Expedia 2005 Annual Report Download - page 52

As we increase our operations in international markets, our exposure to fluctuations in foreign
currency exchange rates increases. The economic impact to us of foreign currency exchange rate
movements is linked to variability in real growth, inflation, interest rates, governmental actions and other
factors. These changes, if material, could cause us to adjust our financing and operating strategies.
As foreign currency exchange rates fluctuate, translation of the income statements of our international
businesses into U.S. dollars affects year-over-year comparability of operating results. Historically, we have
not hedged foreign exchange risks because we generally reinvested cash flows from international operations
locally. We periodically review our strategy for hedging foreign exchange risks. Our goal in managing our
foreign exchange risk is to minimize our potential exposure to the changes that exchange rates might have
on our earnings, cash flows and financial position.
We use cross-currency swaps to hedge against the change in value of an asset denominated in a
currency other than the subsidiary's functional currency. For additional information about our cross-
currency swaps, see Note 10, Derivative Instruments, in the notes to consolidated financial statements.
Equity Price Risk
We do not maintain any investments in equity securities as part of our marketable securities
investment strategy. Our equity price risk relates to fluctuation in our stock price, which affects our
derivative liabilities related to outstanding stock warrants and Ask Jeeves Notes. We base the fair value of
the these derivative instruments on the changes in the market price of our common stock.
In January 2006, certain of these notes were converted for approximately $68.2 million of common
stock, or 2.6 million shares. As notes conversion occur, and reduce the value of the derivative liabilities,
our equity price risk will decrease accordingly. The Ask Jeeves Notes are due June 1, 2008; upon maturity
of these notes, our obligation ceases.
As of March 1, 2006, each $1.00 fluctuation in our common stock will result in approximately
$1.7 million change in the aggregate fair value. An increase in our common stock price will result in a
charge to our consolidated statements of income and visa versa for a decrease in our common stock price.
For additional information about the stock warrants and Ask Jeeves Notes, see Note 10, Derivative
Instruments, in the notes to consolidated financial statements.
Part II. Item 8. Consolidated Financial Statements and Supplementary Data
The Consolidated Financial Statements and schedules listed in the Index to Financial Statements,
Schedules and Exhibits on page F-1 are filed as part of this report.
Part II. Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure
Not applicable.
Part II. Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures.
The Company's management, including the CEO and CFO, does not expect that our disclosure
controls or our internal control over financial reporting will prevent or detect all error and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute
assurance that the control system's objectives will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative to their
costs. The design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures.
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