement of non-financial instruments, (ii) revenue recognition, (iii) loyalty program accruals, (iv) valuation of other long-term liabilities, (v) measurement of stock-based compensation and (vi) income taxes to be its most significant estimates .

Split-Off of Expedia Holdings from Liberty Interactive

 

Following the Expedia Holdings Split-Off, Liberty Interactive and Expedia Holdings operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Expedia Holdings Split-Off, Expedia Holdings entered into certain agreements with Liberty Interactive and/or Liberty Media Corporation (“Liberty Media”) (or certain of their subsidiaries) in order to govern certain of the ongoing relationships between these companies after the Expedia Holdings Split-Off and to provide for an orderly transition. These agreements include a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.

 

The reorganization agreement between Liberty Interactive and Expedia Holdings provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Expedia Holdings Split-Off, certain conditions to the Expedia Holdings Split-Off and provisions governing the relationship between Expedia Holdings and Liberty Interactive with respect to and resulting from the Expedia Holdings Split-Off. The tax sharing agreement between Liberty Interactive and Expedia Holdings provides for the allocation and indemnification of tax liabilities and benefits between Liberty Interactive and Expedia Holdings and other agreements related to tax matters. Pursuant to the services agreement, Liberty Media provides Expedia Holdings with general and administrative services including legal, tax, accounting, treasury and investor relations support. Under the facilities sharing agreement among Liberty Media, a subsidiary of Liberty Media and Expedia Holdings, Expedia Holdings will share office space with Liberty Interactive and Liberty Media and related amenities at Liberty Media's corporate headquarters. Expedia Holdings will reimburse Liberty Media for direct, out-of-pocket expenses incurred by Liberty Media in providing these services and for costs that will be negotiated semi-annually.  Under these various agreements, approximately $1 million was reimbursable to Liberty Media for the three months ended March 31, 2017.

 

Seasonality

 

Expedia generally experiences seasonal fluctuations in the demand for its travel products and services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue for most of Expedia’s travel products, including merchant and agency hotel, is recognized when the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks or longer. The seasonal revenue impact is exacerbated with respect to income by the nature of Expedia’s variable cost of revenue and direct sales and marketing costs, which are typically realized in closer alignment to booking volumes, and the more stable nature of Expedia’s fixed costs. Furthermore, operating profits for Expedia’s primary advertising business, trivago N.V. (“trivago”), are experienced in the second half of the year as selling and marketing costs offset revenue in the first half of the year as Expedia 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

aggressively markets during the busy booking period for spring, summer and winter holiday travel. Additionally, trivago has historically earned a substantial portion of its operating profits in the fourth quarter. As a result on a consolidated basis, revenue and income are typically the lowest in the first quarter and highest in the third quarter. The continued growth of Expedia’s international operations, advertising business or a change in its product mix, including the assimilation and growth of HomeAway, Inc. (“HomeAway”), may influence the typical trend of the seasonality in the future. Expedia expects that as HomeAway continues its shift to more of a transaction-based business model for vacation rental listings its seasonal trends will generally trend similar to Expedia’s other traditional leisure businesses over time.

Recent Accounting Policies

In May 2014, FASB issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has not yet selected a transition method and is currently working with our subsidiaries to evaluate the quantitative effect that the updated standard will have on the Company’s consolidated financial statements and related disclosures. We will continue to provide updates as to the progress of our evaluation in our quarterly reports during 2017.

 

In January 2016, the FASB issued new guidance related to accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We do not expect the adoption of this new guidance to have a material impact on our consolidated financial statements.

 

In February 2016, the FASB issued new guidance which revises the accounting for leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new guidance also simplifies the accounting for sale and leaseback transactions. The new standard, to be applied via a modified retrospective transition approach, is effective for the Company for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. Companies are required to use a modified retrospective approach to adopt this guidance. The Company is currently working with its consolidated subsidiaries to evaluate the impact of the adoption of this new guidance on our consolidated financial statements, including identifying the population of leases, evaluating technology solutions and collecting lease data.

 

In June 2016, the FASB issued new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. The new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within those annual periods. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements.

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

In August and November 2016, the FASB issued new guidance related to the statement of cash flows which clarifies how companies present and classify certain cash receipts and cash payments as well as amends current guidance to address the classification and presentation of changes in restricted cash in the statement of cash flows. The new guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements.

 

In October 2016, the FASB issued new guidance amending the accounting for income taxes associated with intra-entity transfers of assets other than inventory. This accounting update, which is part of the FASB's simplification initiative, is intended to reduce diversity in practice and the complexity of tax accounting, particularly for those transfers involving intellectual property. This new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory in earnings when the transfer occurs. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements.

 

In January 2017, the FASB issued new guidance clarifying the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted for transactions that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The standard must be applied prospectively. Upon adoption, the standard will impact how the Company assesses acquisitions (or disposals) of assets or businesses.

 

In January 2017, the FASB issued new guidance simplifying subsequent goodwill measurement by eliminating Step 2 from the goodwill impairment test. Under this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 with early adoption permitted for annual goodwill impairment tests performed after January 1, 2017. The standard must be applied prospectively. Upon adoption, the standard will impact how we assess goodwill for impairment. We are currently considering our timing of adoption.

 

(2) Earnings (Loss) Attributable to Expedia Holdings Shareholders per Common Share

 

Basic earnings (loss) per common share (“EPS”) is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding (“WASO”) for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented.

The Company issued 56,946,673 common shares, which is the aggregate number of shares of Series A and Series B common stock outstanding upon the completion of the Expedia Holdings Split-Off on November 4, 2016. The number of shares issued upon completion of the Expedia Holdings Split-Off was used to determine both basic and diluted earnings (loss) per share for the three months ended March 31, 2016, as no Company equity awards were outstanding prior to the Expedia Holdings Split-Off.

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

 

2017

 

2016

 

 

 

number of shares in millions

 

Basic WASO

 

57

 

NA

 

Potentially dilutive shares

 

 —

 

NA

 

Diluted WASO

 

57

 

NA

 

 

Excluded from diluted EPS for the three months ended March 31, 2017 are less than a million potential common shares because their inclusion would be anti-dilutive.

 

(3) Investment in Expedia

 

Expedia is an online travel company, empowering business and leisure travelers with the tools and information they need to efficiently research, plan, book and experience travel. Expedia seeks to grow its business through a dynamic portfolio of travel brands, including its majority owned subsidiaries that feature the world's broadest supply portfolio as well as destination services and activities.  Expedia Holdings began consolidating Expedia as of November 4, 2016, the completion date of the Expedia Holdings Split-Off, as Expedia Holdings then controlled a majority of the voting interest in Expedia. As of March 31, 2017, Expedia Holdings beneficially owned approximately 15.6% of the outstanding Expedia common stock which represents a 52.2% voting interest in Expedia.

 

In conjunction with application of acquisition accounting, we recorded a full step up in basis of Expedia which resulted in an approximate $2.0 billion gain during the fourth quarter of 2016. The gain on the transaction was excluded from taxable income. Additionally, the deferred income tax liability that had historically resulted from the difference between the book basis and tax basis of the Company’s ownership in Expedia shares was reversed as a result of the transaction. As control of Expedia was achieved without the exchange of consideration, in order to apply acquisition accounting, we used the sum of the fair value (including an applicable control premium) of our ownership interest previously held (approximately $3.0 billion) and the fair value of the initial noncontrolling interest ($16.3 billion), as determined based on the trading price  of Expedia (Level 1) at the time control was obtained and the fair value of Expedia’s fully vested options (Level 2) on November 4, 2016. Following the Expedia Holdings Split-Off, Expedia is a consolidated subsidiary with an approximate 84% noncontrolling interest as of March 31, 2017.

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The preliminary acquisition price allocation for Expedia is as follows (amounts in millions):

 

 

 

 

 

Fair value of Expedia equity interests

 

$

2,991

Noncontrolling interest

 

 

16,295

 

 

$

19,286

 

 

 

 

Cash and cash equivalents

 

$

1,725

Receivables

 

 

1,487

Property, plant and equipment

 

 

780

Goodwill

 

 

16,796

Other nonamortizable intangible assets

 

 

6,152

Intangible assets subject to amortization

 

 

6,774

Other assets

 

 

815

Debt

 

 

(3,472)

Deferred merchant bookings

 

 

(2,810)

Deferred income tax liabilities, net

 

 

(3,643)

Other liabilities assumed

 

 

(5,318)

 

 

$

19,286

 

Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with future customers, continued innovation and noncontractual relationships. Acquired Expedia nonamortizable intangible assets consist of trademarks and tradenames. Expedia amortizable intangible assets were comprised of customer relationships of $4,233 million with a weighted average life of approximately 9 years, developed technology of $1,480 million with a weighted average life of approximately 5 years, supplier relationships of $980 million with a weighted average life of approximately 4 years and other intangible assets of $81 million with useful lives of 1 to 6 years. None of the acquired goodwill is expected to be deductible for tax purposes. As of March 31, 2017, the valuation related to the acquisition of a controlling interest in Expedia is not final, and the acquisition price allocation is preliminary and subject to revision. The primary areas of the acquisition price allocation that are not yet finalized are related to certain intangible assets, liabilities and tax balances.

 

Included in the Company’s net earnings (loss) for the three months ended March 31, 2017 are acquisition accounting-related adjustments of $271 million, primarily related to amortization on the fair value step-up of amortizable intangible assets acquired.

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The unaudited pro forma revenue and net earnings of Expedia Holdings for the three months ended March 31, 2016, prepared utilizing the historical financial statements of Expedia, giving effect to acquisition accounting related adjustments made at the time of acquisition, as if the transaction discussed above occurred on January 1, 2016, and utilizing 57 million common shares for the calculation of basic and diluted EPS, which is the aggregate number of Series A and Series B common stock outstanding upon the completion of the Expedia Holdings Split-Off on November 4, 2016, are as follows:

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 2016

 

 

 

amounts in millions

 

Revenue

 

$

1,919

 

Net earnings (loss)

 

$

(468)

 

Net earnings (loss) attributable to Expedia Holdings shareholders

 

$

(72)

 

Basic net earnings (loss) attributable to Expedia Holdings shareholders per common share

 

$

(1.26)

 

Diluted net earnings (loss) attributable to Expedia Holdings shareholders per common share

 

$

(1.26)

 

 

The pro forma results include adjustments primarily related to amortization of acquired intangible assets, amortization of the premiums related to the step-up to fair value of Expedia’s debt, the amortization of the step-up to fair value of Expedia’s deferred revenue and incremental stock-based compensation for the step-up to fair value of Expedia’s outstanding options and restricted stock units (“RSUs”) on the date of acquisition. The pro forma information is not representative of the Company’s future results of operations nor does it reflect what the Company’s results of operations would have been if the transaction had happened previously and the Company consolidated Expedia during the period presented.

 

Dividends declared by Expedia

 

In February 2017, Expedia declared a quarterly cash dividend of $0.28 per share of outstanding common stock to the stockholders of record as of the close of business on March 9, 2017. The dividend was paid in cash on March 30, 2017 in the amount of $42 million, of which Liberty received $6 million.  In addition, in April 2017, Expedia declared a quarterly cash dividend of $0.28  per share of outstanding common stock payable on June 15, 2017 to stockholders of record as of the close of business on May 25, 2017 .

 

Expedia share repurchases

 

In February 2015, Expedia’s Executive Committee, acting on behalf of the Board of Directors, authorized a repurchase of up to 10 million shares of its common stock. There is no fixed termination date for the repurchases. As of March 31, 2017, 6.9 million shares remain authorized for repurchase under the 2015 authorization. Subsequent to March 31, 2017, Expedia repurchased an additional 0.1 million shares for a total cost of $14 million, excluding transaction costs.

 

 

 

(4) Assets and Liabilities Measured at Fair Value

 

For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.

 

The Company’s assets and liabilities measured at fair value are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

    

 

 

    

Quoted prices

    

Significant other

    

 

    

Quoted prices

    

Significant other

 

 

 

 

 

 

in active markets

 

observable

 

 

 

in active markets

 

observable

 

 

 

 

 

 

for identical assets

 

inputs

 

 

 

for identical assets

 

inputs

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

Total

 

(Level 1)

 

(Level 2)

 

 

 

amounts in millions

 

Cash equivalents

    

$

516

    

197

    

319

    

464

    

164

    

300

  

Foreign currency forward contracts

 

$

(2)

    

 —

    

(2)

 

(4)

    

 —

    

(4)

 

Time deposits

 

$

812

    

 —

    

812

 

25

    

 —

    

25

 

Available for sale securities

 

$

57

    

 —

    

57

 

64

    

 —

    

64

 

Cash equivalents are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs and are accordingly classified within Level 1 or Level 2. As of March 31, 2017, cash equivalents consisted primarily of prime institutional money market funds with maturities of three months or less, time deposits as well as bank account balances.

Valuation of the foreign currency forward contracts is based on foreign currency exchange rates in active markets, a Level 2 input. Expedia uses foreign currency forward contracts to economically hedge certain merchant revenue exposures, foreign denominated liabilities related to certain of its loyalty programs and its other foreign currency-denominated operating liabilities. Foreign currency forward contracts are typically short-term and are included in the Other current liabilities line item as of March 31, 2017 and December 31, 2016 in the Company’s condensed consolidated balance sheets. As of March 31, 2017, Expedia was party to outstanding forward contracts hedging its liability exposures with a total net notional value of $1.9 billion. Net losses from foreign currency forward contracts were $4 million for the three months ended March 31, 2017. Net losses from foreign currency forward contracts are included in the Other, net line in the Company’s condensed consolidated statement of operations.

Expedia holds time deposit investments with financial institutions. Time deposits with original maturities of less than three months are classified as cash equivalents and those with remaining maturities of less than one year are classified within Short-term marketable securities. Additionally, Expedia has approximately $6 million time deposits classified as restricted cash for certain traveler deposits which are included in Other current assets.  

Corporate debt securities are investment grade, all of which are classified as available for sale. As of March 31, 2017, Expedia had approximately $46 million of short-term available for sale securities, classified in Other current assets and approximately $12 million of long-term available for sale investments, classified in Other assets.  As of December 31, 2016, Expedia had approximately $48 million of short-term available for sale securities, classified in Other current assets and approximately $16 million of long-term available for sale investments, classified in Other assets.  As of March 31, 2017 and December 31, 2016, the amortized cost basis of the investments approximated their fair value with both gross unrealized gains and gross unrealized losses of less than $1 million.

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(5) Goodwill and Other Intangible Assets

 

Goodwill

 

Changes in the carrying amount of goodwill are as follows (amounts in millions):

 

 

 

 

 

 

 

 

 

 

 

 

Expedia

 

Corporate and other

 

Total

 

Balance as of January 1, 2017

 

$

16,560

 

57

 

16,617

 

Foreign exchange translation

 

 

74

 

 —

 

74

 

Other

 

 

10

 

 —

 

10

 

Balance as of March 31, 2017

 

$

16,644

 

57

 

16,701

 

Other Indefinite-lived Intangible Assets

Other indefinite-lived intangible assets relate principally to Expedia trademarks and tradenames recognized in acquisition accounting.

 

Intangible Assets Subject to Amortization

 

Amortization expense for intangible assets with finite useful lives was $466 million and $3 million for the three months ended March 31, 2017 and 2016, respectively. Based on its amortizable intangible assets as of March 31, 2017, the Company expects that amortization expense will be as follows for the next five years (amounts in millions):

 

 

 

 

 

 

Remainder of 2017

    

$

1,560

 

2018

 

 

1,452

 

2019

 

 

1,044

 

2020

 

 

600

 

2021

 

 

473

 

Total

 

$

5,129

 

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(6) Long-Term Debt and Capital Lease Obligations

 

Outstanding debt and capital leases at March 31, 2017 and December 31, 2016 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

Carrying value

 

 

 

Principal

 

March 31, 

    

December 31, 

 

 

 

March 31, 2017

 

2017

 

2016

 

 

 

amounts in millions

 

Expedia Holdings margin loan

 

$

350

 

$

350

 

350

 

Expedia 7.456% senior notes due 2018

 

 

500

 

 

537

 

544

 

Expedia 5.95% senior notes due 2020

 

 

750

 

 

832

 

837

 

Expedia 2.5% (€650 million) senior notes due 2022

 

 

694

 

 

737

 

727

 

Expedia 4.5% senior notes due 2024

 

 

500

 

 

522

 

523

 

Expedia 5.0% senior notes due 2026

 

 

750

 

 

786

 

787

 

Vitalize secured notes

 

 

12

 

 

12

 

13

 

Vitalize revolving line of credit due 2020

 

 

 8

 

 

 8

 

11

 

Capital lease obligations

 

 

 2

 

 

 2

 

 3

 

Total debt and capital lease obligations

 

$

3,566

 

 

3,786

 

3,795

 

Less portion classified as current (1)

 

 

 

 

 

(14)

 

(7)

 

Total long-term debt and capital lease obligations

 

 

 

 

$

3,772

 

3,788

 


(1)

Included in the Other current liabilities line in the condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016.

 

$400 Million Margin Loan due 2018

 

On November 1, 2016, LEXE Marginco, LLC (“SplitSPV”), a wholly-owned subsidiary of Expedia Holdings, entered into a margin loan agreement with an availability of $400 million with various lender parties. Approximately 10.8 million shares of EXPE held by the Company with a value of $1.4 billion were pledged by SplitSPV as collateral to the loan as of March 31, 2017. This margin loan has a term of two years and bears interest at a rate of LIBOR plus 1.60% and contains an undrawn commitment fee of 0.75% per annum. Interest on the term loan is payable on the last business day of each calendar quarter, beginning on December 31, 2016. As of March 31, 2017, the interest rate on this margin loan was 2.60%. The outstanding margin loan contains various affirmative and negative covenants that restrict the activities of the borrower. The loan agreement does not include any financial covenants. On November 2, 2016, Expedia Holdings drew $350 million under the margin loan, and on November 4, 2016, Expedia Holdings distributed approximately $299 million of the proceeds to Liberty Interactive as a dividend.

 

Expedia Outstanding Debt

 

Expedia 7.456% senior notes due 2018

Expedia has $500 million in registered senior unsecured notes outstanding at March 31, 2017 that are due in August 2018 and bear interest at 7.456% (the “Expedia 7.456% Notes”). Interest is payable semi-annually in February and August of each year. At any time Expedia may redeem the Expedia 7.456% Notes at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium, in whole or in part. The premium associated with the Expedia 7.456% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Expedia 5.95% senior notes due 2020

Expedia has $750 million in registered senior unsecured notes outstanding at March 31, 2017 that are due in August 2020 and bear interest at 5.95% (the “Expedia 5.95% Notes”). The Expedia 5.95% Notes were issued at 99.893% of par. Interest is payable semi-annually in February and August of each year. Expedia may redeem the Expedia 5.95% Notes at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium, in whole or in part. The premium associated with the Expedia 5.95% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

 

Expedia 2.5% senior notes due 2022

Expedia has €650 million of registered senior unsecured notes outstanding at March 31, 2017 that are due in June 2022 and bear interest at 2.5% (the “Expedia 2.5% Notes”). The Expedia 2.5% Notes were issued at 99.525% of par. Interest is payable annually in arrears in June of each year. Expedia may redeem the Expedia 2.5% Notes at its option, at whole or in part, at any time or from time to time. If Expedia elects to redeem the Expedia 2.5% Notes prior to March 3, 2022, it may redeem them at a specified “make-whole” premium. If Expedia elects to redeem the Expedia 2.5% Notes on or after March 3, 2022, it may redeem them at a redemption price of 100% of the principal plus accrued and unpaid interest. Subject to certain limited exceptions, all payments of interest and principal for the Expedia 2.5% Notes will be made in Euros. The premium associated with the Expedia 2.5% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

 

Expedia 4.5% senior notes due 2024

Expedia has $500 million in registered senior unsecured notes outstanding at March 31, 2017 that are due in August 2024 and bear interest at 4.5% (the “Expedia 4.5% Notes”). The Expedia 4.5% Notes were issued at 99.444% of par. Interest is payable semi-annually in February and August of each year. Expedia may redeem the Expedia 4.5% Notes at its option at any time in whole or from time to time in part. If Expedia elects to redeem the Expedia 4.5% Notes prior to May 15, 2024, it may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If Expedia elects to redeem the Expedia 4.5% Notes on or after May 15, 2024, it may redeem them at a redemption price of 100% of the principal plus accrued interest. The premium associated with the Expedia 4.5% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

 

Expedia 5.0% senior notes due 2026

Expedia has $750 million in registered senior unsecured notes outstanding at March 31, 2017 that are due in February 2026 and bear interest at 5.0% (the "Expedia 5.0% Notes"). The Expedia 5.0% Notes were issued at 99.535% of par. Interest is payable semi-annually in arrears in February and August of each year. Expedia may redeem the Expedia 5.0% Notes at its option at any time in whole or from time to time in part. If Expedia elects to redeem the Expedia 5.0% Notes prior to November 12, 2025, it may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If Expedia elects to redeem the Expedia 5.0% Notes on or after November 12, 2025, it may redeem them at a redemption price of 100% of the principal plus accrued interest. The premium associated with the Expedia 5.0% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Expedia 7.456%, 5.95%, 2.5%, 4.5% and 5.0% Notes (collectively the “Notes”) are senior unsecured obligations issued by Expedia and guaranteed by certain domestic Expedia subsidiaries. The Notes rank equally in right of payment with all of Expedia’s existing and future unsecured and unsubordinated obligations of Expedia and the guarantor subsidiaries. In addition, the Notes include covenants that limit Expedia’s ability to (i) create certain liens, (ii) enter into sale/leaseback transactions and (iii) merge or consolidate with or into another entity or transfer substantially all of its assets. The Expedia 5.95%, 2.5%, 4.5% and 5.0% Notes are redeemable in whole or in part, at the option of the holders thereof, upon the occurrence of certain change of control triggering events at a purchase price in cash equal to 101% of the principal plus accrued and unpaid interest.

Expedia Credit Facility

As of March 31, 2017, Expedia maintained a $1.5 billion unsecured revolving credit facility with a group of lenders, which is unconditionally guaranteed by certain domestic Expedia subsidiaries that are the same as under the Notes and expires in February 2021. As of March 31, 2017, Expedia did not have any revolving credit facility borrowings outstanding. The facility bears interest based on Expedia’s credit ratings, with drawn amounts bearing interest at LIBOR plus 1.375% and the commitment fee on undrawn amounts at 0.175% as of March 31, 2017. The facility contains covenants including maximum leverage and minimum interest coverage ratios. The amount of stand-by letters of credit (“LOCs”) issued under the facility reduces the credit amount available. As of March 31, 2017, there were $19 million of outstanding stand-by LOCs issued under the facility.

In addition, one of Expedia’s international subsidiaries maintains a €50 million uncommitted credit facility, which is guaranteed by Expedia and may be terminated at any time by the lender. As of March 31, 2017, there were no borrowings outstanding under this facility.

 

Vitalize Secured Notes

 

As of March 31, 2017, Vitalize has various outstanding secured notes. Principal and interest payments on the secured notes are payable monthly based on the date of issuance. The secured notes are comprised of both fixed and variable rate notes with an interest rate of 4.14% on the fixed rate note and an interest rate of LIBOR plus 2.50% on one of the variable rate notes and an interest rate of LIBOR plus 2.50%, with a rate option balance that accrues interest at the CB Floating Rate  on the other the variable rate note  (3.50% on the two variable rate notes at March 31, 2017). The maturity dates on the secured notes range from 2019 to 2022. The land and building purchased by Vitalize in March 2012 for its corporate headquarters are secured as collateral under the terms of the master term loan agreement for a portion of the outstanding secured notes. As of March 31, 2017, the total outstanding balance of the secured notes is $12 million.

 

Vitalize Revolving Line of Credit

 

As of March 31, 2017, Vitalize had a revolving line of credit (the "Revolver") which is secured by Vitalize's inventory and accounts receivable. The maximum amount allowed under the Revolver is $50 million. Vitalize periodically borrows and repays amounts outstanding under the Revolver depending on its cash needs. The Revolver matures on January 20, 2020. The outstanding balance accrues interest at LIBOR plus 1.50%, with a rate option balance that accrues interest at the CB Floating Rate less 1.25%. As of March 31, 2017, the outstanding balance on the Revolver is approximately $8 million subject to an interest rate of 2.50%.

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Fair Value of Debt

 

The fair value, based on quoted market prices in less active markets (Level 2), of Expedia’s publicly traded debt securities is as follows (amounts in millions):

 

 

 

 

 

 

 

    

March 31, 

 

 

 

2017

 

Expedia 7.456% senior notes due 2018

 

$

536

 

Expedia 5.95% senior notes due 2020

 

$

825

 

Expedia 2.5% (€650 million) senior notes due 2022 (1)

 

$

736

 

Expedia 4.5% senior notes due 2024

 

$

526

 

Expedia 5.0% senior notes due 2026

 

$

804

 


(1)

Approximately 689 million Euro as of March 31, 2017.

 

The Company estimates the fair value of its margin loan, secured notes and Revolver based on the current rate offered to the Company for debt of the same remaining maturities (level 3). The Company believes that the carrying value of its margin loan, Revolver and secured notes approximated fair value at March 31,  2017 and December 31, 2016.

 

Covenant Compliance

 

The Company, Expedia and Vitalize were each in compliance with its debt covenants which consist of both financial and non-financial covenants as of March 31, 2017.

 

(7) Stock-Based Compensation

 

Included in the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation, a portion of which relates to Expedia for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

amounts in millions

 

Operating costs and expenses:

 

 

 

 

 

 

Operating expense

 

$

 5

 

 —

 

Selling and marketing

 

 

18

 

 —

 

Technology and content

 

 

22

 

 —

 

General and administrative

 

 

32

 

(1)

 

 

 

$

77

 

(1)

 

 

Expedia Holdings Incentive Plan

 

The Company has granted to certain of its directors and employees RSUs and options to purchase shares of Expedia Holdings common stock (“Awards”). The Company measures the cost of employee services received in exchange for an equity classified Award based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award).

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company has calculated the GDFV for all of its equity classified Awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. Since Expedia Holdings common stock has not traded on the stock market for a significant length of time, the volatility used in the calculation for Awards is based on the historical volatility of Liberty Ventures common stock and the implied volatility of publicly traded Liberty Ventures options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.

 

There were no options to purchase shares of Series A or Series B common stock granted during the three months ended March 31, 2017.

 

Expedia Holdings – Outstanding Awards

The following table presents the number and weighted average exercise price (“WAEP”) of Awards to purchase Expedia Holdings common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the Awards.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

 

 

 

 

average

 

Aggregate

 

 

 

 

 

 

 

 

remaining

 

intrinsic

 

 

 

Series A

 

WAEP

 

contractual life

 

value

 

 

 

(in thousands)

 

 

 

 

 

 

 

(in millions)

 

Outstanding at January 1, 2017

 

1,317

 

$

24.46

 

 

 

 

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

 

 

Exercised

 

(210)

 

$

18.44

 

 

 

 

 

 

 

Forfeited/Cancelled

 

(7)

 

$

40.51

 

 

 

 

 

 

 

Outstanding at March 31, 2017

 

1,100

 

$

25.51

 

3.3

years

 

$

22

 

Exercisable at March 31, 2017

 

839

 

$

20.74

 

2.5

years

 

$

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

 

 

 

 

average

 

Aggregate

 

 

 

 

 

 

 

 

remaining

 

intrinsic

 

 

 

Series B

 

WAEP

 

contractual life

 

value

 

 

 

(in thousands)

 

 

 

 

 

 

 

(in millions)

 

Outstanding at January 1, 2017

 

659

 

$

38.48

 

 

 

 

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

 

 

Exercised

 

 —

 

$

 —

 

 

 

 

 

 

 

Forfeited/Cancelled

 

 —

 

$

 —

 

 

 

 

 

 

 

Outstanding at March 31, 2017

 

659

 

$

38.48

 

4.9

years

 

$

 2

 

Exercisable at March 31, 2017

 

123

 

$

40.46

 

5.7

years

 

$

 —

 

 

As of March 31, 2017, the total unrecognized compensation cost related to unvested Awards was approximately $49 thousand. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately one year.

As of March 31, 2017, the Company reserved 1.8 million shares of Series A and Series B common stock for issuance under exercise privileges of outstanding stock Awards.

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Expedia - Stock-based Compensation

 

Pursuant to the Amended and Restated Expedia, Inc. 2005 Stock and Annual Incentive Plan, Expedia may grant restricted stock, restricted stock awards, RSUs, stock options and other stock-based awards to its directors, officers, employees and consultants. Expedia issues new shares to satisfy the exercise or release of stock-based awards.

Expedia’s annual employee stock-based award grants typically occur during the first quarter of each year and generally vest over four years. In 2017, Expedia introduced an equity choice program for annual awards that allows for the choice of stock options or RSUs, with certain limitations. During the three months ended March 31, 2017, Expedia granted approximately 3 million stock options and 1 million RSUs. The fair value of the stock options granted during the three months ended March 31, 2017 was estimated at the date of grant using appropriate valuation techniques, including the Black-Scholes and Monte Carlo option-pricing models.

As of March 31, 2017, Expedia had stock-based awards outstanding representing approximately 23 million shares of its common stock outstanding, consisting of options to purchase approximately 20 million shares of Expedia’s common stock with a weighted average exercise price of $90.01 and a weighted average remaining life of approximately 4.9 years and approximately 2 million RSUs.

The stock-based compensation recognized by Expedia Holdings related to Expedia stock options and restricted stock awards was $78 million for the three months ended March 31, 2017.  

 

Vitalize Stock Appreciation Rights

 

There were no stock appreciation rights ("SARs") granted during the three months ended March 31, 2017 under Vitalize’s stock appreciation rights plan. As of March 31, 2017, the total unrecognized compensation cost related to 416 thousand unvested Vitalize SARs was approximately $2 million and will be recognized over a weighted average period of approximately 1.7 years. Accrued stock compensation was approximately $2 million at March 31, 2017. 

 

Included in General and administrative expenses in the accompanying condensed consolidated statements of operations is a benefit from stock-based compensation of approximately $1 million for each of the three months ended March 31, 2017 and 2016, which relates to Vitalize. The benefit recognized during the three months ended March 31, 2017 and 2016 was primarily due to forfeitures and changes in the per unit valuation of outstanding stock appreciation rights.

 

(8) Commitments and Contingencies

 

Leases

 

The Company leases certain warehouse and office space, equipment, furniture and computer software under both capital and noncancelable operating leases that expire at various dates through 2026. The Company is responsible, under all leases, for related building maintenance and property taxes. Certain leases contain periodic rent escalation adjustments and renewal options. Total rental expense was $40 million and $1 million for the three months ended   March 31, 2017 and 2016, respectively.

 

Litigation

 

The Company is subject to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying condensed consolidated financial statements.

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Litigation Relating to Occupancy Taxes.  Ninety-five lawsuits have been filed by or against cities, counties and states involving hotel occupancy and other taxes. Eighteen lawsuits are currently active. These lawsuits are in various stages and Expedia continues to defend against the claims made in them vigorously. With respect to the principal claims in these matters, Expedia believes that the statutes or ordinances at issue do not apply to the services it provides and, therefore, that Expedia does not owe the taxes that are claimed to be owed. Expedia believes that the statutes or ordinances at issue generally impose occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations. To date, forty-one of these lawsuits have been dismissed. Some of these dismissals have been without prejudice and, generally, allow the governmental entity or entities to seek administrative remedies prior to pursuing further litigation. Twenty seven dismissals were based on a finding that Expedia and the other defendants were not subject to the local hotel occupancy tax ordinance or that the local government lacked standing to pursue their claims. As a result of this litigation and other attempts by certain jurisdictions to levy such taxes, Expedia has established a reserve for the potential settlement of issues related to hotel occupancy taxes, consistent with applicable accounting principles and in light of all current facts and circumstances, in the amount of $90 million as of March 31, 2017. Expedia’s settlement reserve is based on its best estimate of probable losses, and the ultimate resolution of these contingencies may be greater or less than the liabilities recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount reserved cannot be made. Changes to the settlement reserve are included within Legal reserves, occupancy tax and other in the condensed consolidated statements of operations.

In addition, Expedia was audited by the state of Colorado. The state issued assessments for claimed tax, interest and penalty in the approximate amount of $23 million for the periods December 1, 1999 through December 31, 2005 and January 1, 2009 through December 31, 2011. Expedia does not agree with these assessments and has filed protests.

 

Pay-to-Play. Certain jurisdictions may assert that Expedia is required to pay any assessed taxes prior to being allowed to contest or litigate the applicability of the ordinances. This prepayment of contested taxes is referred to as “pay-to-play.” Payment of these amounts is not an admission that Expedia believes it is subject to such taxes and, even when such payments are made, Expedia continues to defend its position vigorously. If Expedia prevails in the litigation, for which a pay-to-play payment was made, the jurisdiction collecting the payment will be required to repay such amounts and also may be required to pay interest.

 

Hawaii (General Excise Tax). During 2013, the Expedia companies were required to “pay-to-play” and paid a total of $171 million in advance of litigation relating to general excise taxes for merchant model hotel reservations in the State of Hawaii.  In September 2015, following a ruling by the Hawaii Supreme Court, the State of Hawaii refunded the Expedia companies $132 million of the original “pay-to-play” amount. Orbitz also received a similar refund of $22 million from the State of Hawaii in September 2015. The amount paid, net of refunds, by the Expedia companies and Orbitz to the State of Hawaii in satisfaction of past general excise taxes on their services for merchant model hotel reservations was $44 million. The parties reached a settlement relating to Orbitz merchant model hotel tax liabilities, and on October 5, 2016, the Expedia companies paid the State of Hawaii for the tax years 2012 through 2015. The Expedia companies and Orbitz have now resolved all assessments by the State of Hawaii for merchant model hotel taxes through 2015. 

 

The Department of Taxation also issued final assessments for general excise taxes against the Expedia companies, including Orbitz, dated December 23, 2015 for the time period 2000 to 2014 for hotel and car rental revenue for “agency model” transactions.  Those assessments are currently under review in the Hawaii tax courts.

 

Final assessments by the Hawaii Department of Taxation for general exercise taxes against the Expedia companies, including Orbitz, relating to merchant car rental transactions during the years 2000 to 2014 are also under review in the Hawaii tax courts. With respect to merchant model car rental transactions at issue for the tax years 2000 through 2013, the Hawaii tax court held on August 5, 2016 that general excise tax is due on the online travel companies’ services to facilitate car rentals. The court further ruled that for merchant model car rentals in Hawaii, the online travel companies are required to pay general excise tax on the total amount paid by consumers, with no credit for tax amounts already remitted by car

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

rental companies to the State of Hawaii for tax years 2000 through 2013, thus resulting in a double tax on the amount paid by consumers to car rental companies for the rental of the vehicle. The court, however, ruled that when car rentals are paid for as part of a vacation package, tax is only due once on the amount paid by consumers to the car rental company for the rental of the vehicle. In addition, the court ruled that the online travel companies are required to pay interest and certain penalties on the amounts due. On April 25, 2017, the court entered a final judgment. The Expedia companies intend to appeal, and will be expected to pay under protest the full amount claimed due, or approximately $16.7 million, as a condition of appeal.  The Hawaii tax court’s decision did not resolve “merchant model” car rental transactions for the tax year 2014, which also remain under review.

 

San Francisco (Occupancy Tax). During 2009, Expedia companies were required to “pay-to-play” and paid $48 million in advance of litigation relating to occupancy tax proceedings with the city of San Francisco and in May 2014, the Expedia companies paid an additional $25.5 million under protest in order to contest additional assessments for later time periods. In addition, Orbitz in total has paid $4.6 million to the city of San Francisco to contest similar assessments issued against it by the city. On August 6, 2014, the California Court of Appeals stayed this case pending review and decision by the California Supreme Court of the  City of San Diego, California Litigation.   The California Court of Appeals has lifted the stay for this case and the appeal will proceed in light of the California Supreme Court’s decision in the San Diego litigation.

Other Jurisdictions.  Expedia is also in various stages of inquiry or audit with domestic and foreign tax authorities, some of which, including in the United Kingdom regarding the application of value added tax (“VAT”) to its European Union related transactions as discussed below, impose a pay-to-play requirement to challenge an adverse inquiry or audit result in court.

The ultimate resolution of these contingencies may be greater or less than the pay-to-play payments made and Expedia’s estimates of additional assessments mentioned above.

 

Matters Relating to International VAT .  Expedia is in various stages of inquiry or audit in multiple European Union jurisdictions, including in the United Kingdom, regarding the application of VAT to Expedia’s European Union related transactions. While Expedia believes it complies with applicable VAT laws, rules and regulations in the relevant jurisdictions, the tax authorities may determine that it owes additional taxes. In certain jurisdictions, including the United Kingdom, it may be required to “pay-to-play” any VAT assessment prior to contesting its validity. While Expedia believes that it will be successful based on the merits of its positions with regard to the United Kingdom and other VAT audits in pay-to-play jurisdictions, it is nevertheless reasonably possible that Expedia could be required to pay any assessed amounts in order to contest or litigate the applicability of any assessments and an estimate for a reasonably possible amount of any such payments cannot be made.

Matters Relating to Competition Reviews and Legislation Relating to Parity Clauses. Over the last several years, the online travel industry has become the subject of investigations by various national competition authorities ("NCAs"), particularly in Europe. Expedia is or has been involved in investigations predominately related to whether certain parity clauses in contracts between Expedia entities and accommodation providers, sometimes also referred to as "most favored nation" or “MFN” provisions, are anti-competitive.

 

In Europe, investigations or inquiries into contractual parity provisions between hotels and online travel companies, including Expedia, were initiated in 2012, 2013 and 2014 by NCAs in Austria, Belgium, Czech Republic, Denmark, France, Germany, Greece, Hungary, Ireland, Italy, Poland, Sweden and Switzerland.  While the ultimate outcome of some of these investigations or inquiries remains uncertain, and Expedia’s circumstances are distinguishable from other online travel companies subject to similar investigations and inquiries, Expedia notes in this context, that on April 21, 2015, the French, Italian and Swedish NCAs, working in close cooperation with the European Commission, announced that they had

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

accepted formal commitments offered by Booking.com to resolve and close the investigations against Booking.com in France, Italy and Sweden by Booking.com removing and/or modifying certain rate, conditions and availability parity provisions in its contracts with accommodation providers in France, Italy and Sweden as of July 1, 2015, among other commitments. Booking.com voluntarily extended the geographic scope of these commitments to accommodation providers throughout Europe as of the same date.

 

With effect from August 1, 2015, Expedia waived certain rate, conditions and availability parity clauses in its agreements with its European hotel partners for a period of five years. While Expedia maintains that its parity clauses have always been lawful and in compliance with competition law, these waivers were nevertheless implemented as a positive step towards facilitating the closure of the open investigations into such clauses on a harmonized pan-European basis.  Following the implementation of Expedia's waivers, nearly all NCAs in Europe have announced either the closure of their investigation or inquiries involving Expedia or a decision not to open an investigation or inquiry involving Expedia.  Below are descriptions of additional rate parity-related matters of note in Europe.

 

The German Federal Cartel Office ("FCO") has required another online travel company, Hotel Reservation Service ("HRS"), to remove certain clauses from its contracts with hotels. HRS’ appeal of this decision was rejected by the Higher Regional Court Düsseldorf on January 9, 2015. On December 23, 2015, the FCO announced that it had also required Booking.com by way of an infringement decision to remove certain clauses from its contracts with German hotels. Booking.com has appealed the decision and the appeal was heard by the Higher Regional Court Düsseldorf on February 8, 2017.

 

The Italian competition authority's case closure decision against Booking.com and Expedia has subsequently been appealed by two Italian hotel trade associations, i.e. Federalberghi and AICA. These appeals remain at an early stage and no hearing date has been fixed.

 

On November 6, 2015, the Swiss competition authority announced that it had issued a final decision finding certain parity terms existing in previous versions of agreements between Swiss hotels and each of Expedia, Booking.com and HRS to be prohibited under Swiss law. The decision explicitly notes that Expedia's current contract terms with Swiss hotels are not subject to this prohibition. The Swiss competition authority imposed no fines or other sanctions against Expedia and did not find an abuse of a dominant market position by Expedia. The FCO’s case against Expedia’s contractual parity provisions with accommodation providers in Germany remains open but is still at a preliminary stage with no formal allegations of wrong-doing having been communicated to Expedia to date.

 

The Directorate General for Competition, Consumer Affairs and Repression of Fraud (the “DGCCRF”), a directorate of the French Ministry of Economy and Finance with authority over unfair trading practices, brought a lawsuit in France against Expedia entities objecting to certain parity clauses in contracts between Expedia entities and French hotels. In May 2015, the French court ruled that certain of the parity provisions in certain contracts that were the subject of the lawsuit were not in compliance with French commercial law, but imposed no fine and no injunction. The DGCCRF has appealed the decision.

 

Hotelverband Deutschland (“IHA”) e.V. (a German hotel association) brought proceedings before the Cologne regional court against Expedia, Expedia.com GmbH and Expedia Lodging Partner Services Sàrl. IHA applied for a ‘cease and desist’ order against these companies in relation to the enforcement of certain rate and availability parity clauses contained in contracts with hotels in Germany.  On or around February 16, 2017, the court dismissed IHA’s action and declared the claimant liable for the Expedia defendants’ statutory costs.  IHA has appealed the decision.

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

A working group of 10 European NCAs (Belgium, Czech Republic, Denmark, France, Hungary, Ireland, Italy, Netherlands, Sweden and the United Kingdom) and the European Commission was established by the European Competition Network (“ECN”) at the end of 2015 to monitor the functioning of the online hotel booking sector, following amendments made by a number of online travel companies (including Booking.com and Expedia) in relation to certain parity provisions in their contracts with hotels. The working group issued questionnaires to online travel agencies including Expedia, metasearch sites and hotels in 2016.  On February 17, 2017, the heads of the European Union (“EU”) competition authorities and the European Commission announced that in light of the results of the monitoring exercise, the sector should be allowed more time to make full use of the measures that have already been taken by certain market participants, including Expedia. The underlying results of the ECN monitoring exercise were published on April 6, 2017.