EXHIBIT 99.2
[LOGO]
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Financial Statements
December 31, 1998 and 1999
(With Independent Auditors' Report Thereon)
Report of Independent Auditors
The Board of Directors
Las Vegas Reservation Systems, Inc.,
Travelscape.com, Inc. (a Nevada corporation),
Professional Travel Services, Inc. and
Travelscape.com (a Delaware corporation):
We have audited the accompanying combined balance sheet of Las Vegas Reservation
Systems, Inc., Travelscape.com, Inc. (a Nevada corporation) and Professional
Travel Services, Inc. as of December 31, 1998 and the related combined
statements of operations, stockholders' deficiency and cash flows for the years
ended December 31, 1997 and 1998 and the consolidated balance sheet of
Travelscape.com Inc. (a Delaware corporation) as of December 31, 1999 and the
related statements of operations, stockholders' deficiency and cash flows for
the year then ended. The combined and consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the combined and consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined and consolidated financial statements referred to
above present fairly, in all material respects, the combined financial position
of Las Vegas Reservation Systems, Inc., Travelscape.com, Inc. and Professional
Travel Services, Inc. as of December 31, 1998 and the results of their
operations and their cash flows for the years ended December 31, 1997 and 1998
and the consolidated financial position of Travelscape.com, Inc. as of December
31, 1999 and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ KMPG LLP
Las Vegas, Nevada
February 18, 2000
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Combined (1998) and Consolidated (1999) Balance Sheets
December 31, 1998 and 1999
Assets 1998 1999
--------------- --------------
Current assets:
Cash and cash equivalents $ 265,674 4,701,950
Officer receivable -- 234,988
Prepaid expenses 177,788 1,630,976
Other current assets -- 177,859
--------------- --------------
Total current assets 443,462 6,745,773
Property, plant and equipment, net (notes 2, 5 and 10) 2,647,401 3,453,257
Other assets (note 8) 752,853 2,720,689
Intangible assets, net -- 1,761,356
--------------- --------------
$ 3,843,716 14,681,075
=============== ==============
Liabilities and Stockholders' Deficiency
Current liabilities:
Borrowings under lines of credit (note 4) $ 91,144 34,737
Current portion of notes payable (note 5) 32,926 37,409
Current portion of capital lease obligations (notes 2 and 10) 182,274 293,025
Accounts payable 2,063,549 7,274,624
Accrued room payable 660,571 3,813,884
Accrued expenses 461,072 1,453,927
Deferred revenue 1,983,472 10,572,246
--------------- --------------
Total current liabilities 5,475,008 23,479,852
Notes payable, less current portion (note 5) 1,399,524 7,901,176
Capital lease obligations, less current portion (notes 2 and 10) 528,815 358,122
Related party loan (note 3) 46,684 --
--------------- --------------
Total liabilities 7,450,031 31,739,150
--------------- --------------
Stockholders' deficiency (note 6):
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued and outstanding 15,042,500 shares -- 150,425
Common stock, no par value. Authorized 2,500 shares; issued
and outstanding 200 shares -- --
Common stock, $.001 par value. Authorized 25,000,000 shares;
issued and outstanding 5,000,000 shares 5,000 --
Common stock, no par value. Authorized 2,500 shares;
issued and outstanding 1,000 shares 40,000 --
Preferred stock, $.01 par value. Authorized 1,272,569 shares;
issued and outstanding 1,272,569 shares -- 5,611,604
Additional paid-in capital 2,623,305 8,558,891
Deferred stock compensation (note 9) -- (2,179,134)
Stockholder loans (note 3) (91,786) (65,266)
Accumulated deficit (6,182,834) (29,134,595)
--------------- --------------
Net stockholders' deficiency (3,606,315) (17,058,075)
Commitments, contingencies and subsequent event (notes 6, 8, 10 and 11)
--------------- --------------
$ 3,843,716 14,681,075
=============== ==============
See accompanying notes to combined and consolidated financial statements.
2
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Combined (1997 and 1998) and Consolidated (1999) Statements of Operations
Years ended December 31, 1997, 1998 and 1999
1997 1998 1999
------------ ----------- -----------
Revenues:
Room sales $ 11,715,836 18,851,718 60,449,327
Airfare sales 716,121 2,027,067 6,377,871
Other sales -- -- 200,535
------------ ----------- -----------
Total revenues 12,431,957 20,878,785 67,027,733
Cost of sales 8,200,004 14,697,664 48,817,357
------------ ----------- -----------
Gross profit 4,231,953 6,181,121 18,210,376
------------ ----------- -----------
Operating expenses:
General and administrative 3,065,933 5,420,838 12,002,277
Sales and marketing 990,601 4,109,105 23,159,686
Systems development 114,896 896,753 2,365,182
Stock compensation -- -- 1,141,474
------------ ----------- -----------
Total operating expenses 4,171,430 10,426,696 38,668,619
------------ ----------- -----------
Operating income (loss) 60,523 (4,245,575) (20,458,243)
------------ ----------- -----------
Other income (expense):
Interest expense, net (76,602) (183,949) (1,158,741)
Other income (loss) 17,994 2,884 (1,133,940)
Loss on sale of equipment -- -- (200,837)
------------ ----------- -----------
Total other income (expense) (58,608) (181,065) (2,493,518)
------------ ----------- -----------
Net income (loss) $ 1,915 (4,426,640) (22,951,761)
============ =========== ===========
See accompanying notes to combined and consolidated financial statements.
3
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Combined (1997 and 1998) and Consolidated (1999) Statements of Stockholders'
Deficiency (Notes 8 and 9)
Years ended December 31, 1997, 1998 and 1999
Common
stock/
additional Deferred Net
Preferred paid-in stock Stockholder Accumulated stockholders'
stock capital compensation loans deficit deficiency
------------- ------------ ------------ ------------ ------------- --------------
Balance at December 31, 1996 $ -- 40,000 -- -- (965,703) (925,703)
Net income -- -- -- -- 1,915 1,915
Distributions -- -- -- -- (792,406) (792,406)
------------- ------------ ----------- ------------ ------------- --------------
Balance at December 31, 1997 -- 40,000 -- -- (1,756,194) (1,716,194)
Net loss -- -- -- -- (4,426,640) (4,426,640)
Contributions -- 2,628,305 -- (91,786) -- 2,536,519
------------- ------------ ----------- ------------ ------------- --------------
Balance at December 31, 1998 -- 2,668,305 -- (91,786) (6,182,834) (3,606,315)
Net loss -- -- -- -- (22,951,761) (22,951,761)
Contributions (notes 3 and 6) 5,611,604 -- -- 26,520 -- 5,638,124
Deferred stock compensation (note 9) -- 3,184,650 (2,179,134) -- -- 1,005,516
Stock warrants (note 5) -- 844,403 -- -- -- 844,403
Stock awards and warrants (note 6) -- 135,958 -- -- -- 135,958
Reorganization adjustment (note 1) -- 1,876,000 -- -- -- 1,876,000
------------- ------------ ----------- ------------ ------------- --------------
Balance at December 31, 1999 $ 5,611,604 8,709,316 (2,179,134) (65,266) (29,134,595) (17,058,075)
============= ============ =========== ============ ============= ==============
See accompanying notes to combined and consolidated financial statements.
4
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Combined (1997 and 1998) and Consolidated (1999) Statements of Cash Flows
Years ended December 31, 1997, 1998 and 1999
1997 1998 1999
------------- ----------- -------------
Cash flows from operating activities:
Net income (loss) $ 1,915 (4,426,640) (22,951,761)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Loss on sale of equipment -- -- 200,837
Depreciation and amortization 96,836 160,444 656,530
Amortization of debt discount and issuance costs -- -- 550,041
Stock compensation -- -- 1,141,474
Changes in operating assets and liabilities:
Increase in officer receivable -- -- (234,988)
Increase in prepaid expenses and other current assets (54,818) (99,700) (1,631,047)
Increase (decrease) in other assets 198,751 (417,621) (1,690,347)
Increase (decrease) in accounts payable and accrued
expenses 913,683 1,376,452 9,357,243
Increase in deferred revenue 169,581 1,205,770 8,588,774
------------ ----------- -------------
Net cash provided by (used in) operating activities 1,325,948 (2,201,295) (6,013,244)
------------ ----------- -------------
Cash flows from investing activities:
Acquisition of property and equipment (2,036,228) (66,877) (1,412,106)
Sale of investments 32,310 -- --
Proceeds from sale of equipment -- -- 50,950
------------ ----------- -------------
Net cash used in investing activities (2,003,918) (66,877) (1,361,156)
------------ ----------- -------------
Cash flows from financing activities:
(Distributions to) contributions from stockholders, net (792,406) 2,536,519 5,611,604
Repayments of loan from stockholders (9,800) (21,791) (20,164)
Advances from (repayments of) line of credit, net 35,780 (6,436) (56,407)
Proceeds from (repayments of) notes payable 1,470,390 (37,940) 6,998,703
Payment of debt issuance costs -- -- (475,695)
Repayments of capital lease obligations -- -- (247,365)
------------ ----------- -------------
Net cash provided by financing activities 703,964 2,470,352 11,810,676
------------ ----------- -------------
Net increase in cash and cash equivalents 25,994 202,180 4,436,276
Cash and cash equivalents:
Beginning of year 37,500 63,494 265,674
------------ ----------- -------------
End of year $ 63,494 265,674 4,701,950
============ =========== =============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 8,722 85,613 --
============ =========== =============
Supplemental disclosures of noncash financing activities:
Equipment acquired under capital lease $ -- 711,089 187,423
Stockholder loans -- 91,786 --
Deferred compensation -- -- 2,179,134
Stock awards and warrants -- -- 135,958
Original issue discount -- -- 844,403
Intangible assets -- -- 1,876,000
============ =========== =============
See accompanying notes to combined and consolidated financial statements.
5
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation and Description of Business
For 1997 and 1998, the accompanying financial statements combine the
accounts of Las Vegas Reservation Systems, Inc. (LVRS),
Travelscape.com, Inc. (a Nevada corporation) and Professional Travel
Services, Inc. (PTS) (collectively referred to as the Company). The
entities were owned and controlled principally by common ownership and
management and part of a reorganization. Following the reorganization,
the accompanying 1999 consolidated financial statements include the
accounts of Travelscape.com, Inc. (a Delaware corporation) and its
wholly owned subsidiaries. All intercompany transactions have been
eliminated in combination and consolidation.
LVRS, a Nevada corporation, sells hotel room packages in Las Vegas,
Reno, Laughlin and Lake Tahoe to individual and group customers. In
the normal course of business, certain hotel properties require cash
deposits or letters of credit to secure hotel room inventory.
In March 1998, LVRS established its web site www.lvrs.com to sell
rooms over the Internet. The success of the web site prompted
management to begin an effort to replicate its Las Vegas based system
across the United States through Old Travelscape, which was created in
April 1998. Travelscape.com, Inc. (a Nevada corporation) created its
own web site www.travelscape.com in which it offers its services. The
Internet offers the Company advertising and distribution means to
market and sell its rooms to a worldwide audience in a cost-effective
manner.
Effective September 30, 1998, LVRS merged with Fort Apache, Inc. whose
principal business was to hold a building and land in Las Vegas. Fort
Apache, Inc. shared common owners with LVRS; accordingly, the
transaction was recorded as a reorganization of entities under common
control and the historical-cost basis of the net assets of Fort
Apache, Inc. was carried over to LVRS. Prior year financial statements
have been restated to reflect this reorganization.
PTS operates a travel agency in Las Vegas. PTS provides transportation
arrangements primarily for business travel.
On January 21, 1999, the Company completed a reorganization whereby
LVRS, Travelscape.com, Inc. (a Nevada Corporation) (Old Travelscape)
and PTS became wholly owned subsidiaries of Travelscape.com, Inc.
(Travelscape), a Delaware corporation. The transaction was accounted
for principally as a reorganization of entities under common control.
Accordingly, the combined financial statements of LVRS, Old
Travelscape and PTS for the years presented herein are predecessor
operations to the comparable entity which exists after January 21,
1999. At the time of the reorganization, 20% of the common stock of
Old Travelscape was not owned by the common control group. The
exchange of Travelscape shares for this 20% interest was considered a
purchase of a minority interest. The consideration exceeded historical
book value by $1,876,000 which was allocated to goodwill in the
accompanying balance sheet. Goodwill is amortized on a straight-line
basis over 15 years.
6
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
The financial statements as of and for the year ended December 31,
1999 are combined through January 22, 1999 (the date of the
organizational restructuring) and consolidated through and as of
December 31, 1999.
(b) Cash Equivalents
Cash equivalents include highly liquid investments purchased with an
original maturity date of three months or less.
(c) Property, Plant and Equipment
Property and equipment are recorded at cost and depreciated on a
straight-line basis over estimated useful lives ranging from 3-20
years. Expenditures for maintenance and repairs are expensed when
incurred. Property and equipment under capital leases are stated at
the present value of minimum lease payments.
Amortization of property and equipment held under capital leases and
leasehold improvements is computed on a straight-line basis over the
shorter of the lease term or estimated useful lives of the asset.
(d) Revenue Recognition
Revenues from sales of hotel rooms and airline tickets, as well as the
related cost of sales, including the associated taxes, and other
travel products and services for which the Company is the credit card
merchant of record, are recorded at the aggregate retail value upon
booking. Such revenues are deferred until the customer checks in to
the hotel or completes their air travel. Revenues earned from sales of
travel products and services in which the travel provider is the
credit card merchant of record are recognized upon receipt of cash and
are recorded at the commission amount.
(e) Systems Development
Systems development expenses are comprised primarily of compensation
to the Company's information systems and technical staff, payments to
outside contractors for information systems and technical services,
data communications lines, web hosting services and other expenses
associated with operating the Company's web sites.
(f) Use of Estimates
Management of the Company has made estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
7
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
(g) Income Taxes
Prior to January 22, 1999, LVRS and PTS were taxed as S Corporations
under provisions of the Internal Revenue Code. Under these provisions,
LVRS and PTS do not pay income tax on their income. Instead, the
stockholders of LVRS and PTS were liable for income tax on the taxable
income as it effects the stockholders' income tax returns.
Accordingly, a provision for income taxes has not been included in the
accompanying combined financial statements for LVRS and PTS as of and
for the years ended December 31, 1997 and 1998.
Old Travelscape is a Nevada C Corporation which is subject to federal
income tax. Old Travelscape accounted for income taxes under the asset
and liability method whereby deferred income taxes are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years those temporary differences are expected
to be recovered or settled. The effect on deferred taxes of a change
in the tax rates is recognized in income for the period that includes
enactment date.
Effective with the reorganization, LVRS, Old Travelscape and PTS
became wholly owned subsidiaries of Travelscape, and accordingly,
Travelscape recorded net deferred tax assets of $1,200,000 related to
the cumulative differences between the basis of certain assets and
liabilities for financial reporting and income tax purposes.
Travelscape recorded a corresponding 100% valuation allowance due to
the uncertainty regarding Travelscape's ability to utilize its
deferred tax assets to offset future tax liabilities.
(h) Start-Up Costs
Start-up costs are expensed as incurred.
(i) Sales and Marketing Expenses
The Company expenses advertising as incurred. Advertising expense
aggregated $990,601, $4,109,105 and $23,159,686 for the years ended
December 31, 1997, 1998 and 1999, respectively.
(j) Stock Compensation
The Company has adopted Statement of Financial Accounting Standards
Statement, or SFAS, No. 123, Accounting for Stock-Based Compensation,
and has elected to measure compensation cost under Accounting
Principles Board Opinion No. 25 and comply with the pro forma
disclosure requirements of SFAS No. 123, except for options and
warrants granted to nonemployees, which are accounted for under SFAS
No. 123.
8
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
(k) Long-Lived Assets
The Company accounts for long-lived assets at amortized costs. As part
of an ongoing review of the valuation and amortization of long-lived
assets, management assesses the carrying value of such assets if facts
and circumstances suggest that such assets may be impaired. If this
review indicates that the assets will not be recoverable, as
determined by the nondiscounted cash flow analysis over the remaining
amortization period, the carrying value of the assets would be reduced
to its estimated fair market value, based on discounted cash flows.
(2) Property, Plant and Equipment
Property, plant and equipment consist of the following:
1998 1999
------------------- -------------------
Land $ 408,000 408,000
Building and improvements 1,549,756 1,621,539
Computer hardware and software 729,807 1,706,656
Furniture and office equipment 263,817 415,428
------------------- -------------------
2,951,380 4,151,623
Less accumulated depreciation and amortization 303,979 698,366
------------------- -------------------
$ 2,647,401 3,453,257
=================== ===================
Future minimum capital lease payments as of December 31, 1999 are:
Capital Operating
leases leases
------------------- -------------------
Year ending December 31:
2000 $ 309,740 89,566
2001 207,997 88,989
2002 130,704 88,989
2003 108,920 88,989
2004 -- 49,810
------------------- -------------------
Net minimum lease payments 757,361 $ 406,343
===================
Less amounts representing interest 106,214
-------------------
Present value of net minimum capital lease payments 651,147
Less current portion of obligations under capital leases 293,025
-------------------
Obligations under capital leases excluding current
portion $ 358,122
===================
9
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
The Company leases office equipment under operating leases, which expire in
2001. Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$25,510, $24,603 and $25,283, respectively.
(3) Stockholder Transactions
At December 31, 1998, PTS had loans from the stockholders of $46,684 for
start-up costs of the business. This non-interest bearing loan with no
fixed repayment terms was repaid during 1999. As of December 31, 1998, Old
Travelscape had loans of $91,786 to officers of the Company for the
purchase of common stock. As of December 31, 1999, the remaining balance
was $65,266 which is due in 2001. This amount is reported as an increase in
stockholders' deficiency.
(4) Borrowings under Lines of Credit
Borrowings under unsecured lines of credit with various financial
institutions are as follows:
1998 1999
------------------- -------------------
Wells Fargo Bank, interest is 11.25% at December 31, 1999,
expires on June 30, 2000 $ 41,144 34,737
Bank West of Nevada, expired on March 27, 1999 50,000 --
------------------- -------------------
$ 91,144 34,737
=================== ===================
The Bank West of Nevada line of credit was not renewed. The Wells Fargo
Bank credit line has a borrowing capacity of $50,000.
(5) Notes Payable
Notes payable consist of the following:
1998 1999
-------------------- -------------------
First mortgage note payable in monthly installments of $7,681, at an
interest rate of prime plus 1.5% (9.5% as of December 31, 1999),
maturity date of June 30, 2017, secured by real property $ 801,687 782,545
First mortgage note payable in monthly installments of $4,781, at an
interest rate of 6.85%, maturity date of November 11, 2017, secured
by real property 609,645 592,862
Second mortgage note payable in monthly installments of $303, at an
interest rate of prime plus 1.5% (9.5% as of December 31, 1999),
maturity date of June 30, 2007, secured by real property 21,118 19,047
10
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
1998 1999
------------------- -------------------
Senior notes payable, net of discount, at an interest rate of 10%
for initial 12 months and 12% for the subsequent 12 months,
maturity date in February 2001, unsecured $ -- 7,036,700
Less original issue discount -- (492,569)
------------------- -------------------
1,432,450 7,938,585
Less current portion 32,926 37,409
------------------- -------------------
$ 1,399,524 7,901,176
=================== ===================
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1999 are as follows:
2000 $ 37,409
2001 7,077,176
2002 43,801
2003 47,406
2004 51,316
Thereafter 1,174,046
------------
$ 8,431,154
============
During February 1999, Travelscape completed a private placement of 70.367
units of Travelscape senior notes and common stock purchase warrants were
subscribed for a total value of $100,000 per unit or $7,036,700. Each unit
consists of a note with a face value of $100,000 bearing interest at 10%
prior to February 2000 and 12% thereafter and a warrant to purchase 7,500
shares of Travelscape common stock, par value $.01 per share. The notes
have a stated maturity of two years from the date of issuance. The notes'
maturity accelerates and the warrants convert to common stock at a "trigger
event," which is generally defined as either an initial public offering of
the Company's common stock or a sale of the Company. The fair value of the
warrants issued in connection with the private placement of $844,403 has
been allocated to a debt discount and will be amortized over the effective-
interest method. The warrants are exercisable over three years. Warrants
for a total of 527,752 shares of common stock were issued in connection
with the private placement. The fair value of the warrants was determined
pursuant to Black-Scholes model for calculating the fair value of equity
instruments. The discount will be amortized to interest expense over the
term of the senior notes using the effective-interest method. Upon
repayment prior to the due date, any outstanding balance of the discount
will be written off to interest expense. The aforementioned share numbers
have been adjusted to give effect to a 3-for-2 split of Travelscape's
common stock. As a result of the pending sale of the Company (see note 11),
the notes will mature on March 15, 2000 and convert to common stock on this
date.
11
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
(6) Stockholders' Deficiency
(a) Preferred Stock
During December 1999, Travelscape completed a private placement for
$5,611,604 in net proceeds through the sale of 1,272,569 shares of
Series A Convertible Preferred Stock with a par value of $.01 per
share. Holders of preferred stock are entitled to receive dividends
when and if declared by the Board of Directors.
Preferred stock may be converted at the option of the holder at a rate
of one share of preferred stock to one share of common stock.
Holders of preferred stock have a liquidation preference over common
stock holders. Upon liquidation, holders of preferred stock shall be
entitled to receive $4.44 per share.
The preferred stock will automatically convert to common stock upon
the consummation of certain events. As a result of the pending sale of
the Company (see note 11), the preferred stock will be converted to
common on March 15, 2000.
(b) Common Stock
Effective April 24, 1999, Travelscape's Board of Directors approved an
increase in the number of authorized shares from 25,000,000 to
50,000,000 shares. The financial statements reflect this increase. The
number of shares outstanding of Travelscape.com, Inc. common stock
reflects the effect of a 3-for-2 split of common stock completed in
June 1999.
(c) Stock Warrants
The Company issued stock warrants to purchase 475,833 shares of common
stock at exercise prices that range from $4 - $7 per share to third
parties in lieu of services rendered. The fair value of the stock
warrants of $19,508 has been recognized in additional paid-in capital
and stock compensation expense. Of the total stock warrants, 400,000
are subject to certain vesting conditions. As of December 31, 1999,
none of the 400,000 stock warrants had vested. The warrants vest
immediately if there is a certain change in the control of the
Company. As a result of the pending sale of the Company (see note 11),
the warrants will become fully vested on March 15, 2000.
In addition, the Company issued stock awards of 42,500 shares of
common stock for a total fair value of $116,450.
12
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
(7) Income Taxes
The components of the net deferred taxes are as follows:
December 31
--------------------------------------------
1998 1999
------------------- -------------------
Net operating loss carryforwards $ 1,152,615 8,419,059
Deferred revenue (98,644) (137,681)
Other 166,014 240,116
------------------- -------------------
1,219,985 8,521,494
Valuation allowance (1,219,985) (8,521,494)
------------------- -------------------
Deferred tax asset, net of valuation allowance $ -- --
=================== ===================
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon generation of future taxable income. A 100%
valuation allowance has been provided for the net deferred tax assets since
the likelihood of taxable income sufficient enough to realize the entire
balance of deferred tax assets in the future is uncertain.
At December 31, 1999, the Company has approximately $24,500,000 of net
operating loss carryforwards available for federal tax reporting purposes,
which expire in 2014. The ultimate realization of the net operating loss
carryforwards will be subject to certain limitations due to changes in the
Company's ownership and will be dependent upon the Company attaining future
taxable earnings.
If certain substantial changes in the Company's ownership should occur,
there would be an annual limitation on the amount of the tax loss
carryforwards that can be utilized, which could result in such losses
expiring before they are used.
(8) Commitments and Contingencies
(a) Litigation
The Company is involved in legal proceedings from outside parties
involving routine business matters. Management believes that the
ultimate resolution of these matters will not have a material adverse
affect on the Company's financial condition or results of operations.
13
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
(b) Advertising Contracts
The Company has entered into several advertising contracts, including
various Internet web sites, which run through the year 2001. The
agreements provide for monthly and quarterly payments and are
summarized as follows as of December 31, 1999:
Year ending December 31:
2000 $ 22,790,254
2001 152,000
-------------
$ 22,942,254
=============
(c) Letters of Credit
The Company has an agreement with Bank West of Nevada to extend
letters of credit on behalf of the Company to certain hotel properties
to secure payment for the potential purchase of blocks of hotel rooms.
Letters of credit with Bank West of Nevada at December 31, 1999 were
$2,059,000. The letter of credit agreements require the Company to
place 100% of a required hotel deposit in a certificate of deposit
with the bank. If the Company were to default on the payment of a
block of rooms, the hotel would exercise the letter of credit. As of
December 31, 1999, the Company has placed $2,059,000 in a certificate
of deposit under this arrangement. These deposits are restricted and
are included in other assets.
(9) Stock Options
The Financial Accounting Standards Board issued SFAS No. 123 which defines
a fair-value method of accounting for an employee stock option or similar
instrument and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans. However, it allows an
entity to continue to measure the compensation cost for these plans using
the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board Opinion, or APB, No. 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting in APB No. 25
must make pro forma disclosures of net earnings and earnings per share, as
if the fair-value-based method of accounting defined in SFAS No. 123 had
been applied.
14
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
Stock options outstanding are as follows:
Weighted-average
Number of shares exercise price
------------------- -------------------
Balance at December 31, 1997 -- $ --
Granted 1,027,500 1.33
------------------- -------------------
Balance at December 31, 1998 1,027,500 1.33
Granted 3,127,500 3.18
Canceled (185,000) (1.33)
------------------- -------------------
Balance at December 31, 1999 3,970,000 $ 2.79
=================== ===================
Stock options outstanding are as follows:
Outstanding at Weighted- Weighted-
Range of December 31, average average
prices 1999 exercise price contract life
----------------- ----------------- ------------------ ------------------
$ 1.33 - 6.00 3,970,000 $ 2.79 3
================= ================= ================== ==================
Old Travelscape accounted for these options pursuant to APB No. 25. These
options were issued with an option price substantially equal to the fair
value of the common stock on the date of the grant. The options vest over a
three-year period.
As a result of the 1999 option grants, the Company recorded compensation
expense of $1,005,516 for the year ended December 31, 1999 and will
amortize deferred stock compensation expense of $2,179,134 over the future
vesting period of the options, calculated under APB No. 25 for employees
and SFAS No. 123 for nonemployees. The deferred stock compensation is
recorded as a component of net stockholders' deficiency in the accompanying
balance sheet. The total number options exercisable was 1,114,413 at
December 31, 1999.
All outstanding options to purchase common stock prior to January 21, 1999
were assumed by Travelscape and will retain all of the same terms included
in the initial grant.
15
LAS VEGAS RESERVATION SYSTEMS, INC.,
TRAVELSCAPE.COM, INC. (A NEVADA CORPORATION),
PROFESSIONAL TRAVEL SERVICES, INC. AND
TRAVELSCAPE.COM, INC. (A DELAWARE CORPORATION)
Notes to Combined and Consolidated Financial Statements
December 31, 1998 and 1999
Had the Company complied with SFAS No. 123 for financial reporting
purposes, the impact on net loss for the year ended December 31, 1999 would
be to increase the net loss to $23,269,105. The granting of options in 1998
did not give rise to any additional compensation expense as none of the
options were exercisable at December 31, 1998. The pro forma net loss is
based on the following assumptions: risk-free interest rate of 6.5%,
volatility of 20%, dividend yield of 0% and economic life of the option of
four years.
(10) Lease Commitments
The Company is obligated under various capital leases, for certain office
equipment, that expire at various dates through 2003. The gross amount of
office equipment and related accumulated depreciation capitalized and
recorded under capital leases at December 31, 1999 was as follows:
Office equipment $ 248,940
Less accumulated depreciation 93,385
-------------
$ 155,555
=============
(11) Subsequent Event
On January 31, 2000, the Company was acquired by Expedia, Inc. for total
consideration aggregating approximately $100 million. As a result of this
acquisition, Expedia, Inc. will record the assets and liabilities of the
Company at their respective fair values. No adjustments have been made to
the accompanying financial statements for this transaction. As a result of
this acquisition, certain equity and debt instruments will become fully
vested and/or be converted to common stock.
16