Expedia 2005 Annual Report Download - page 81

Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
Ask Jeeves Notes
As a result of the Spin-Off, when holders of IAC's Ask Jeeves Notes convert their notes, they will
receive shares of both IAC and Expedia common stock, Under the terms of the Spin-Off, we are obligated
to issue shares of our common stock to IAC for delivery to the holders of the Ask Jeeves Notes, or
receive cash in equal value, in lieu of issuing such shares, at our option. This obligation represents a
derivative liability in our consolidated balance sheet because it is not indexed solely to shares of our
common stock. We record the fair value of this derivative obligation on our consolidated balance sheets
with any changes in fair value recorded in our consolidated statements of income. The estimated fair value
of this liability fluctuates based on changes in the price of our common stock. As of August 9, 2005, we
estimated that we could be required to issue up to 4.3 million shares of our common stock (or pay cash in
equal value, in lieu of issuing such shares, at our option), with a value of $99.7 million, upon conversion of
these notes.
In 2005, we recorded in other income an unrealized loss of $6.0 million related to the derivative
liability on the outstanding Ask Jeeves Notes, and a realized loss of $0.1 million related to Ask Jeeves
Notes that were converted. In December 2005, certain of these notes were converted for $0.9 million of
cash. Our estimated liability was $104.8 million as of December 31, 2005. In January 2006, certain of
these notes were converted for approximately 2.6 million shares at a value of approximately $68.2 million.
The Ask Jeeves Notes are due June 1, 2008; upon maturity of these notes, our obligation ceases.
Cross-Currency Swaps
We enter into cross-currency swaps to hedge against the change in value of assets denominated in a
currency other than our subsidiary's functional currency.
In November 2003, we entered into a swap with a notional amount of Euro 39.0 million that matures
in October 2013. Under the terms of this swap, we pay Euro at a rate of the three-month EURIBOR plus
0.50% on Euro 39.0 million and we receive 4.90% interest on $46.4 million in U.S. dollars.
In April 2004, we entered into a swap with a notional amount of Euro 38.2 million that matures in
April 2014. Under the terms of this swap, we pay Euro at a rate of the six-month EURIBOR plus 0.90%
on Euro 38.2 million and we receive 5.47% interest on $45.9 million in U.S. dollars.
Upon maturity, these cross-currency swap agreements call for the exchange of notional amounts. We
have designated these derivative contracts as cash flow hedges for accounting purposes. We record foreign
exchange re-measurement gains and losses related to these contracts and assets, which are offsetting, in
each period in other income (expense) in our consolidated statements of income.
Because these derivatives are perfectly effective, we record the net gain and loss in other
comprehensive income and will reclassify the gains and losses into other income or expense when we
extinguish the hedged items. There was no ineffectiveness related to these cash flow hedges for the years
ended December 31, 2005, 2004 and 2003.
In addition, as of December 31, 2005, we had $5.1 million of cash held by counterparties as collateral
for our cross-currency swaps.
Stock Warrants
In connection with prior transactions, IAC assumed a number of stock warrants that were adjusted to
become exercisable into IAC common stock and subsequent to the Spin-Off, also in our common stock.
As of December 31, 2005, there are approximately 43,800 of these stock warrants outstanding with
expiration dates through May 2010. In addition, IAC is potentially obligated to issue an additional 509,500
stock warrants to its vendor upon the vendor meeting certain performance targets. Each stock warrant
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