Expedia 2005 Annual Report Download - page 72

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Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
the Black-Scholes option valuation model and amortize the fair value over the remaining vesting term on a
straight-line basis.
In determining the estimated forfeiture rates, we periodically conduct an assessment of the actual
number of instruments that have been forfeited to date as well as those expected to be forfeited in the
future. We consider many factors when estimating expected forfeitures, including the type of award, the
employee class and historical experience. The estimation of stock awards that will ultimately be forfeited
requires significant judgment and to the extent that actual results or updated estimates differ from our
current estimates, such amounts will be recorded as a cumulative adjustment in the period such estimates
are revised. For additional information about the changes in estimated forfeiture rates, see Note 12, Stock-
Based Awards and Other Equity Instruments.
The following table presents the effect on net income if the fair value based method was applied to
the outstanding and unvested awards for the year ended December 31, 2003. For the years ended
December 31, 2005 and 2004, the stock-based compensation expense included in net income equaled the
stock-based compensation expense determined under the fair value based method for all awards.
December 31, 2003
(In thousands)
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $111,407
Add: Stock-based employee compensation expense included in reported net
income, net of related tax effectsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,563
Deduct: Total stock-based compensation expense determined under fair value
based method for all awards, net of related tax effects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (74,636)
Pro forma net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 92,334
Earnings Per Share
We compute basic earnings per share, in accordance with SFAS No. 128, ""Earnings per Share,''
(""SFAS 128''), by taking net income available to common shareholders divided by the weighted average
number of common and Class B common shares outstanding during the period excluding restricted stock
and stock held in escrow. Diluted earnings per share include the potential dilution that could occur from
stock-based awards and other stock-based commitments using the treasury stock or the as if converted
methods, as applicable. For additional information on how we compute earnings per share, see Note 15,
Earnings Per Share.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents reported
on our consolidated balance sheets approximate fair value as we maintain them with various high-quality
financial institutions or in short-term duration high-quality debt securities. The accounts and notes
receivable are short-term in nature and are generally settled shortly after the sale. The carrying amounts
for the short-term borrowings and all other financial instruments approximate their fair value. We maintain
the carrying amounts of the derivative liabilities created in the Spin-Off at fair value, which is based upon
appropriate valuation methodologies.
Certain Risks and Concentrations
Our business is subject to certain risks and concentrations including dependence on relationships with
travel suppliers, primarily airlines and hotels, dependence on third party technology providers, exposure to
risks associated with online commerce security and credit card fraud. We are highly dependent on our
F-15