UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

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EXPEDIA, INC.

(Name of Registrant as Specified in Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

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May 1, 2007

 

Dear Stockholder:

 

You are invited to attend the Annual Meeting of Stockholders of Expedia, Inc., which will be held on Wednesday, June 6, 2007, at 8:00 a.m. local time at 8800 West Sunset Boulevard, West Hollywood, California 90069.

 

At the Annual Meeting, you will be asked (1) to elect ten directors, (2) to approve the Expedia, Inc. 2005 Stock and Annual Incentive Plan and (3) to ratify the appointment of Ernst & Young LLP as Expedia’s independent registered public accounting firm for 2007. The Board of Directors unanimously recommends a vote FOR each of these proposals.

 

Your vote is very important.  Whether or not you plan to attend the Annual Meeting, please take the time to vote by completing and mailing the enclosed proxy card or otherwise submitting a proxy, including by telephone or the internet. You may complete, sign, date and return the accompanying proxy card in the enclosed envelope to make certain your shares will be represented at the meeting. If you attend the Annual Meeting, you may vote in person if you wish, even though you have previously returned your proxy card. You may also submit a proxy for your shares by telephone or the internet by following the instructions on the enclosed proxy card.

 

Sincerely,

 

 

Dara Khosrowshahi

Chief Executive Officer

 

3150 139th Avenue S.E.

Bellevue, WA 98005

EXPEDIA, INC.

3150 139th Avenue S.E.
Bellevue, WA 98005

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

The Annual Meeting of Stockholders of Expedia, Inc., a Delaware corporation, will be held on Wednesday, June 6, 2007, at 8:00 a.m. local time at 8800 West Sunset Boulevard, West Hollywood, California 90069.

 

Items of business at the Annual Meeting will be:

 

1. To elect ten members of the Board of Directors, each to hold office for a one-year term ending on the date of the next annual meeting of stockholders or until such director’s successor shall have been duly elected and qualified;

 

2. To approve the Expedia, Inc. 2005 Stock and Annual Incentive Plan;

 

3. To ratify the appointment of Ernst & Young LLP as Expedia’s independent registered public accounting firm for 2007; and

 

4. To transact such other business as may properly come before the meeting and any adjournments or postponements thereof.

 

Only holders of record of outstanding shares of Expedia stock at the close of business on April 12, 2007 are entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement thereof.

 

Only stockholders and persons holding proxies from stockholders may attend the Annual Meeting. If your shares are registered in your name, you must bring a form of identification to the Annual Meeting. If your shares are held in the name of a broker, trust, bank or other stockholder nominee, you must bring a proxy or letter from that broker, trust, bank or other stockholder nominee that confirms you are the beneficial owner of those shares.

 

By order of the Board of Directors,

 

 

Burke F. Norton
Executive Vice President, General Counsel
and Secretary

 

 

May 1, 2007

 

TABLE OF CONTENTS

 

 

This Proxy Statement is being furnished to holders of common stock, Class B common stock and Series A preferred stock of Expedia, Inc., a Delaware corporation (“Expedia” or the “Company”), in connection with the solicitation of proxies by Expedia’s Board of Directors for use at its 2007 Annual Meeting of Stockholders or any adjournment or postponement thereof (the “Annual Meeting”).

 

Expedia’s principal offices are located at 3150 139th Avenue S.E., Bellevue, Washington 98005. This Proxy Statement and the accompanying proxy card are being first mailed to Expedia stockholders on or about May 11, 2007.

 

The Annual Meeting will be held on Wednesday, June 6, 2007, at 8:00 a.m. local time at 8800 West Sunset Boulevard, West Hollywood, California 90069.

 

Only stockholders and persons holding proxies from stockholders may attend the Annual Meeting. If your shares are registered in your name, you must bring a form of identification to the Annual Meeting. If your shares are held in the name of a broker, trust, bank or other stockholder nominee, otherwise known as holding in “street name,” you must bring a proxy or letter from that broker, trust, bank or other stockholder nominee that confirms you are the beneficial owner of those shares. Cameras and recording devices will not be permitted at the Annual Meeting.

 

General.  The Board of Directors established the close of business on April 12, 2007 as the record date for determining the holders of Expedia stock entitled to notice of and to vote at the Annual Meeting. On the record date, 277,225,979 shares of common stock, 25,599,998 shares of Class B common stock and 846 shares of Series A preferred stock were outstanding and entitled to vote at the Annual Meeting. Expedia stockholders are entitled to one vote for each share of common stock, ten votes for each share of Class B common stock and two votes for each share of Series A preferred stock held as of the record date, voting together as a single voting group, in (i) the election of seven of the ten director nominees, (ii) the approval of the Expedia, Inc. 2005 Stock and Annual Incentive Plan, and (iii) the ratification of Expedia’s independent registered public accounting firm. Expedia stockholders are entitled to one vote for each share of common stock held as of the record date in the election of the three director nominees that the holders of Expedia common stock are entitled to elect as a separate class pursuant to the Company’s certificate of incorporation.

 

As of the record date, Barry Diller, the Chairman and Senior Executive of Expedia, held an irrevocable proxy over all Expedia securities owned by Liberty Media Corporation and its subsidiaries (“Liberty Media”). This irrevocable proxy includes authority to vote on each of the proposals presented for approval at the Annual Meeting. Mr. Diller, through shares that he owns as well as those subject to the Liberty Media proxy, generally controls the vote of approximately 27% of the outstanding shares of common stock and 100% of the outstanding shares of Class B common stock and, consequently, approximately 58% of the combined voting power of the outstanding Expedia capital stock as of the record date. As a result, regardless of the vote of any other Expedia stockholder, Mr. Diller has control over the vote relating to the election of seven of the ten director nominees, approval of the Expedia, Inc. 2005 Stock and Annual Incentive Plan and the ratification of Expedia’s independent registered public accounting firm.

 

Voting of Stock Held in 401(k) Plan.  The trustee of Expedia’s 401(k) plan for employees, Fidelity Management Trust Company, will vote Expedia stock credited to employee accounts in accordance with the voting instructions such employees give to it. The trustee will vote the 401(k) plan stock for which it does not receive voting instructions in the same proportion as the shares for which it receives voting instructions.

 

Transaction of business at the Annual Meeting may occur if a quorum is present. If a quorum is not present, it is expected that the Annual Meeting will be adjourned or postponed in order to permit additional

time for soliciting and obtaining additional proxies or votes, and, at any subsequent reconvening of the Annual Meeting, all proxies will be voted in the same manner as such proxies would have been voted at the original convening of the Annual Meeting, except for any proxies that have been effectively revoked or withdrawn.

 

The presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the total votes entitled to be cast constitutes a quorum. In the election of seven of the ten director nominees, the approval of the Expedia, Inc. 2005 Stock and Annual Incentive Plan and the ratification of the appointment of Expedia’s independent registered public accounting firm, the presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the total votes entitled to be cast constitutes a quorum. In the election of the three directors whom the holders of Expedia common stock are entitled to elect as a separate class, the presence at the Annual Meeting, in person or by proxy, of the holders of a majority of votes of the common stock constitutes a quorum. If a share is represented for any purpose at the meeting, it is deemed to be present for quorum purposes and for all other matters as well. Shares of Expedia stock represented by a properly executed proxy will be treated as present at the Annual Meeting for purposes of determining a quorum, without regard to whether the proxy is marked as casting a vote or abstaining.

 

Abstentions and broker non-votes are counted as present and entitled to vote for purposes of determining a quorum. A broker non-vote occurs when a nominee holding shares for a beneficial owner does not vote the shares on a proposal because the nominee does not have discretionary voting power for a particular item and has not received instructions from the beneficial owner regarding voting.

 

Expedia will bear the cost of the solicitation of proxies from its stockholders. In addition to solicitation by mail, the directors, officers and employees of Expedia may solicit proxies from stockholders by telephone, by letter, by facsimile, in person or otherwise. Following the original mailing of the proxies and other soliciting materials, Expedia will request brokers, trusts, banks or other stockholder nominees to forward copies of the proxy and other soliciting materials to persons for whom they hold shares of Expedia capital stock and to request authority for the exercise of proxies. In such cases, Expedia, upon the request of the brokers, trusts, banks or other stockholder nominees, will reimburse such holders for their reasonable expenses.

 

Expedia has retained MacKenzie Partners, Inc. to distribute proxy solicitation materials to brokers, trusts, banks and other stockholder nominees and to assist in the solicitation of proxies from Expedia stockholders. The fee for such firm’s services is estimated not to exceed $15,000 plus reimbursement for reasonable out-of-pocket costs and expenses.

 

The proxy conferred by the proxy card accompanying this Proxy Statement is solicited on behalf of the Board of Directors for use at the Annual Meeting. Stockholders of record may vote their shares in any of four ways:

 

 

If you submit a proxy by telephone or the internet, you should not return your proxy card by mail.

 

All proxies properly submitted and not revoked will be voted at the Annual Meeting in accordance with the instructions indicated thereon. If no instructions are provided, such proxies will be voted FOR each of the proposals described in this Proxy Statement.

 

If your shares are held in “street name,” follow the directions on the voting instructions card you receive from your broker, trust, bank or other stockholder nominee to submit your proxy.

 

Your vote is important. We encourage you to submit your proxy by using the internet or telephone or by signing and returning the accompanying proxy card, whether or not you plan to attend the Annual Meeting.

 

If your shares are held in “street name,” you may revoke the proxy or change your vote only by following the separate instructions provided by your broker, trust, bank or other stockholder nominee.

 

Registered holders who have given a proxy may revoke it at any time before it is exercised at the Annual Meeting by (i) delivering written notice, bearing a date later than the proxy, stating that the proxy is revoked, (ii) submitting a later-dated proxy relating to the same stock by mail, telephone or the internet prior to the vote at the Annual Meeting, or (iii) attending the Annual Meeting and giving notice of revocation to the inspector of elections or voting in person. Registered holders may send any written notice or request of a new proxy card to Expedia, Inc., c/o The Bank of New York Shareholder Services, P.O. Box 11258, New York, New York 10286, or follow the instructions provided on your proxy card to submit a new proxy by telephone or the internet. You may also request a new proxy card by calling Expedia’s proxy solicitor, MacKenzie Partners, Inc., at 1-800-322-2885.

 

The Board of Directors does not presently intend to bring any business before the Annual Meeting other than the proposals discussed in this Proxy Statement and specified in the Notice of Annual Meeting of Stockholders. The Board has no knowledge of any other matters to be presented at the Annual Meeting other than those described in this Proxy Statement. If any other matters should properly come before the Annual Meeting, it is the intention of the persons designated in the proxy to vote on them according to their best judgment.

 

In order to vote in person at the Annual Meeting, stockholders of record must attend the meeting and cast their votes in accordance with the voting procedures established for the Annual Meeting. Attendance at the Annual Meeting without voting or revoking a previous proxy in accordance with the voting procedures will not in and of itself revoke a proxy. If your shares are held in “street name,” and you want to attend the Annual Meeting, you must bring to the Annual Meeting a letter from your broker, trust, bank or other stockholder nominee identifying you as the beneficial owner of the shares and authorizing you to vote.

 

 

At the Annual Meeting, a board of ten directors will be elected to hold office until the next annual meeting of stockholders or until their successors shall have been duly elected and qualified. The Company’s certificate of incorporation provides that the holders of the Company’s common stock, acting as a single class, are entitled to elect a number of directors equal to twenty-five percent of the total number of directors, rounded up to the next whole number of directors, currently three directors. The Board of Directors has designated Messrs. Battle, Goldhill and Kern as nominees for the positions on the Board to be elected by the holders of Expedia common stock voting as a separate class. Pursuant to a Governance Agreement among Expedia, Liberty Media and Mr. Diller (the “Governance Agreement”), Liberty Media has the right to nominate up to two individuals for election to the Board and has certain other rights regarding committee participation, so long as certain stock ownership requirements applicable to Liberty Media are satisfied. Liberty Media has designated Dr. Malone and Mr. Fitzgerald as its nominees to the Board. Although management does not anticipate that any of the nominees named below will be unable or unwilling to stand for election, in the event of such an occurrence, proxies may be voted for a substitute nominee designated by the Board. Background information about each of the Board’s nominees for election is set forth below.

 

The name and certain information regarding each nominee, as of March 31, 2007, are set forth below. There are no family relationships among directors or executive officers of Expedia.

 

 

Barry Diller has been the Chairman of the Board and Senior Executive of Expedia since completion of the Company’s spin-off from IAC/InterActiveCorp (“IAC”) on August 9, 2005 (the “Spin-Off”). Mr. Diller has been the Chairman of the Board and Chief Executive Officer of IAC (and its predecessors) since August 1995. He was Chairman of the Board and Chief Executive Officer of QVC, Inc. from December 1992 through December 1994. Mr. Diller served as the Chairman of the Board and Chief Executive Officer of Fox, Inc. from 1984 to 1992. Prior to joining Fox, Inc., Mr. Diller served for ten years as Chairman of the Board and Chief Executive Officer of Paramount Pictures Corporation. Mr. Diller is currently a member of the Boards of Directors of The Washington Post Company and of The Coca-Cola Company. He also serves on the Board of Conservation International and of the Educational Broadcasting Corporation. In addition, Mr. Diller is a member of the Board of Councilors for the University of Southern California’s School of Cinema — Television, the New York University Board of Trustees and the Executive Board for the Medical Sciences of the University of California, Los Angeles.

 

Dara Khosrowshahi has been a director and the Chief Executive Officer of Expedia since completion of the Spin-Off. Mr. Khosrowshahi served as the Chief Executive Officer of IAC Travel, a division of IAC, from January 2005 to the Spin-Off date. Prior to his tenure as Chief Executive Officer of IAC Travel, Mr. Khosrowshahi served as Executive Vice President and Chief Financial Officer of IAC from January 2002 to January 2005. Mr. Khosrowshahi served as IAC’s Executive Vice President, Operations and Strategic Planning, from July 2000 to January 2002 and as President, USA Networks Interactive, a division of IAC,

from 1999 to 2000. Mr. Khosrowshahi joined IAC in 1998 as Vice President of Strategic Planning, and was promoted to Senior Vice President in 1999. Mr. Khosrowshahi worked at Allen & Company LLC from 1991 to 1998, where he served as Vice President from 1995 to 1998.

 

Victor A. Kaufman has been a director and the Vice Chairman of Expedia since completion of the Spin-Off. Mr. Kaufman has been a director of IAC (and its predecessors) since 1996, and has served as the Vice Chairman of IAC since October 1999. Mr. Kaufman served in the Office of the Chairman in 1997 and as Chief Financial Officer of IAC from 1997 to 1999. Prior to his tenure with IAC, Mr. Kaufman served as the Chairman and Chief Executive Officer of Savoy Pictures Entertainment, Inc. beginning in 1992. Mr. Kaufman was the founding Chairman and Chief Executive Officer of Tri-Star Pictures, Inc. and served in those capacities from 1983 until 1987, at which time he became President and Chief Executive Officer of Tri-Star’s successor company, Columbia Pictures Entertainment, Inc. He resigned from those positions in 1989 following the acquisition of Columbia by Sony USA, Inc. Mr. Kaufman joined Columbia in 1974 and served in a variety of senior positions at Columbia and its affiliates prior to the founding of Tri-Star.

 

A. George “Skip” Battle has been a director of Expedia since completion of the Spin-Off. Mr. Battle previously served as the Executive Chairman of Ask Jeeves, Inc. from January 2004 through July 2005, and he served as the Chief Executive Officer of Ask Jeeves from December 2000 until January 2004. Mr. Battle was a business consultant and investor and served as a member of the boards of directors of several technology companies from 1995 to 2000. Prior thereto, Mr. Battle served with Andersen Consulting in various roles, including Worldwide Managing Partner, Market Development, until his retirement from Andersen Consulting in 1995. Mr. Battle is currently Chairman of the Board of Fair Isaac Corporation, a position he has held since 2002. He is also a director of Masters Select Equity Fund, Masters Select International Fund, Masters Select Value Fund and Masters Select Smaller Company Fund (all registered investment companies), Advent Software, Inc., Netflix, Inc. and two non-profit organizations. Mr. Battle also served as a director of PeopleSoft, Inc. in 2004, until its acquisition by Oracle Corp., and of Barra, Inc. Mr. Battle holds a B.A. in economics from Dartmouth College and an M.B.A. from the Stanford Graduate School of Business.

 

Simon J. Breakwell has been a director of Expedia since May 2006. Mr. Breakwell served as President of the European Travel division of Expedia, Inc. from 2001 until his resignation in May 2006. Prior to that Mr. Breakwell served as Expedia’s Vice President, International from 2000 to 2001 and Senior Vice President of Sales and Marketing from 1997 to 2000. From 1997 until 1999 Mr. Breakwell served as a group business manager at Microsoft Corporation. Prior to joining Microsoft, Mr. Breakwell worked at British Airways, holding a variety of sales positions from 1987 to 1993, as well as various senior sales management positions from 1993 to 1997. Mr. Breakwell was educated in the United Kingdom and holds a B.A. in politics from Portsmouth Polytechnic and an M.B.A. degree from Lancaster University.

 

Jonathan L. Dolgen has been a director of Expedia since completion of the Spin-Off. Mr. Dolgen is a private investor and served as a Senior Advisor to Viacom, Inc. (“Old Viacom”) from July 2004 until December 2005 when Old Viacom separated into two new companies, including Viacom, Inc. (“New Viacom”), and since then he has served as a Senior Advisor to New Viacom. Since October 2006, Mr. Dolgen has served as senior consultant for ArtistDirect, Inc. Since September 2004, Mr. Dolgen has been a principal of Wood River Ventures, LLC (“Wood River”), a private start-up entity that seeks investment and other opportunities primarily in the media sector. Since April 2005, Mr. Dolgen through Wood River, has had an arrangement with Madison Dearborn Partners, LLC to seek investment opportunities primarily in the media sector. Mr. Dolgen served as the Chairman and Chief Executive Officer of the Viacom Entertainment Group, a division of Old Viacom, from 1994 to July 2004. Mr. Dolgen began his career in the entertainment industry in 1976, and prior to joining the Viacom Entertainment Group, served in various executive positions at Columbia Pictures Industries, Inc., Twentieth Century Fox and Fox, Inc. and Sony Pictures Entertainment. Mr. Dolgen is also a Director of Charter Communications, Inc. Mr. Dolgen holds a B.S. from Cornell University and a J.D. from New York University.

 

William R. Fitzgerald has been a director of Expedia since March 2006. He has served as a Senior Vice President of Liberty Media since 2000. In addition, he has served as Chairman of Ascent Media Group, a wholly owned subsidiary of Liberty Media since 2000. Prior to joining Liberty Media, Mr. Fitzgerald served

as Executive Vice President and Chief Operating Officer, Operations Administration for AT&T Broadband (formerly known as Tele-Communications, Inc.) (“TCI”) from 1999 to 2000 and was Executive Vice President and Chief Operating Officer of TCI Communications, Inc. from 1998 to 1999. Mr. Fitzgerald also serves on the board of directors of On Command Corporation. Mr. Fitzgerald received his undergraduate degree from Indiana University Kelley School of Business and a master’s degree from the Kellogg School of Business at Northwestern University. Mr. Fitzgerald was nominated as a director by Liberty Media, which currently has the right to nominate two individuals for election to Expedia’s Board of Directors pursuant to the Governance Agreement.

 

David Goldhill has been a director of Expedia since completion of the Spin-Off and is also a director of eLong, Inc., a majority-owned subsidiary of Expedia. Mr. Goldhill is a Senior Advisor to Liberty Associated Partners, LP, a private equity fund, and Current Communications Group LLC., a provider of broadband over power line technology. From 2000 to 2006 he was the Chairman of Independent Network Television Holdings Ltd., the owner of the TV3 Russia broadcast network, having served as its Chief Executive Officer from 1996 to 2000. Mr. Goldhill was President and Chief Operating Officer of Universal Television, a division of Universal Studios, from 2002 through 2004. Mr. Goldhill was Executive Vice President and Chief Financial Officer of Act III Communications from 1993 to 1998. Mr. Goldhill began his career as an investment banker with Morgan Stanley and Lehman Brothers. Mr. Goldhill holds a B.A. from Harvard University and an M.A. in history from New York University.

 

Peter M. Kern has been a director of Expedia since completion of the Spin-Off. Mr. Kern is a Managing Director of InterMedia Partners, a private equity firm. Prior to joining InterMedia, Mr. Kern was Senior Managing Director and Principal of Alpine Capital LLC. Mr. Kern joined Alpine when he merged his own firm, Gemini Associates, Inc., with Alpine in 2001. Mr. Kern founded Gemini Associates in 1996 and served as its President from its inception through its acquisition. Prior to founding Gemini Associates, Mr. Kern was at the Home Shopping Network and Whittle Communications. Mr. Kern holds a B.S. from the Wharton School at the University of Pennsylvania.

 

John C. Malone has been a director of Expedia since completion of the Spin-Off. Dr. Malone has served as the Chairman of the Board of Liberty Media since 1990, and he served as Liberty Media’s Chief Executive Officer from August 2004 through February 2006. Dr. Malone also served as Chairman of the Board of TCI from 1996 to 1999 and as Chief Executive Officer of TCI from 1994 to 1997. Dr. Malone also serves as Chairman of the Board of Directors of Liberty Global, Inc., as Chairman of the Board of Directors and Chief Executive Officer of Discovery Holding Company and as a director of IAC and The Bank of New York. Dr. Malone was nominated as a director by Liberty Media, which currently has the right to nominate two individuals for election to Expedia’s Board of Directors pursuant to the Governance Agreement.

 

Expedia is subject to The Nasdaq Stock Market Marketplace Rules (the “Marketplace Rules”). The Marketplace Rules exempt “controlled companies,” or companies of which more than 50% of the voting power is held by an individual, a group or another company, from certain requirements.

 

Pursuant to a Stockholders Agreement, dated as of August 9, 2005 by and between Liberty Media and Mr. Diller (the “Stockholders Agreement”), Mr. Diller, through shares owned by him as well as those beneficially owned by Liberty Media as of March 31, 2007, generally controls the vote of approximately 27% of the outstanding common stock and 100% of the outstanding Class B common stock, and consequently, approximately 58% of the combined voting power of the outstanding Expedia capital stock. Mr. Diller, Liberty Media and certain of their affiliates have filed a Statement of Beneficial Ownership on Schedule 13D (and related amendments) with respect to their Expedia holdings and related voting arrangements with the Securities and Exchange Commission (“SEC”). On this basis, Expedia is relying on the exemption for controlled companies from certain Nasdaq requirements, including, among others, the requirement that a majority of the Board be comprised of independent directors, the requirement that the Compensation Committee be comprised solely of independent directors and certain requirements relating to the nomination of directors.

 

The Board of Directors has determined that each of Messrs. Battle, Dolgen, Goldhill and Kern is an “independent director” as defined by the Marketplace Rules. In making its independence determinations, the Board considered the applicable legal standards and any relevant transactions, relationships or arrangements, including those between directors and Liberty Media.

 

The Board of Directors met six times and acted by written consent once in 2006. During such period, all of the incumbent directors attended at least 75% of the meetings of the Board and the Board committees on which they served. Directors are not required to attend annual meetings of Expedia stockholders. Seven members of the Board attended the 2006 Annual Meeting of Stockholders.

 

The Board of Directors has the following standing committees: the Audit Committee, the Compensation Committee, the Section 16 Committee and the Executive Committee.

 

Audit Committee.  The Audit Committee currently consists of Messrs. Battle, Goldhill and Kern. Each Audit Committee member satisfies the independence requirements under the current standards imposed by the rules of the SEC and the Marketplace Rules. The Board of Directors has determined that each Audit Committee member is an “audit committee financial expert,” as such term is defined in the regulations promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

The Audit Committee functions pursuant to a written charter adopted by the Board of Directors, pursuant to which the Audit Committee is granted the responsibilities and authority necessary to comply with Rule 10A-3 of the Exchange Act. The full text of the Audit Committee charter is available in the Investor Information section of the Company’s corporate website at www.expediainc.com/ir. The Audit Committee is appointed by the Board to assist the Board with a variety of matters, including monitoring: (i) the integrity of the Company’s financial reporting process, (ii) the independent registered public accounting firm’s qualifications and independence, (iii) the performance of the Company’s internal audit function and the independent registered public accounting firm and (iv) the Company’s compliance with legal and regulatory requirements.

 

Mr. Battle is the Chairman of the Audit Committee. In 2006, the Audit Committee met nine times and acted by written consent once. The formal report of the Audit Committee with respect to the year ended December 31, 2006, is set forth under the heading “Audit Committee Report.”

 

Compensation Committee.  The Compensation Committee consists of Messrs. Dolgen, Fitzgerald and Kern. With the exception of Mr. Fitzgerald, each member is an “independent director” as defined by the Marketplace Rules. The Compensation Committee is responsible for administering and overseeing matters pertaining to compensation, including salary matters, incentive/bonus plans and stock compensation plans, except that the Section 16 Committee (see below) exercises such powers with respect to matters governed by Rule 16b-3 under the Exchange Act. The Compensation Committee does not act pursuant to a written charter. No member of the Compensation Committee is an employee of Expedia. Mr. Dolgen is the Chairman of the Compensation Committee. In 2006, the Compensation Committee met seven times and acted by written consent once. A description of the Company’s processes and procedures for the consideration and determination of executive compensation is included in the section below titled “Compensation Discussion and Analysis.”

 

Section 16 Committee.  The Section 16 Committee consists of Messrs. Dolgen and Kern. Each member is an “independent director” as defined by the Marketplace Rules and satisfies the definition of “non-employee director” for purposes of Section 16 of the Exchange Act. The Section 16 Committee is authorized to exercise all powers of the Board of Directors with respect to matters governed by Rule 16b-3 under the Exchange Act, including approving grants of equity awards to Expedia’s executive officers. Mr. Dolgen is the Chairman of the Section 16 Committee. The Section 16 Committee met seven times and acted by written consent once in 2006.

 

Executive Committee.  The Executive Committee consists of Messrs. Diller, Kaufman and Khosrowshahi. The Executive Committee has all the power and authority of the Board of Directors, except those powers specifically reserved to the Board by Delaware law. Mr. Diller is the Chairman of the Executive Committee. In 2006, the Executive Committee met twice and acted by written consent nine times.

 

Other Committees.  In addition to the foregoing committees, the Board of Directors may from time to time establish other committees of the Board consisting of one or more of its directors.

 

Given the ownership structure of the Company and its status as a “controlled company,” the Board of Directors does not have a nominating committee or other committee performing similar functions or any formal policy on director nominations. Pursuant to the Governance Agreement, Liberty Media, an affiliate of Expedia, has the right to nominate two directors for election to the Board so long as certain stock ownership requirements are satisfied. The Board does not have specific requirements for eligibility to serve as a director of Expedia. However, in evaluating candidates, regardless of how recommended, the Board considers whether the professional and personal ethics and values of the candidate are consistent with those of Expedia, whether the candidate’s experience and expertise would be beneficial to the Board in rendering service to Expedia, whether the candidate is willing and able to devote the necessary time and energy to the work of the Board and whether the candidate is prepared and qualified to represent the best interests of Expedia’s stockholders. Given the controlled status of Expedia, the Board believes the process described above is appropriate. As of January 1, 2006, Dr. Malone and Gregory B. Maffei had been nominated by Liberty Media and appointed by the Board. Mr. Maffei resigned from the Board effective February 27, 2006 and Liberty Media nominated Mr. Fitzgerald, who was appointed to the Board, effective March 7, 2006. Liberty Media has nominated Dr. Malone and Mr. Fitzgerald as nominees for 2007. The other nominees to the Board were recommended by the Chairman, upon consultation with other members of the Board, and then were considered and recommended by the entire Board.

 

The Board of Directors does not have a formal policy regarding the consideration of director candidates recommended by stockholders. However, the Board would consider such recommendations if made in the future. Stockholders who wish to make such a recommendation should send the recommendation to Expedia, Inc., 3150 139th Avenue S.E., Bellevue, Washington 98005, Attention: Corporate Secretary. The envelope must contain a clear notation that the enclosed letter is a “Director Nominee Recommendation.” The letter must identify the author as a stockholder, provide a brief summary of the candidate’s qualifications and history and be accompanied by evidence of the sender’s stock ownership, as well as consent by the candidate to serve as a director if elected. Any director candidate recommendations will be reviewed by the Corporate Secretary and, if deemed appropriate, forwarded to the Chairman for further review. If the Chairman believes that the candidate fits the profile of a director nominee as described above, the recommendation will be shared with the entire Board.

 

Stockholders who wish to communicate with the Board of Directors or a particular director may send such communication to Expedia, Inc., 3150 139th Avenue S.E., Bellevue, Washington 98005, Attention: Corporate Secretary. The mailing envelope must contain a clear notation indicating that the enclosed letter is a “Stockholder-Board Communication” or “Stockholder-Director Communication.” All such letters must identify the author as a stockholder, provide evidence of the sender’s stock ownership and clearly state whether the intended recipients are all members of the Board or just certain specified directors. The Corporate Secretary will then review such correspondence and forward it to the Board, or to the specified directors, if appropriate. Communications that are primarily commercial in nature, that are not relevant to stockholders or other interested constituents or that relate to improper or irrelevant topics will generally not be forwarded to the Board or to specified directors.

 

The Board of Directors sets non-employee director compensation. Expedia employees do not receive compensation for services as directors, and Liberty Media nominees have historically agreed that they would

not receive compensation for their Expedia Board service, including for 2006. During 2006, each non-employee director of Expedia was entitled to receive the following compensation:

 

 

On March 6, 2007, the Board of Directors approved certain changes to the compensation to be paid to non-employee directors, including eliminating meeting fees. Effective as of January 1, 2007, non-employee directors of Expedia are entitled to receive the following compensation:

 

 

Non-Employee Director Deferred Compensation Plan

 

Under Expedia’s Non-Employee Director Deferred Compensation Plan, non-employee directors may defer all or a portion of their annual retainer and all meeting fees. Eligible directors who defer their directors’ fees may elect to have such deferred fees (i) applied to the purchase of share units, representing the number of shares of Expedia common stock that could have been purchased on the relevant date, or (ii) credited to a cash fund. If any dividends are paid on Expedia common stock, dividend equivalents will be credited on the share units. The cash fund will be credited with deemed interest at an annual rate equal to the weighted-average prime or base lending rate of The Chase Manhattan Bank (or successor thereto). Upon termination of service as a director of the Company, a director will receive (1) with respect to share units, such number of shares of Expedia common stock as the share units represent and (2) with respect to the cash fund, a cash payment. Payments upon termination will be made in either one lump sum or up to five installments, as elected by the eligible director at the time of the deferral election.

 

2006 Non-Employee Director Compensation

 

As employees of the Company, Messrs. Diller, Kaufman and Khosrowshahi did not receive compensation for service as directors. Mr. Maffei, until his resignation from the Board of Directors on February 27, 2006, and Dr. Malone and Mr. Fitzgerald, who were each nominated by Liberty Media, did not receive compensation for their Expedia Board service. The following table shows the 2006 compensation information for the remaining directors of the Company:

 

 

 

 

The Board of Directors currently has a Compensation Committee, consisting of Messrs. Dolgen, Fitzgerald and Kern, and a Section 16 Committee, consisting of Messrs. Dolgen and Kern. None of Messrs. Dolgen, Fitzgerald or Kern was an executive officer of an entity for which an executive officer of Expedia served as a member of the compensation committee or as a director during the one-year period ended December 31, 2006.

 

At the Annual Meeting, stockholders will be asked to elect ten members of the Board of Directors, each to hold office for a one-year term ending on the date of the next annual meeting of stockholders or until each such director’s successor shall have been duly elected and qualified.

 

Election of each of Barry Diller, Dara Khosrowshahi, Victor A. Kaufman, Simon J. Breakwell, Jonathan L. Dolgen, William R. Fitzgerald and John C. Malone as Expedia directors requires the affirmative vote of a plurality of the total number of votes cast by the holders of shares of Expedia capital stock, present in person or represented by proxy, voting together as a single class.

 

Election of each of A. George “Skip” Battle, David Goldhill and Peter M. Kern as Expedia common stock directors requires the affirmative vote of a plurality of the total number of votes cast by the holders of shares of Expedia common stock, present in person or represented by proxy, voting together as a separate class.

 

For the election of the directors, abstentions and broker non-votes will have no effect because approval by a certain percentage of voting stock present or outstanding is not required.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES FOR DIRECTOR NAMED ABOVE.

 

The Expedia, Inc. 2005 Stock and Annual Incentive Plan (the “2005 Incentive Plan”) was adopted by the Board of Directors and approved by Expedia’s then sole shareholder, IAC, on August 8, 2005, prior to the Spin-Off.

 

Pursuant to Section 162(m) of the Internal Revenue Code, in order for Expedia to be able to deduct compensation in excess of $1 million paid in any year to our Chief Executive Officer and the other four most highly compensated executive officers (within the meaning of Section 162(m)), such compensation must qualify as “performance-based.” One of the requirements of “performance-based” compensation for purposes of Section 162(m) is that the material terms of the performance goals for the compensation be approved by our public stockholders by a date that is no later than the date of the Annual Meeting. To preserve the tax status of performance-based compensation under the 2005 Incentive Plan, and thereby to allow the Company to continue to fully deduct the compensation expense related to such compensation, we are now asking the stockholders to approve the material terms of the performance goals in the 2005 Incentive Plan. We are not amending or altering the 2005 Incentive Plan.

 

The material terms of the performance goals for awards that may be granted under the 2005 Incentive Plan are described below. This summary is qualified in its entirety by reference to the full text of the 2005 Incentive Plan, a copy of which is attached as Appendix A to this proxy statement and incorporated into this proxy statement by reference. Please refer to Appendix A for more information.

 

Purpose

 

The purpose of the 2005 Incentive Plan is to give the Company a competitive advantage in attracting, retaining and motivating officers, employees, directors and consultants and to provide the Company and its subsidiaries and affiliates with a stock and incentive plan granting awards to provide incentives directly linked to stockholder value.

 

Administration

 

The 2005 Incentive Plan is administered by the Compensation Committee or the Section 16 Committee or such other committees of the Board of Directors as the Board may from time to time designate (the “Committee”). Among other things, the Committee has the authority to select individuals to whom awards may be granted, to determine the type of award as well as the number of shares of Expedia common stock to be covered by each award, and to determine the terms and conditions of any such awards.

 

Eligibility

 

Awards may be granted under the 2005 Incentive Plan to officers, employees, directors and consultants of Expedia and Expedia’s subsidiaries and affiliates, and to assume and govern other awards pursuant to the adjustment of awards granted under certain IAC incentive plans. As of March 31, 2007, approximately 5,000 individuals were eligible to participate in the 2005 Incentive Plan.

 

Shares Subject to the Plan

 

The 2005 Incentive Plan authorizes the issuance of up to 12,000,000 shares of Expedia common stock pursuant to new awards under the plan, plus up to 50,002,461 shares pursuant to the assumption of adjusted awards outstanding following the Spin-Off. No single participant may be granted awards covering in excess of 8,000,000 shares of Expedia common stock over the life of the 2005 Incentive Plan, except that this limitation does not apply to adjusted awards.

 

The shares of Expedia common stock subject to grant under the 2005 Incentive Plan are to be made available from authorized but unissued shares or from treasury shares, as determined from time to time by the Board of Directors. Other than adjusted awards, to the extent that any award is forfeited, or any option or stock appreciation right terminates, expires or lapses without being exercised, or any award is settled for cash, the shares of Expedia common stock subject to such awards not delivered as a result thereof will again be available for awards under the 2005 Incentive Plan. If the exercise price of any option and/or the tax withholding obligations relating to any award are satisfied by delivering shares of Expedia common stock (by either actual delivery or by attestation), only the number of shares of Expedia common stock issued net of the shares of Expedia common stock delivered or attested to will be deemed delivered for purposes of the limits in the plan. To the extent any shares of Expedia common stock subject to an award are withheld to satisfy the exercise price (in the case of an option) and/or the tax withholding obligations relating to such award, such shares of Expedia common stock are not generally be deemed to have been delivered for purposes of the limits set forth in the plan.

 

In the case of certain events affecting the capital structure of the Company, including stock dividends and stock splits, and certain extraordinary corporate transactions, the Committee or the Board of Directors can make such substitutions or adjustments as it deems appropriate and equitable to (1) the aggregate number and kind of shares or other securities reserved for issuance and delivery under the plan, (2) the various maximum limitations set forth in the plan, (3) the number and kind of shares or other securities subject to outstanding awards, and (4) the exercise price of outstanding options and stock appreciation rights.

 

As indicated above, several types of stock grants can be made under the 2005 Incentive Plan. A summary of these grants is set forth below. In addition, Expedia options and Expedia restricted stock units that converted from IAC options and IAC restricted stock units in connection with the Spin-Off are governed by the 2005 Incentive Plan to the extent that the terms and conditions in the 2005 Incentive Plan are not inconsistent with the terms and conditions that were applicable to such awards immediately prior to the Spin-Off.

 

Stock Options and Stock Appreciation Rights

 

Stock options granted under the 2005 Incentive Plan can either be incentive stock options or nonqualified stock options. Stock appreciation rights granted under the 2005 Incentive Plan can be granted either alone or in tandem with a stock option. The exercise price of options and stock appreciation rights cannot be less than 100% of the fair market value of the stock underlying the options or stock appreciation rights on the date of grant. Stock options and stock appreciation rights cannot be repriced without stockholder approval. Optionees may pay the exercise price in cash or, if approved by the Committee, in Expedia common stock (valued at its fair market value on the date of exercise) or a combination thereof, or by “cashless exercise” through a broker or by withholding shares otherwise receivable on exercise. The term of options and stock appreciation rights are as determined by the Committee, but an Incentive Stock Option (“ISO”) may not have a term longer than ten years from the date of grant. The Committee determines the vesting and exercise schedule of options and stock appreciation rights, which the Committee may waive or accelerate at any time, and the extent to which they will be exercisable after the award holder’s employment terminates. Generally, unvested options and stock appreciation rights terminate upon the termination of employment, and vested options and stock appreciation rights will remain exercisable for one year after the award holder’s death, disability or retirement, and 90 days after the award holder’s termination for any other reason. Vested options and stock appreciation rights also terminate upon the optionee’s termination for cause (as defined in the 2005 Incentive Plan and described under Potential Payments Upon Termination or Change in Control). Stock options and stock appreciation rights are transferable only by will or by the laws of descent and distribution, or pursuant to a qualified domestic relations order or in the case of nonqualified stock options or stock appreciation rights, as otherwise expressly permitted by the Committee including, if so permitted, pursuant to a transfer to the participant’s family members or to a charitable organization, whether directly or indirectly or by means of a trust or partnership or otherwise.

 

Restricted Stock

 

Restricted stock may be granted with such restriction periods as the Committee may designate. The Committee may provide at the time of grant that the vesting of restricted stock will be contingent upon the achievement of applicable performance goals and/or continued service. In the case of performance-based awards that are intended to qualify under Section 162(m), such goals will be based on the attainment of one or any combination of the following: specified levels of earnings per share from continuing operations; net profit after tax; earnings before interest, taxes, depreciation and amortization; earnings before interest, taxes and amortization; gross profit; cash generation; unit volume; market share; sales; asset quality; earnings per share; operating income; revenues; return on assets; return on operating assets; return on equity; profits; total shareholder return (measured in terms of stock price appreciation and/or dividend growth); cost saving levels; marketing-spending efficiency; core non-interest income; change in working capital; return on capital; and/or stock price, with respect to Expedia or any subsidiary, division or department of Expedia. Such performance goals also may be based upon the attaining of specified levels of Expedia, subsidiary, affiliate or divisional performance under one or more of the measures described above relative to the performance of other entities, divisions or subsidiaries. Performance goals based on the foregoing factors are hereinafter referred to as “Performance Goals.” The terms and conditions of restricted stock awards (including any applicable Performance Goals) need not be the same with respect to each participant. During the restriction period, the Committee may require that the stock certificates evidencing restricted shares be held by Expedia. Restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered, and it is forfeited upon termination of employment, unless otherwise provided by the Committee. Other than such restrictions on transfer and any other restrictions the Committee may impose, the participant will have all the rights of a stockholder with respect to the restricted stock award.

 

Restricted Stock Units

 

The Committee may grant restricted stock units payable in cash or shares of Expedia common stock, conditioned upon continued service and/or the attainment of Performance Goals determined by the Committee. The terms and conditions of restricted stock unit awards (including any applicable Performance Goals) need not be the same with respect to each participant.

 

Other Stock-Based Awards

 

Other awards of Expedia common stock and other awards that are valued in whole or in part by reference to, or are otherwise based upon, Expedia common stock, including (without limitation), unrestricted stock, dividend equivalents and convertible debentures, may be granted under the 2005 Incentive Plan.

 

Bonus Awards

 

Bonus awards granted to eligible employees of Expedia and its subsidiaries and affiliates under the 2005 Incentive Plan shall be based upon the attainment of the Performance Goals established by the Committee for the plan year or such shorter performance period as may be established by the Committee. Bonus amounts earned by any individual shall be limited to $10 million for any plan year, pro rated (if so determined by the Committee) for any shorter performance period. Bonus amounts will be paid in cash or, in the discretion of the Committee, in Expedia common stock, as soon as practicable following the end of the plan year. The Committee may reduce or eliminate a participant’s bonus award in any year notwithstanding the achievement of Performance Goals.

 

Change in Control

 

Unless otherwise provided by the Committee in an award agreement (and with respect to adjusted awards only if provided in an applicable award agreement or in the IAC plan under which the award was granted), in the event of a change in control of Expedia, in the case of officers of Expedia, Inc., the Delaware corporation

(and not its subsidiaries), who are Senior Vice Presidents and above as of the time of the change in control and, in the case of other employees of Expedia if provided by the Committee in an award agreement

 

 

In addition, in the event that, during the two-year period following a change in control, a participant’s employment is terminated by Expedia other than for cause or disability or a participant resigns for good reason,

 

 

Unless otherwise provided in an award agreement, the terms “change in control,” “cause” and “good reason” are as defined in the 2005 Incentive Plan and described in the section entitled “Potential Payments Upon Termination or Change in Control.”

 

Amendment and Discontinuance

 

The 2005 Incentive Plan may be amended, altered or discontinued by the Board of Directors, but no amendment, alteration or discontinuance may impair the rights of an optionee under an option or a recipient of a stock appreciation right, restricted stock award, restricted stock unit award or bonus award previously granted without the optionee’s or recipient’s consent. Amendments to the 2005 Incentive Plan will require stockholder approval to the extent such approval is required by law or agreement. The 2005 Incentive Plan will terminate on August 8, 2015.

 

Other Information

 

A new plan benefits table, as described in the federal proxy rules, is not provided because all awards made under the 2005 Incentive Plan are discretionary. The closing price of Expedia common stock, as reported on The Nasdaq Stock Market on last business day of the quarter ended March 31, 2007 (i.e., March 30, 2007) was $23.18 per share.

 

The following is a summary of the material U.S. federal income tax consequences to the Company and to recipients of stock options and stock appreciation rights under the 2005 Incentive Plan. The summary is based on the Internal Revenue Code (the “Code”) and the U.S. Treasury regulations promulgated under the Code in effect as of the date of this proxy statement, all of which are subject to change with retroactive effect. The summary is not intended to be a complete analysis or discussion of all potential tax consequences that may be important to recipients of awards under the 2005 Incentive Plan. The laws governing the tax aspects of these

awards are highly technical and such laws are subject to change. Different tax rules may apply to specific participants and transactions under the Plan, particularly in jurisdictions outside the United States.

 

Nonqualified Stock Options and Stock Appreciation Rights

 

The recipient will not have any income at the time a nonqualified stock option or stock appreciation right (an “SAR”) is granted nor will the Company be entitled to a deduction at that time. When a nonqualified option is exercised, the optionee generally will recognize ordinary income (whether the option price is paid in cash or by delivery or surrender of shares of common stock), in an amount equal to the excess of the fair market value of the shares to which the option exercise pertains over the option exercise price. When an SAR is exercised, the holder will recognize ordinary income equal to the sum of (a) the gross cash proceeds payable and (b) the fair market value on the exercise date of any shares received. The Company will be entitled to a corresponding deduction with respect to a nonqualified stock option or SAR equal to the ordinary income recognized by the optionee or holder of the SAR, provided that the deduction is not disallowed by Section 162(m) or otherwise limited by the Code.

 

Incentive Stock Options

 

A recipient will not have any income at the time an incentive stock option (an “ISO”) is granted or have regular taxable income at the time the ISO is exercised. However, the excess of the fair market value of the shares at the time of exercise over the option exercise price will be a preference item that could create an alternative minimum tax liability for the optionee. Such alternative minimum tax may be payable even though the optionee receives no cash upon the exercise of the ISO with which to pay such tax. If the optionee disposes of the shares acquired on exercise of an ISO after the later of two years after the grant of the ISO and one year after exercise of the ISO, the gain recognized by the optionee (i.e., the excess of the proceeds received over the option exercise price), if any, will be long-term capital gain eligible for favorable tax rates under the Code. Conversely, if the optionee disposes of the shares within two years of the grant of the ISO or within one year of exercise of the ISO, the disposition will generally be a “disqualifying disposition,” and the optionee will recognize ordinary income in the year of the disqualifying disposition equal to the lesser of (i) the excess of the fair market value of the stock on the date of exercise over the option exercise price and (ii) the excess of the amount received for the shares over the option exercise price. The balance of the gain or loss, if any, will be long-term or short-term capital gain, depending on how long the shares were held.

 

The Company is not entitled to a deduction as the result of the grant or exercise of an ISO. However, if the optionee recognizes ordinary income as a result of a disqualifying disposition, the Company will be entitled to a corresponding deduction equal to the amount of ordinary income recognized by the optionee, provided that the deduction is not disallowed by Section 162(m) or otherwise limited by the Code.

 

Section 162(m) Awards and Other Awards

 

As discussed above, the 2005 Incentive Plan allows the Committee to make awards that would be performance-based for purposes of exemption from the limitations of Section 162(m). Nothing precludes the Committee from making any payments or granting any awards that do not qualify for tax deductibility under Section 162(m).

 

At the Annual Meeting, stockholders will be asked to approve the 2005 Incentive Plan. This proposal requires the affirmative vote of a majority of the voting power of the shares of Expedia capital stock, present in person or represented by proxy, voting together as a single class.

 

Abstentions and broker non-votes will be counted toward the tabulation of votes cast on the approval of the 2005 Incentive Plan proposal and will have the same effect as votes against that proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” APPROVAL OF THE 2005 INCENTIVE PLAN.

 

Ernst & Young LLP was Expedia’s independent registered public accounting firm for the year ended December 31, 2006. The Audit Committee of the Board of Directors has appointed Ernst & Young LLP as Expedia’s independent registered public accounting firm for the year ending December 31, 2007.

 

Selection of Expedia’s independent registered public accounting firm is not required to be submitted to a vote of the stockholders for ratification. The Sarbanes-Oxley Act of 2002 requires that the Audit Committee be directly responsible for the appointment, compensation and oversight of the audit work of the independent registered public accounting firm. However, the Board is submitting this matter to stockholders as a matter of good corporate practice. If the stockholders fail to vote on an advisory basis in favor of the appointment, the Audit Committee will reconsider whether to retain Ernst & Young LLP, and may retain that firm or another firm without resubmitting the matter to Expedia stockholders. Even if stockholders vote on an advisory basis in favor of the appointment, the Audit Committee may, in its discretion, direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of Expedia and its stockholders.

 

A representative of Ernst & Young LLP is expected to be present at the Annual Meeting and will be given an opportunity to make a statement if he or she so chooses and will be available to respond to appropriate questions.

 

At the Annual Meeting, stockholders will be asked to ratify the appointment of Ernst & Young LLP as Expedia’s independent registered public accounting firm for 2007. This proposal requires the affirmative vote of a majority of the voting power of the shares of Expedia capital stock, present in person or represented by proxy, voting together as a single class.

 

Abstentions will be counted toward the tabulations of votes cast on the ratification of the independent registered public accounting firm proposal and will have the same effect as votes against the proposal. Brokers have discretion to vote on the ratification of the independent registered public accounting firm proposal and therefore, there will be no broker non-votes.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS EXPEDIA’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2007.

 

The Audit Committee reviews the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements, the reporting process and maintaining an effective system of internal control over financial reporting. The Company’s independent registered public accounting firm is engaged to audit and express opinions on the conformity of the Company’s financial statements to generally accepted accounting principles and applicable rules and regulations, management’s assessment of the Company’s internal control over financial reporting and the effectiveness of the Company’s internal control over financial reporting.

 

In this context, the Audit Committee has reviewed and discussed the audited consolidated financial statements, together with the results of management’s assessment of the Company’s internal control over financial reporting, with management and the independent registered public accounting firm. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, “Communication with Audit Committees.” In addition, the Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” and has discussed with the independent registered public accounting firm its independence from the Company and the Company’s management. Finally, the Audit Committee has considered whether the independent registered public accounting firm’s provision of non-audit services to the Company is compatible with its independence.

 

Relying on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, for filing with the SEC.

 

 

Members of the Audit Committee:

 

A. George “Skip” Battle (Chairman)
David Goldhill
Peter M. Kern

 

The following table sets forth fees for professional services rendered by Ernst & Young LLP for 2005 and 2006. Fees billed by Ernst & Young LLP to IAC for periods prior to the Spin-Off on August 9, 2005 are not included below.

 

 

 

 

The Audit Committee has considered the non-audit services provided by Ernst & Young LLP as described above and believes that they are compatible with maintaining Ernst & Young LLP’s independence as the Company’s independent registered public accounting firm.

 

The Audit Committee has adopted a policy governing the pre-approval of all audit and permitted non-audit services performed by the Company’s independent registered public accounting firm to ensure that the provision of such services does not impair the independent registered public accounting firm’s independence from the Company and its management. Unless a type of service to be provided by the Company’s independent registered public accounting firm has received general pre-approval from the Audit Committee, it requires specific pre-approval by the Audit Committee. The payment of any proposed services in excess of pre-approved cost levels requires specific pre-approval by the Audit Committee.

 

Pursuant to its pre-approval policy, the Audit Committee may delegate its authority to pre-approve services to one or more of its members, and has currently delegated this authority to its Chairman, subject to a limit of $500,000 per approval. The decisions of the Chairman (or any other member(s) to whom such authority may be delegated) to grant pre-approvals must be presented to the full Audit Committee at its next scheduled meeting. The Audit Committee may not delegate its responsibilities to pre-approve services to management.

 

The following table presents information as of March 31, 2007 relating to the beneficial ownership of Expedia’s capital stock by (1) each person or entity known to Expedia to own beneficially more than 5% of the outstanding shares of Expedia’s common stock and Class B common stock, (2) each director and director nominee of Expedia, (3) Expedia’s Chief Executive Officer, Chief Financial Officer, former Chief Financial Officer and the other current executive officers included in the 2006 Summary Compensation Table (collectively, “Named Executive Officers”), and (4) all Named Executive Officers, other executive officers and directors of Expedia, as a group.

 

Unless otherwise indicated, beneficial owners listed in the table may be contacted at Expedia’s corporate headquarters at 3150 139th Avenue S.E., Bellevue, Washington 98005.

 

For each listed person, entity or group, the number of shares of Expedia common stock and Class B common stock and the percentage of each such class listed assume the conversion or exercise of certain Expedia equity securities, as described below, owned by such person, entity or group, but do not assume the conversion or exercise of any equity securities owned by any other person, entity or group. Shares of Expedia Class B common stock may, at the option of the holder, be converted on a one-for-one basis into shares of Expedia common stock. For each listed person, entity or group, the number of shares of Expedia common stock and Class B common stock and the percentage of each such class listed include shares of Expedia common stock and Class B common stock that may be acquired by such person, entity or group on the conversion or exercise of equity securities, such as stock options and warrants, that can be converted or exercised, and restricted stock units that have or will have vested, within 60 days of March 31, 2007.

 

The percentage of votes for all classes of Expedia’s capital stock is based on one vote for each share of common stock, ten votes for each share of Class B common stock and two votes for each share of Series A preferred stock.

 

 

 

 

 

Pursuant to Section 16(a) of the Exchange Act, Expedia officers and directors and persons who beneficially own more than 10% of a registered class of Expedia’s equity securities are required to file initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) with the SEC. Such persons are required by the rules of the SEC to furnish Expedia with copies of all such forms they file. Based solely on a review of the copies of such forms furnished to Expedia and/or written representations that no additional forms were required, Expedia believes that all of its directors and officers complied with all of the reporting requirements applicable to them with respect to transactions during 2006, except that one report was inadvertently filed late for Mr. Onnen due to an administrative error.

 

Background information as of March 31, 2007 about each of Expedia’s executive officers who does not also serve as a director of Expedia is provided below.

 

 

Michael B. Adler has served as Chief Financial Officer of Expedia since May 2006. Mr. Adler had served as Executive Vice President, Finance during a one-month transition period prior to the effective date of his appointment as Chief Financial Officer of Expedia. Prior to joining Expedia Mr. Adler served as the Senior Vice President, Financial Planning and Analysis for IAC. Mr. Adler was promoted to that position in April 2005 from Vice President, Financial Analysis and Operational Reporting, a position he had held since January 2002. Mr. Adler joined IAC in May 2001 as Senior Vice President, Finance and Administration, for IAC’s Information and Services Group. Prior to joining IAC, Mr. Adler held a number of positions, including Chief Financial Officer and General Counsel for SchoolSports, Inc. and Vice President and General Counsel for Cheyenne Software, Inc. Prior to that, Mr. Adler practiced law with Feldman, Waldman & Kline. Mr. Adler received his B.S. in economics from The Wharton School, University of Pennsylvania. Mr. Adler received his J.D. from the University of Pennsylvania Law School.

 

Kathleen K. Dellplain has served as Executive Vice President, Human Resources of Expedia since completion of the Spin-Off. Ms. Dellplain served as Executive Vice President of Human Resources of IAC Travel from September 2003 to the Spin-Off date. Prior to the formation of IAC Travel in September 2003, Ms. Dellplain served as Executive Vice President of Human Resources of Expedia beginning in November 1999. Ms. Dellplain was initially hired by the Microsoft Corporation in 1999 to build the human resources

function of Expedia, then a subsidiary of Microsoft, in anticipation of Expedia’s initial public offering. Previously, Ms. Dellplain served as Vice President of Human Resources for IDX Systems Corporation from 1997 to 1999. Prior to that, Ms. Dellplain worked as the Senior Director of Human Resources for PHAMIS, Inc. from 1990 until its merger with IDX Systems Corporation in 1997. Ms. Dellplain received her B.A. from the University of Hawaii and her M.B.A. from the University of Washington.

 

Burke F. Norton has served as Executive Vice President, General Counsel and Secretary of Expedia since October 2006. Prior to joining Expedia, Mr. Norton was a partner at the law firm of Wilson Sonsini Goodrich & Rosati P.C. where he practiced corporate and securities law for 11 years. Mr. Norton received his J.D. from the University of California, Berkeley, Boalt Hall School of Law.

 

Paul Onnen has served as Executive Vice President, Technology of Expedia, overseeing the areas of Information Technology and Product Development, since May 2005. Mr. Onnen served as Senior Vice President and Chief Technology Officer at WebMD Corporation, a health information services provider, from February 2003 to April 2004. Mr. Onnen served as Executive Vice President and Chief Information Officer at Nordstrom.com, from January 2000 to February 2002. Prior to his tenure at Nordstrom.com, Mr. Onnen served as President and Chief Technology Officer at Punch Networks, a digital storage services provider, from 1998 to 2000. Before that, Mr. Onnen served in a number of capacities in research and development in software engineering for various technology companies. Mr. Onnen received his B.A. in Mathematics and Physics from St. Olaf College and his master’s degree in computer science from the University of Wisconsin, Madison.

 

Patricia L. Zuccotti has served as Senior Vice President, Chief Accounting Officer and Controller of Expedia since October 2005. Prior to joining Expedia, Ms. Zuccotti was employed by Deloitte & Touche LLP, a professional services firm, for 22 years, serving most recently as Director, Enterprise Risk Services from June 2003 to October 2005, and as Director, Audit from June 1993 to June 2003. Ms. Zuccotti received her B.A. from Trinity College and her M.B.A. from the University of Washington. She is also a certified public accountant.

 

This Compensation Discussion and Analysis explains Expedia’s compensation philosophy, policies and practices with respect to the Named Executive Officers.

 

From August 8, 2003 until the Spin-off of Expedia from IAC on August 9, 2005, the Expedia group of companies were wholly owned subsidiaries of IAC. As a result, compensation policies and equity grants made during that period reflect the compensation programs established by the Compensation Committee of the IAC Board of Directors. Certain employment matters in place following the Spin-Off continued to be governed by the Employee Matters Agreement entered into between IAC and Expedia. Prior to August 8, 2003, Expedia was a separately listed company through Expedia, Inc., a Washington corporation, and its compensation policies and grants reflect the compensation programs established by that company’s Compensation Committee.

 

Roles of the Compensation Committee and Section 16 Committee

 

Expedia has a Compensation Committee and a Section 16 Committee (collectively, the “Compensation Committees”).

 

The Compensation Committee is appointed by the Board of Directors, and consists entirely of directors who are “outside directors” for purposes of Section 162(m) of the Internal Revenue Code. The Compensation Committee consists of Messrs. Dolgen, Fitzgerald and Kern. The Compensation Committee is responsible for administering and overseeing the Company’s executive compensation program, including salary matters, bonus plans and stock compensation plans, other than for matters governed by Rule 16b-3 under the Exchange Act (see below). Mr. Dolgen is the chairman of the Compensation Committee.

 

The Section 16 Committee is also appointed by the Board of Directors, and consists entirely of directors who are “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act. The Section 16 Committee consists of Messrs. Dolgen and Kern. The Section 16 Committee is responsible for administering and overseeing matters governed by Rule 16b-3 under the Exchange Act, including approving grants of equity awards to the Named Executive Officers. Mr. Dolgen is also the chairman of the Section 16 Committee.

 

Role of Executive Officers in Compensation Decisions

 

Mr. Khosrowshahi, Expedia’s Chief Executive Officer, annually reviews the performance of each Named Executive Officer with the Compensation Committees and makes recommendations with respect to the appropriate base salary, annual cash bonus and the grants of long-term equity incentive awards for each Named Executive Officer, excluding himself and Mr. Diller, the Chairman/Senior Executive. Based in part on these recommendations and other considerations discussed below, the Compensation Committees review and approve the annual compensation package of the Named Executive Officers.

 

Expedia’s executive compensation program is designed to attract, retain and motivate highly skilled executives with the business experience and acumen that management and the Compensation Committees believe necessary for achievement of our long-term business objectives. In addition, the executive compensation program is designed to reward short-and long-term performance and to align the financial interests of executive officers with the interests of the Company’s equity owners. Management and the Compensation Committees evaluate both performance and compensation levels to ensure that the Company maintains its ability to attract and retain outstanding employees in executive positions and that the compensation provided to these executives remains competitive with the compensation paid to similarly situated executives at comparable companies. To that end, management and the Compensation Committees believe executive compensation packages provided by the Company to the Named Executive Officers should include both cash and equity-based compensation.

 

General

 

The primary elements of the executive compensation program are base salary, cash bonus and equity compensation. After considering recommendations from management, the Compensation Committees review these elements in light of Company and individual performance each February. Management and the Compensation Committees do not adhere to rigid formulas in recommending or determining, as applicable, the amount and mix of compensation elements for the Named Executive Officers. Following recommendations from management, the Compensation Committees may also adjust compensation for specific individuals at other times during the year when there are significant changes in responsibilities or under other circumstances that the Compensation Committees consider appropriate.

 

Base Salary

 

Base salary represents the annual salary paid to each Named Executive Officer. An executive’s base salary is initially determined upon hire or promotion, and thereafter typically following the annual review process. Management makes base salary recommendations to the Compensation Committees based on consideration of a variety of factors, including:

 

 

After considering management’s recommendations, the Compensation Committees set base compensation for Named Executive Officers. The Compensation Committees do not apply a formulaic approach to setting base salaries for Named Executive Officers.

 

Cash Bonuses

 

Cash bonuses are granted to Named Executive Officers to recognize and reward annual contributions to Company performance. In 2006, each Named Executive Officer, other than the Chairman/Senior Executive, had a target cash bonus based on a percentage of the executive’s base salary earnings for the year. These targets ranged from 40% to 100% of base salary earnings. Target bonuses for executives are generally determined by the Chief Executive Officer at the time of the executive’s hire or promotion, with the approval of the Chairman/Senior Executive. Targets are reviewed annually.

 

In February 2007, management recommended bonuses for certain Named Executive Officers after taking into account a variety of factors, including:

 

 

Based on these recommendations, the Compensation Committees granted cash bonuses to certain Named Executive Officers. As noted, the Compensation Committees do not apply a formulaic approach to approving bonus payments and considers all of the foregoing criteria in light of the specific circumstances of each Named Executive Officer.

 

In addition to annual bonuses related to performance, management may also recommend to the Compensation Committee that it grant bonuses for new executives upon hire. The Company utilizes new hire bonuses to help attract highly skilled executives to Expedia and to offset an executive’s loss of incentive compensation from a prior employer.

 

Equity Compensation

 

Equity compensation is designed to align executive compensation with long-term Company performance. Expedia utilizes restricted stock units as its principal form of equity compensation. Restricted stock units provide an equity vehicle that has ongoing value that relates to Company performance. In addition, restricted stock units are an important employee retention tool because they generally vest over a multi-year period, generally subject to continued service by the award recipient. Restricted stock units are typically granted to Named Executive Officers upon hire and annually thereafter.

 

After consideration of management recommendations as described below, the Compensation Committees approve all grants of restricted stock units, including to Named Executive Officers. In addition, the Compensation Committees review the Company-wide equity grant pool, including:

 

 

For specific grants to Named Executive Officers, management makes recommendations to the Compensation Committees based on a variety of factors, including:

 

 

After review and consideration of management’s recommendations, the Section 16 Committee approves the grant of equity compensation for Named Executive Officers.

 

In general, both annual and new hire restricted stock unit awards vest in equal installments on the first five anniversaries of the grant date, although individually negotiated arrangements and special circumstances may result in shorter vesting periods and may provide for cliff vesting as opposed to installment vesting. For example, certain awards vest in their entirety on the fifth anniversary of the grant date. For purposes of allowing the Company to fully deduct all employee compensation in accordance with Section 162(m), the Compensation Committees made all grants of restricted stock units for Named Executive Officers in 2006 subject to the satisfaction of performance goals tied to stock price performance or growth in earnings before interest, taxes and amortization (“EBITA”), in addition to the time vesting requirements described in this paragraph. In addition, in 2006, the Section 16 Committee granted an award to the Chief Executive Officer which will vest upon the achievement of a goal tied to the operating income before amortization of the Company, as well as satisfaction of either the stock price performance or growth in EBITA discussed above. This goal has not yet been achieved.

 

Other Compensation

 

In addition to the primary elements of compensation (base salary, cash bonuses and equity awards) described above, the Named Executive Officers may also receive compensation in the following forms:

 

 

Management reviews the compensation practices of comparable companies in formulating recommendations for Expedia’s compensation program. Management considers multiple data sources when reviewing compensation information to ensure that the data reflect compensation practices of relevant companies in terms of size, industry and geographic location. Among other factors, management considers the following information in connection with its recommendations to the Compensation Committees regarding executive compensation for the Named Executive Officers:

 

 

 

 

Management also reviews equity compensation utilization at peer companies in making recommendations to the Compensation Committees regarding the Company-wide equity compensation program. For purposes of establishing its equity compensation peer group for 2006, management recommended to, and reviewed with, the Compensation Committees companies in technology, travel and/or e-commerce businesses with which Expedia competes for talent at both the executive and employee levels. The companies comprising the equity compensation peer group for 2006 were:

 

Amazon.com, Inc.
American Express Company
Cendant Corp.
Dell Inc.
E*TRADE Financial Corp.
eBay Inc.
Google Inc.
Microsoft Corp.
Monster Worldwide, Inc.
Priceline.com Inc.
Sabre Holdings Corp.
Yahoo! Inc.

For 2007, management, following conversations with the Compensation Committees, reviewed and revised the list of companies in the peer group and also considered peer group compensation data when approving salary and bonuses for the Named Executive Officers. The companies comprising the compensation peer group for 2007 are:

 

Adobe Systems Inc.
Alaska Air Group Inc.
Amazon.com, Inc.
Cendant Corp.*
E*TRADE Financial Corp.
eBay Inc.
Google Inc.
Microsoft Corp.
Monster Worldwide, Inc.
Priceline.com Inc.
Sabre Holdings Corp.*
Starbucks Corp.
Starwood Hotels & Resorts Worldwide Inc.
Yahoo! Inc.

 

 

 

Management considers competitive market compensation paid by other companies, such as the peer companies listed above, but does not attempt to maintain a certain target percentile within the peer group or otherwise rely solely on such data when making recommendations to the Compensation Committees regarding compensation for the Named Executive Officers. Management and the Compensation Committees strive to incorporate flexibility into the compensation programs and in the assessment process to respond to and adjust for the evolving business environment.

 

Section 162(m) of the Internal Revenue Code generally permits a tax deduction to public corporations for compensation over $1,000,000 paid in any fiscal year to a corporation’s chief executive officer and certain other highly compensated executive officers only if the compensation qualifies as being performance-based under Section 162(m). Expedia endeavors to structure its compensation policies to qualify as performance-based under Section 162(m) whenever it is reasonably possible to do so while meeting Expedia’s compensation objectives. For 2006, the grants of restricted stock units and the payments of annual bonuses (other than for Named Executive Officers who joined the Company mid-year) were designed to meet the requirements for deductible compensation.

 

Nonetheless, from time to time certain non-deductible compensation may be paid and the Board of Directors and the Compensation Committees reserve the authority to award non-deductible compensation in appropriate circumstances. In addition, it is possible that some compensation paid pursuant to certain equity awards that have already been granted may be nondeductible as a result of Section 162(m).

 

Some of the Named Executive Officers are entitled to accelerated vesting of equity awards in the event of a change in control of Expedia and/or upon the termination of the executive’s employment with Expedia under specified circumstances. Pursuant to his employment agreement, our Chief Financial Officer is also entitled to receive his base salary through the longer of the end of the term of the employment agreement and one year upon the termination of his employment with Expedia under specified circumstances. These arrangements are intended to attract and retain qualified executives who could have other job alternatives that may appear to them to be less risky absent these arrangements. In addition, the Compensation Committees believe that the accelerated vesting of equity awards in connection with change in control transactions would provide an incentive for these executives to continue to help successfully execute such a transaction from its early stages until closing. For a description and quantification of these severance and change in control benefits, please see the section entitled “Potential Payments Upon Termination or Change in Control.”

 

Not all of our Named Executive Officers have employment agreements or award agreements that provide benefits in the event their employment with Expedia is terminated. In these cases, the Compensation Committees have determined that it is in the best interests of the Company to retain the flexibility to determine such benefits on a case by case basis. In 2006, the Compensation Committees elected to grant our former Chief Financial Officer one year of forward vesting of his outstanding equity in connection with his resignation after considering management’s recommendation.

 

The Compensation Committees have reviewed the Compensation Discussion and Analysis and discussed that Analysis with management. Based on this review and discussions with management, the Compensation Committees recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s 2007 proxy statement. This report is provided by the following directors:

 

 

Members of the Compensation Committee:

 

Jonathan L. Dolgen (Chairman)

William R. Fitzgerald

Peter M. Kern

 

Members of the Section 16 Committee:

 

Jonathan L. Dolgen (Chairman)

Peter M. Kern

 

The table below sets forth information regarding the compensation paid or compensation expenses recognized by Expedia for services rendered in all capacities during the last fiscal year by the Named Executive Officers. We have also provided supplementary information in footnote one below regarding two additional executive officers of Expedia: Victor A. Kaufman, Expedia’s Vice Chairman, and Burke F. Norton, Expedia’s Executive Vice President, General Counsel and Secretary.

 

 

 

 

 

The following table sets forth information regarding awards by Expedia for services rendered in all capacities during the last fiscal year to the Named Executive Officers.

 

 

 

 

On February 27, 2007, the Section 16 Committee approved restricted stock unit awards to the Named Executive Officers who were then employees of Expedia as follows:

 

 

 

 

On the same date, the Section 16 Committee also granted to Mr. Kaufman 46,061 restricted stock units with a fair value of $999,984 and 23,030 restricted stock units with a fair value of $499,981. The grant of 46,061 restricted stock units will vest in five equal installments commencing on February 27, 2008 and the grant of 23,030 restricted stock units will vest in two equal installments commencing on February 27, 2008. Also on that date, Mr. Norton was granted 18,424 restricted stock units with a fair value of $399,985, which will vest in five equal installments commencing on February 27, 2008.

 

The following table provides information regarding the holdings of stock option, warrant and restricted stock unit awards by the Named Executive Officers as of December 31, 2006. The market value of the restricted stock unit awards is based on the closing price of Expedia common stock on The Nasdaq Stock Market on December 29, 2006, the last trading day of the year, which was $20.98.

 

 

 

 

The following table shows information regarding vesting of Expedia restricted stock units for the Named Executive Officers during 2006. No Named Executive Officer exercised Expedia options during 2006.

 

 

 

 

Certain of our compensation plans, award agreements and employment agreements entitle some of the Named Executive Officers to accelerated vesting of equity awards or severance payments in the event of a change in control of Expedia and/or upon the termination of the executive’s employment with Expedia under specified circumstances. These plans and agreements are described below as they apply to each Named Executive Officer.

 

  Barry Diller

 

2005 Stock Option Agreement.  On June 7, 2005, the IAC Compensation Committee, pursuant to the IAC/InterActiveCorp 2005 Stock and Annual Incentive Plan (the “IAC 2005 Plan”) granted to Mr. Diller options to purchase 4,800,000 shares of IAC common stock at an exercise price of $32.03, representing 130% of the closing price of IAC common stock on June 7, 2005, and options to purchase 2,800,000 shares of IAC common stock at an exercise price of $43.12, representing 175% of the closing price of IAC common stock on June 7, 2005. Upon completion of the Spin-Off, among other things, Mr. Diller’s awards were adjusted to grant an option to purchase 2,400,000 shares of Expedia common stock at $28.49 per share and an option to purchase 1,400,000 shares at $38.35 per share. The stock option agreement provides that following completion of the Spin-Off, the satisfaction of conditions to vesting of Mr. Diller’s options to purchase shares of Expedia common stock is determined based on Mr. Diller’s employment with Expedia.

 

The options have a ten-year term and vest on the fifth anniversary of the grant date, subject to continued employment. Upon a termination of Mr. Diller’s employment for death, disability, by Expedia without cause, or by Mr. Diller for good reason, the options will vest pro rata at 20% per year of completed service from the

date of grant to the date of termination. Upon a change in control, 20% of the options will vest, with an additional 20% vesting for each completed year of service following the grant date.

 

For purposes of the agreement, a “change in control” is defined by reference to the IAC 2005 Plan, as follows: a “change of control” occurs if: (a) there is a change in the majority of our Board not endorsed by the requisite number of incumbent board members; (b) another party becomes the beneficial owner of at least 50% of the Company’s outstanding voting stock, with certain exceptions; (c) the Company consummates a merger, reorganization, or consolidation with another party, or the sale or other disposition of all or substantially all of our assets or the purchase of assets or stock of another entity (“Business Combination”) unless the beneficial stockholders of the Company immediately prior to the Business Combination retain more than 50% of the outstanding voting stock of the entity resulting from the Business Combination in substantially the same proportions immediately prior to such Business Combination; or (d) the Company consummates its complete liquidation or dissolution. However, the agreement provides that notwithstanding the provisions of the plan, no change in control will occur so long as Mr. Diller has sufficient voting power with respect to Expedia such that he effectively controls the election of a majority of members of the Board of Expedia.

 

“Good reason” is defined in the agreement to mean any of the following actions without Mr. Diller’s consent: (i) a reduction in his rate of annual base salary, (ii) a relocation of his principal place of business more than 35 miles from New York City, or (iii) a material and demonstrable adverse change in the nature and scope of his duties.

 

“Cause” is defined by reference to the IAC 2005 Plan, as follows: (i) the willful or gross neglect by a participant of his employment duties, (ii) the plea of guilty or nolo contendere to, or conviction for, the commission of a felony offense by a participant, (iii) a material breach of the participant’s fiduciary duty owed to the Company, or (iv) a material breach by a participant of any nondisclosure, non-solicitation or non-competition obligation owed to the Company.

 

  Dara Khosrowshahi

 

Spin-Off.  Prior to the Spin-Off, IAC and Mr. Khosrowshahi agreed to amend his outstanding equity awards granted under the USA Interactive Amended and Restated 2000 Stock and Annual Incentive Plan (the “IAC 2000 Plan”) to provide that all restricted stock units held by Mr. Khosrowshahi on the date of the Spin-Off would vest in the event of the termination of his employment by Expedia without cause. “Cause” is defined by reference to the IAC 2000 Plan and has substantially the same meaning as under the IAC 2005 Plan, discussed above regarding Mr. Diller’s 2005 Stock Option Agreement, except that “cause” also includes the resignation by Mr. Khosrowshahi for “good reason,” which is defined as an adverse change in his powers and duties, such that his new powers and duties are inconsistent with his position and status.

 

Pursuant to the IAC 2000 Plan, in the event of a change in control, the restrictions applicable to restricted stock units granted under that plan and held by Mr. Khosrowshahi will lapse and such restricted stock units will become free of all restrictions and fully vested. Under the IAC 2000 Plan, the definition of a “change of control” has substantially the same meaning as under the IAC 2005 Plan, described above under Mr. Diller’s 2005 Stock Option Agreement.

 

2006 Restricted Stock Unit Award Agreement.  On March 7, 2006, the Compensation Committees approved certain compensation arrangements with Mr. Khosrowshahi, including the grant of 800,000 restricted stock units pursuant to the Expedia 2005 Plan. The restricted stock units vest as follows: upon Expedia’s achievement of (i) operating income before amortization (“OIBA”) of $1.0 billion for a full fiscal year (the “OIBA Target”) and (ii) either achievement of a target increase in the price of the Company’s common stock or the achievement of certain EBITA targets approved by the Compensation Committees (the “RSU Performance Goals”), 75% of the restricted stock unit grant will vest (the “Initial Vesting”). If Mr. Khosrowshahi has not voluntarily terminated his employment with Expedia or has not been terminated for cause on the first anniversary of the Initial Vesting, the remaining portion of the restricted stock units will vest.

 

If Expedia terminates Mr. Khosrowshahi without cause in any year in which Expedia achieves an OIBA target of $900 million (the “Modified OIBA Target”) and one of the RSU Performance Goals has been met, then 75% of the restricted stock units will vest upon such termination of employment and the remaining restricted stock units will be forfeited.

 

If there is a change in control of Expedia, then 50% of the outstanding restricted stock units vest immediately, without regard to the OIBA targets or RSU Performance Goals. If within one year of the change in control, Mr. Khosrowshahi is terminated without cause or Mr. Khosrowshahi terminates employment following a modification of his duties and responsibilities, then the remaining restricted stock units will vest, without regard to the performance targets or Performance Goals.

 

For purposes of calculating the OIBA Target and the Modified OIBA Target, the operating results of all entities acquired by Expedia will also be included, starting with the first full fiscal year after any such acquisitions. In the case of each acquisition, the OIBA Target or Modified OIBA Target will be increased by the amount of OIBA that Expedia expects to achieve in the first full fiscal year following such acquisition, as projected by Expedia at the time of the acquisition.

 

For the purposes of the restricted stock unit agreement, a “change in control” is defined by reference to the Expedia 2005 Plan, under which change in control has substantially the same meaning as under the IAC 2005 Plan, as described above under Mr. Diller’s 2005 Stock Option Agreement. In addition, the agreement provides that a change in control will include termination of the irrevocable proxy held by Mr. Diller to vote shares of Expedia common stock held by Liberty Media or its affiliates, or the acquisition by Liberty Media or its affiliates, of beneficial ownership of equity securities of Expedia, whereby Liberty Media acquires or assumes more than 35% of the voting power of the then outstanding equity securities of Expedia entitled to vote generally on the election of Expedia’s directors.

 

Under the restricted stock unit agreement, “cause” is defined by reference to the Expedia 2005 Plan, and has the same meaning as under the IAC 2005 Plan, discussed above regarding Mr. Diller’s 2005 Stock Option Agreement.

 

In connection with the foregoing arrangements, Mr. Khosrowshahi has agreed not to compete with Expedia’s businesses during the term of his employment with Expedia and for a period of two years from his date of departure.

 

  Michael B. Adler

 

On October 31, 2006, Expedia entered into an employment agreement (the “Adler Employment Agreement”) and a restricted stock unit agreement (the “Adler RSU Agreement”) with Mr. Adler. The Adler Employment Agreement was effective as of May 16, 2006 for a term of three years.

 

Employment Agreement.  Pursuant to the Adler Employment Agreement, Mr. Adler received a signing bonus of $250,000, which is subject to forfeiture if the Company terminates Mr. Adler’s employment for cause or Mr. Adler terminates his employment without good reason prior to May 16, 2007. In the event Mr. Adler terminates his employment with the Company for good reason or the Company terminates Mr. Adler’s employment with the Company without cause, Mr. Adler is entitled to receive his base salary through the longer of (i) the completion of the term of the Adler Employment Agreement and (ii) one year. Mr. Adler will be restricted from competing with the Company or soliciting/hiring Company employees during the two-year period following the termination of his employment with the Company.

 

RSU Agreement.  Mr. Adler was granted 84,832 restricted stock units (the “First RSU Award”) and 53,020 restricted stock units (the “Second RSU Award,” and together, the “Awards”) pursuant to the Expedia 2005 Plan with 20% of the Awards vesting on each anniversary of the Award Date over a five-year term. Upon a Company termination of employment without cause or an employee termination of employment for good reason, to the extent not already vested (i) 50% of the First RSU Award will vest, and (ii) 20% of the Second Award will vest for each year or partial year between the award date and the date of termination. Both awards were contingent upon the satisfaction of certain performance goals, which have subsequently been met. Both awards vest upon a change in control of the Company.

 

For the purposes of the Adler RSU Agreement, a “change in control” is defined by reference to the Expedia 2005 Plan, under which change in control has substantially the same meaning as under the IAC 2005 Plan, as described above under Mr. Diller’s 2005 Stock Option Agreement. In addition, the agreement provides that a change in control will include termination of the irrevocable proxy held by Mr. Diller to vote shares of Expedia common stock held by Liberty Media or its affiliates, or the acquisition by Liberty Media or its affiliates, of beneficial ownership of equity securities of Expedia, whereby Liberty Media acquires or assumes more than 50% of the voting power of the then outstanding equity securities of Expedia entitled to vote generally on the election of Expedia’s directors.

 

“Good reason” is defined under the Adler Employment Agreement to mean the occurrence of any of the following without Mr. Adler’s consent: (i) the Company’s material breach of any material provision of the employment agreement, (ii) the material reduction in his title, duties, reporting responsibilities or level of responsibilities as Chief Financial Officer of the Company, (iii) the reduction in his base salary or percentage of discretionary annual target bonus, or (iv) the relocation of his principal place of employment more than 50 miles outside of the Seattle metropolitan area.

 

“Cause” is defined under the Adler Employment Agreement to mean his (i) plea of guilty or nolo contendere to, conviction for, or the commission of, a felony offense, (ii) material breach of a fiduciary duty owed to the Company, (iii) material breach of any of the covenants made pursuant to the employment agreement, (iv) willful or gross neglect of the material duties required by the employment agreement, or (v) knowing and material violation of any Company policy pertaining to ethics, wrongdoing or conflicts of interest, subject to certain qualifications.

 

  Kathleen K. Dellplain and Paul Onnen

 

Ms. Dellplain and Mr. Onnen hold restricted stock units under the Expedia 2005 Plan, which provides that in the event of a change in control of Expedia, the restricted stock units held by officers of the Company (and not the Company’s subsidiaries) with a title of Senior Vice President or above as of the time of the change in control, including Ms. Dellplain and Mr. Onnen, will be considered to be earned and payable in full and any deferral or other restrictions will lapse and such restricted stock units will be settled in cash or shares of Expedia common stock as promptly as practicable.

 

As of December 31, 2006, Ms. Dellplain held stock options and restricted stock units under the Expedia, Inc. Amended and Restated 2001 Stock Plan (the “Expedia 2001 Plan”), which provides that in the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, all outstanding stock options and restricted stock units will be assumed or an equivalent option or restricted stock unit will be substituted by the successor corporation. In the event the successor corporation refuses to assume or substitute for the awards, any options will become fully exercisable and vested, and any restrictions on restricted stock units will lapse. In addition, in the event of death or disability, the Expedia 2001 Plan provides for the accelerated vesting of stock options that would have otherwise vested within one year of the date of death or termination as a result of the disability. As of February 7, 2007, all options and restricted stock units held by Ms. Dellplain under the Expedia 2001 Plan were vested.

 

Ms. Dellplain also holds restricted stock units under the IAC 2000 Plan, which provides that in the event of a change in control, the restrictions applicable to restricted stock units granted under that plan and held by Ms. Dellplain will lapse and such restricted stock units will become free of all restrictions and fully vested. Under the IAC 2000 Plan, the definition of a “change of control” has substantially the same meaning as under the IAC 2005 Plan, discussed above under Mr. Diller’s 2005 Stock Option Agreement.

 

The table below reflects the estimated amount of incremental compensation payable to the Named Executive Officers upon termination of the executive’s employment in the following circumstances: (i) a termination by the Company without cause or by the executive for good reason that is not in connection with a change in control; (ii) a termination by the Company without cause in a fiscal year in which the Company meets the performance goals established by the Compensation Committees; (iii) upon a change in control; (iv) a termination by the Company without cause or by the executive for good reason in connection with a change in control; (v) disability; or (vi) death. The amounts shown assume that the termination was effective as of the last business day of 2006 (i.e., December 29, 2006) and that the price of Expedia common stock upon which certain of the calculations are made was the closing price of $20.98 on The Nasdaq Stock Market on that date. These amounts are estimates of the incremental amounts that would be paid out to the executive upon such terminations. The actual amounts to be paid out can only be determined at the time of the executive’s termination of employment or the change in control, if any.

 

Estimated Potential Incremental Payments Upon Termination or Change in Control

 

 

 

 

  Mark Gunning Resignation