<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1997
REGISTRATION NO. 333-37183
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2 TO FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
PREVIEW TRAVEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CONSTITUTION)
---------------
DELAWARE 4724 94-2965892
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
---------------
747 FRONT STREET
SAN FRANCISCO, CA 94111
(415) 439-1200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
KENNETH J. ORTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
747 FRONT STREET
SAN FRANCISCO, CA 94111
(415) 439-1200
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
MARK A. MEDEARIS JAMES N. STRAWBRIDGE
SONYA F. ERICKSON JOSE F. MACIAS
EDWARD Y. KIM ROBERT M. TARKOFF
VENTURE LAW GROUP WILSON SONSINI GOODRICH & ROSATI
A PROFESSIONAL CORPORATION PROFESSIONAL CORPORATION
2800 SAND HILL ROAD 650 PAGE MILL ROAD
MENLO PARK, CA 94025 PALO ALTO, CA 94304
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=====================================================================================================
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE (2) PRICE(2) FEE(3)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.001.... 2,875,000 Shares $12.00 $34,500,000 $10,455
=====================================================================================================
</TABLE>
(1) Includes 375,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act.
(3) $9,584 of such registration fee has been previously paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 29, 1997
PROSPECTUS
2,500,000 SHARES
[LOGO OF PREVIEW TRAVEL(SM)]
PREVIEW TRAVEL, INC.
COMMON STOCK
All of the 2,500,000 shares of Common Stock offered hereby are being sold by
the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $10.00 and $12.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Company has applied to have the Common Stock listed
on the Nasdaq National Market under the symbol PTVL.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............. $ $ $
- --------------------------------------------------------------------------------
Total (3)............. $ $ $
- --------------------------------------------------------------------------------
</TABLE>
================================================================================
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $850,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock solely to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the offices of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY
SECURITIES, INC.
, 1997
<PAGE>
[PREVIEW TRAVEL LOGO] [AOL LOGO]
[EXCITE LOGO]
Preview Travel is a leading provider of branded online travel services for
leisure and small business travelers and a producer of travel-related
programming for broadcast and cable television. In addition to its own Web
sites, the Company operates a co-branded travel web site with Excite and the
primary travel service on America Online, both under long-term strategic
distribution agreements.
TRAVEL ON YOUR TERMS
Preview Travel's easy-to-use online travel services empower consumers with
the information and tools they need to plan and purchase their own travel 24
hours a day, seven days a week. The Company's online services are enhanced by
round-the-clock customer service and personalized communications.
[GRAPHICS DEPICTING THREE SCREENS ON PREVIEW TRAVEL WEB SITE]
ONLINE TRAVEL RESERVATIONS
Preview Travel provides its customers with real-time access to schedule,
pricing and availability information for over 500 airlines, access to rooms at
more than 13,000 hotels worldwide and access to rental cars from all the major
agencies. Complete vacation packages, cruises and specialty tours are also
available. The Company's services are designed to enable customers to make
informed choices about their travel purchases.
AWARD-WINNING CONTENT
Preview Travel's destination information features award-winning editorial
content supported by a wide variety of multimedia. The Company's travel experts
constantly search for the latest travel trends and bargains and produce a wide
range of news and feature articles for online distribution, updated each
business day. Much of this content is provided by Preview Travel's broadcast
subsidiary, News Travel Network, which produces travel-related television
programs and maintains an extensive travel video library.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
Preview Travel, Farefinder, Preview Vacations and Travel Update are
trademarks and service marks of the Company. This Prospectus also contains the
trademarks of other companies.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The Common Stock offered hereby
involves a high degree of risk. See "Risk Factors."
THE COMPANY
Preview Travel, Inc. ("Preview Travel" or the "Company") is a leading
provider of branded online travel services for leisure and small business
travelers. The Company operates its own Web sites (www.previewtravel.com,
www.reservations.com and www.vacations.com), the primary travel service on
America Online, Inc. ("AOL") (AOL keyword: previewtravel) and a co-branded
travel Web site with Excite, Inc. ("Excite") (City.Net). The Company offers
one-stop travel shopping and reservation services, providing reliable, real-
time access to schedule, pricing and availability information for over 500
airlines, 13,000 hotels and all major car rental companies. The Company's
proprietary technology and user-friendly interface enable customers to easily
and quickly access travel information 24 hours a day, seven days a week, to
make informed choices about their travel purchases. In addition to its
reservation and ticketing service, the Company offers vacation packages,
discounted and promotional fares, travel news and destination content. The
Company complements its compelling content and user-friendly interface with a
high level of customer service.
Through its News Travel Network, Inc. division ("NTN"), Preview Travel
produces entertainment programming for broadcast and cable television and the
in-flight market. NTN also produces 90-second news inserts for local television
station newscasts. NTN has compiled and continually updates an extensive
library of over 6,000 hours of proprietary, broadcast quality footage featuring
over 2,000 destinations around the world. NTN employs an in-house sales staff
that syndicates this programming to television stations worldwide and sells the
commercial airtime within these programs to national advertisers.
To broaden its online presence and build brand recognition, the Company
entered into long-term agreements with AOL, the leading online service provider
with over nine million members, and Excite, a leading search engine provider
with over two million visitors per day. The Company is AOL's primary and
preferred provider of online travel services and the exclusive provider of
travel reservations services on the Company's co-branded Web site for Excite's
Travel Channel (City.Net) in the U.S. and the WebCrawler Travel Channel.
Through such long term agreements, the Company's travel services are
prominently featured on the AOL and Excite travel channels and contextually
integrated throughout the AOL and Excite services.
Since launching its online booking service in May 1996, the Company has
experienced significant growth in its gross bookings. As of September 30, 1997,
over two million users had registered on the Company's online site, and over
$74 million in gross bookings of travel services had been purchased by
approximately 145,000 customers in over 217,000 transactions. Of the customers
who had purchased the Company's travel services as of September 30, 1997,
approximately 35% were repeat customers.
Preview Travel's objective is to be the leading provider of branded online
travel services for leisure and small business travelers. The Company plans to
attain this goal by delivering compelling value to customers, building customer
loyalty and brand recognition, enhancing and expanding strategic relationships
and broadening existing offerings.
Preview Travel, Inc. (formerly Preview Media, Inc.) was incorporated in March
1985 under the laws of the State of California. Prior to completion of this
offering, the Company intends to reincorporate under the laws of the State of
Delaware. The Company's principal executive offices are located at 747 Front
Street, San Francisco, California 94111. Its telephone number at that location
is (415) 439-1200. As used in this Prospectus, the "Company" refers to Preview
Travel, Inc. and its subsidiaries.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company................... 2,500,000 shares
Common Stock to be out-
standing after the offer-
ing....................... 11,654,368 shares (1)
Use of proceeds............ Working capital, payment of obligations and general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol............. PTVL
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, QUARTER ENDED
---------------- --------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1996 1997 1997 1997
---- ---- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Online revenues......... $ 579 $ 2,573 $ 167 $ 424 $ 745 $ 1,237 $ 1,496 $ 1,174 $ 1,556
Television revenues..... 9,564 9,801 2,390 2,875 2,805 1,731 2,023 2,033 1,845
------- ------- ------- ------ ------- ------- ------- ------- -------
Total revenues......... 10,143 12,374 2,557 3,299 3,550 2,968 3,519 3,207 3,401
Gross profit............ 672 3,066 577 1,098 1,073 319 1,223 851 1,042
Loss from operations.... (4,667) (5,501) (1,231) (574) (1,182) (2,513) (1,526) (1,540) (2,480)
Net loss................ $(4,933) $(5,592) $(1,299) $ (650) $(1,159) $(2,484) $(1,505) $(1,542) (2,498)
Pro forma net loss per
share (2).............. $ (0.70) $ (0.65) $ (0.16) $(0.08) $ (0.13) $ (0.27) $ (0.16) $ (0.17) $ (0.27)
Weighted average shares
used in pro forma net
loss per share calcula-
tion (2)................ 7,043 8,573 7,958 8,008 9,194 9,208 9,221 9,231 9,275
SUPPLEMENTAL FINANCIAL
DATA (UNAUDITED):
Gross bookings (3)..... $ 2,043 $20,263 $ 537 $2,786 $ 6,207 $10,733 $14,117 $17,816 $22,074
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED(4)
------ --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $13,640 $43,788
Total assets............................................ 20,921 57,120
Long-term obligations (5)............................... 1,475 2,884
Total stockholders' equity.............................. $14,251 $44,918
</TABLE>
- ------------------
(1) Includes an aggregate of 849,814 shares and 340,909 shares issuable upon
exercise or conversion of warrants and convertible subordinated notes,
respectively, outstanding as of September 30, 1997, substantially all of
which are expected to be exercised or converted upon completion of this
offering. Excludes (a) 1,157,914 shares issuable upon exercise of
outstanding options at a weighted average exercise price of $3.54 per share
as of September 30, 1997, (b) 31,666 shares issuable upon exercise of
outstanding warrants at a weighted average exercise price of $5.97 per
share as of such date and (c) an aggregate of 2,362,155 shares available
for future issuance under the Company's 1988 Stock Option Plan, 1997 Stock
Option Plan, 1997 Directors' Stock Option Plan and 1997 Employee Stock
Purchase Plan. See "Management--Stock Plans" and Note 9 of Notes to
Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing pro forma net loss per
share.
(3) Represents the total purchase price of all travel services booked through
the Company's online reservation system. This presentation of gross
bookings does not affect the Company's operating results, and gross
bookings are not included in revenues. Management believes that gross
bookings provide a more consistent comparison between historical periods
than do online revenues. Gross bookings are not required by generally
accepted accounting principles ("GAAP") and should not be considered in
isolation or as a substitute for other information prepared in accordance
with GAAP, and period-to-period comparisons of gross bookings are not
necessarily meaningful due to, among other things, changes in commission
rates, and, as with operating results, should not be relied upon as an
indication of future performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(4) As adjusted to reflect (a) the sale of 2,500,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per
share after deduction of the estimated underwriting discounts and offering
expenses payable by the Company and (b) the items described in footnote (1)
above. See "Use of Proceeds" and "Capitalization."
(5) Long-term obligations include capital lease obligations, long-term notes
payable, line of credit, subordinated convertible notes payable,
subordinated notes payable and bank equipment note.
------------------
Except as otherwise noted herein, all information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option and gives effect to: (i)
the reincorporation of the Company in Delaware pursuant to a merger at an
exchange ratio of one share of Common Stock of the Delaware corporation for
each two shares of Common Stock and common stock equivalents of the California
corporation to be effected prior to completion of this offering, (ii) the
automatic conversion of all outstanding shares of Preferred Stock into Common
Stock upon completion of this offering and (iii) the filing of the Company's
Amended and Restated Certificate of Incorporation, authorizing a class of
5,000,000 shares of undesignated Preferred Stock upon completion of this
offering. See "Description of Capital Stock" and "Underwriting."
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results and timing of certain events could
differ materially from those discussed in the forward-looking statements as a
result of certain factors, including those set forth below and elsewhere in
this Prospectus. The following risk factors should be considered carefully in
evaluating the Company and an investment in the shares of Common Stock offered
hereby.
Limited Operating History of Online Business; Accumulated Deficit;
Anticipated Losses. The Company's television programming operations, which
represented 58% of its revenues for the first nine months ended September 30,
1997, have incurred net operating losses in each of the last four years, and
the Company anticipates that its television programming operations will
continue to incur net operating losses for the foreseeable future. As a
result, the Company believes that its future success depends on its ability to
significantly increase revenues from its Internet and commercial online
service operations, for which it has a limited operating history. The Company
initiated its online operations in 1994, first recognized revenues from its
online operations in the first quarter of 1995 and booked its first airline
ticket reservations online in the second quarter of 1996. Accordingly, the
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in an early stage of
development, particularly companies engaged in new and rapidly evolving
markets such as online commerce. There can be no assurance that the Company
will be successful in addressing such risks, and the failure to do so could
have a material adverse effect on the Company's business, operating results
and financial condition.
The Company has incurred a net operating loss in each of the last four years
and, as of September 30, 1997, had an accumulated deficit of approximately
$21.2 million. The Company believes that its success will depend in large part
on, among other things, its ability to generate sufficient sales volume to
achieve profitability and effectively maintain existing relationships and
develop new relationships with travel suppliers, strategic partners and
advertising customers. Accordingly, the Company intends to expend significant
financial and management resources on brand development, marketing and
promotion, site and content development, strategic relationships and
technology and operating infrastructure. As a result, the Company expects to
incur additional losses and continued negative cash flow from operations for
the foreseeable future, and such losses are anticipated to increase
significantly from current levels. There can be no assurance that the
Company's revenues will increase or even continue at their current level or
that the Company will achieve or maintain profitability or generate cash from
operations in future periods. In view of the rapidly evolving nature of the
Company's business and its limited operating history in the online business,
the Company believes that period-to-period comparisons of its operating
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Unpredictability of Future Revenues; Fluctuations in Quarterly Results. As a
result of the Company's limited operating history in online commerce and the
emerging nature of the markets in which the Company competes, the Company is
unable to accurately forecast its revenues. The Company's current and future
expense levels are based predominantly on its operating plans and estimates of
future revenues and are to a large extent fixed. The Company may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues would likely
have an immediate material adverse effect on the Company's business, operating
results and financial condition. Further, the Company currently intends to
substantially increase its operating expenses to develop and offer new and
expanded travel services, to fund increased sales and marketing and customer
service operations, and to develop its technology and transaction-processing
systems. To the extent such expenses precede or are not subsequently followed
by increased revenues, the Company's operating results will fluctuate and net
anticipated losses in a given quarter may be greater than expected.
The Company expects that it will experience seasonality in its business,
reflecting seasonal fluctuations in the travel industry, Internet and
commercial online service usage and advertising expenditures. The Company
5
<PAGE>
anticipates that travel bookings will typically increase during the second
quarter in anticipation of summer travel and will typically decline during the
fourth quarter. Internet and commercial online service usage and the rate of
growth of such usage may be expected typically to decline during the summer.
In addition, advertising sales in traditional media, such as broadcast and
cable television, generally decline in the first and third quarters of each
year. Depending on the extent to which the Internet and commercial online
services are accepted as an advertising medium, seasonality in the level of
advertising expenditures could become more pronounced for Internet-based
advertising. Seasonality in the travel industry, Internet and commercial
online service usage and advertising expenditures is likely to cause quarterly
fluctuations in the Company's operating results and could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of other factors, many of which
are outside the Company's control. Factors that may adversely affect the
Company's quarterly operating results include, but are not limited to, (i) the
Company's ability to retain existing customers, attract new customers at a
steady rate and maintain customer satisfaction, (ii) changes in inventory
availability from third party suppliers or commission rates paid by travel
suppliers, such as the reduction in commissions paid by major airlines for
online bookings implemented during the first nine months of 1997, (iii) the
announcement or introduction of new or enhanced sites, services and products
by the Company or its competitors, (iv) general economic conditions and
economic conditions specific to the Internet, online commerce or the travel
industry, (v) the level of use of online services and consumer acceptance of
the Internet and commercial online services for the purchase of consumer
products and services such as those offered by the Company, (vi) the Company's
ability to upgrade and develop its systems and infrastructure and to attract
new personnel in a timely and effective manner, (vii) the level of traffic on
the Company's online sites, (viii) technical difficulties, system downtime or
Internet brownouts, (ix) the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business, operations and
infrastructure, (x) governmental regulation and (xi) unforeseen events
affecting the travel industry.
Gross margins may be impacted by a number of different factors, including
the mix of television revenues versus online revenues, the mix of online
commission revenues versus online advertising revenues, the mix of travel
services sold, the mix of revenues from AOL, Excite and the Company's Web
site, the mix of airline ticket commissions (which vary from airline to
airline) and the amount of override commissions. The Company typically
realizes higher gross margins on advertising revenues than commission
revenues, higher commissions on vacation packages than hotel rooms and car
rentals, higher commissions on hotel rooms and car rentals than airline
tickets, higher gross margins on advertising revenues from the Company's own
Web site than through AOL or Excite, higher commissions from certain airlines
than others and higher gross margins in periods of higher overrides. Any
change in one or more of the foregoing factors could materially adversely
affect the Company's gross margins and operating results in future periods.
As a result of the foregoing factors, the Company's annual or quarterly
operating results may be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Dependence on the Travel Industry. The Company derives a significant portion
of its revenues directly or indirectly from the travel industry, and the
Company's future growth is dependent on the travel industry. The travel
industry, especially leisure travel, which is dependent on personal
discretionary spending levels, is sensitive to changes in economic conditions
and tends to decline during general economic downturns and recessions. The
travel industry is also highly susceptible to unforeseen events, such as
political instability, regional hostilities, fuel price escalation, travel-
related accidents, unusual weather patterns or other adverse occurrences. Any
event that results in decreased travel generally would likely have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
6
<PAGE>
Uncertain Acceptance of the Preview Travel Brand; Dependence on Increased
Bookings. The Company believes that establishing, maintaining and enhancing
the Preview Travel brand is a critical aspect of its efforts to attract and
expand its online traffic. The number of Internet sites that offer competing
services, many of which already have well-established brands in online
services or the travel industry generally, increase the importance of
establishing and maintaining brand name recognition. Promotion of the Preview
Travel brand will depend largely on the Company's success in providing a high-
quality online experience supported by a high level of customer service, which
cannot be assured. In addition, to attract and retain online users, and to
promote and maintain the Preview Travel brand in response to competitive
pressures, the Company may find it necessary to increase substantially its
financial commitment to creating and maintaining a strong brand loyalty among
customers. If the Company is unable to provide high-quality online services or
customer support, or otherwise fails to promote and maintain its brand, or if
the Company incurs excessive expenses in an attempt to promote and maintain
its brand, the Company's business, operating results and financial condition
would be materially adversely affected.
The Company's future success, and in particular its revenues and operating
results, depends upon its ability to successfully execute several key aspects
of its business plan. The Company must increase the dollar volume of
transactions booked through its online sites, either by generating
significantly higher and continuously increasing levels of traffic to its
online sites or by increasing the percentage of visitors to its online sites
who purchase travel services, or through some combination thereof. The Company
must also increase the number of repeat purchasers of travel services through
its online sites. In addition, the Company must deliver a high level of
customer service and compelling content in order to attract users with
demographic characteristics valuable to advertisers. Although the Company has
implemented strategies, including its relationships with AOL and Excite,
designed to accomplish these objectives, there can be no assurance that the
Company will be able to increase the dollar volume of transactions booked
through its online sites, increase traffic to its online sites, increase the
percentage of visitors who purchase travel services, increase the number of
repeat purchasers or increase its advertising revenues. The failure to do one
or more of the foregoing would likely have a material adverse effect on the
Company's business, operating results or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Reliance on Distribution Agreements with America Online and Excite. In
September 1997, the Company entered into agreements with AOL and Excite
establishing the Company as the primary and preferred provider of travel
services on AOL and the exclusive provider of travel reservations services on
Excite's Travel Channel (City.Net) in the U.S. and on the WebCrawler Travel
Channel until September 2002. Under these agreements, both AOL and Excite are
obligated to promote the Company and to deliver minimum numbers of annual page
views to the online areas featuring the Company's travel services. In
addition, the Company is eligible to receive payments from Excite representing
a share of advertising revenues received by Excite in connection with the
online areas featuring the Company's travel services; however, there can be no
assurance that such payments, if any, will be significant. Over the next five
years, the Company is obligated to make minimum payments totaling $56 million
to AOL and Excite, as well as pay to AOL and Excite a percentage of certain
commissions earned by the Company in excess of specified thresholds. The
Company is also obligated to share certain advertising revenues with each of
AOL and Excite, as specified in their respective agreements. Moreover, the
Company's agreements with AOL are conditioned upon the Company achieving
specified levels of travel services bookings. There can be no assurance that
the Company will achieve sufficient online traffic, travel bookings or
commissions to realize economies of scale that justify the Company's
significant fixed financial obligations to AOL and Excite or that the Company
will satisfy the minimum levels of travel services bookings required to
maintain the AOL agreement, and failure to do so would likely have a material
adverse effect on the Company's business, operating results and financial
condition.
In addition, the Company entered into a database services agreement with AOL
to develop and manage a travel-related destinations database for AOL with
content that is reasonably satisfactory to AOL. The Company has committed to
an aggressive schedule to develop and maintain the destinations database which
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will require significant efforts and resources on the Company's part. There
can be no assurance that the Company will be able to fulfill its commitments
to AOL on the agreed upon schedule, and failure to do so could result in a
breach of the distribution agreement with AOL, as well as the database
services agreement, which would likely have a material adverse effect on the
Company's business, operating results and financial condition.
Furthermore, the Company's significant investment in the AOL and Excite
relationships is based on the continued positive market presence, reputation
and anticipated growth of AOL and Excite, as well as the commitment by each of
AOL and Excite to deliver specified numbers of annual page views. Any decline
in the significant market presence, business or reputation of AOL or Excite,
or the failure of either or both of AOL and Excite to deliver the specified
numbers of annual page views, will reduce the value of these strategic
agreements to the Company and will likely have a material adverse effect on
the business, operating results and financial condition of the Company. In
addition, while the Company and Excite have agreed to cooperate on
advertising, AOL and the Company have the right to separately pursue and sell
advertising in the Company's content areas distributed through AOL. There can
be no assurance that the Company and AOL will not compete for limited travel
supplier advertising revenues. Travel services sold through AOL accounted for
89%, 77% and 67% of the Company's online revenues for the three months ended
March 31, 1997, June 30, 1997 and September 30, 1997, respectively. Travel
services sold through Excite accounted for 8% and 13% of the Company's online
revenues for the three months ended June 30, 1997 and September 30, 1997,
respectively. Accordingly, the AOL agreement represents and is expected to
continue to represent, and the Excite agreement is expected to represent,
significant distribution channels for the Company's travel services, and any
termination of either or both of the Company's agreements with AOL and Excite
would likely have a material adverse effect on the Company's business,
operating results and financial condition.
Except for its arrangements with AOL and Excite, the Company has no other
long-term distribution arrangements with any other service provider on the
Internet or commercial online services and accordingly must rely on search
engines, directories and other navigational tools which significantly affect
traffic to the Company's online sites. There can be no assurance that such
cooperation will be available to the Company on acceptable commercial terms or
at all or that such relationships will not already be established with the
Company's competitors. If the Company is unable to maintain satisfactory
relationships with AOL or Excite, or if the Company is unable to develop and
maintain satisfactory relationships with additional third parties on
acceptable commercial terms, or if the Company's competitors are better able
to leverage such relationships, the Company's business, operating results and
financial condition could be materially adversely affected. See "Use of
Proceeds," "Business--Strategic Relationships" and Note 15 of Notes to
Consolidated Financial Statements.
Reliance on Travel Suppliers; Potential Adverse Changes in Commission
Payments. The Company is dependent on airlines, hotels and other providers of
travel services ("travel suppliers") in order to offer its customers
comprehensive access to travel services and products. Consistent with industry
practices, the Company currently has no agreements with its travel suppliers
that obligate such suppliers to sell services or products through the Company.
In addition, travel suppliers may be unable or choose not to make their
inventory of services and products available through online distribution,
including those services offered by the Company. Accordingly, travel suppliers
could elect to sell exclusively through other sales and distribution channels
or to restrict the Company's access to their inventory, which could
significantly decrease the amount or breadth of the Company's inventory of
available travel offerings and could have a material adverse effect on the
Company's business, operating results and financial condition.
In addition, a substantial majority of the Company's online revenue is
dependent on the commissions customarily paid by travel suppliers for bookings
made through the Company's online travel service. Consistent with industry
practices, these travel suppliers are not obligated to pay any specified
commission rate for bookings made through the Company or to pay commissions at
all. Accordingly, travel suppliers can reduce current industry commission
rates or eliminate such commissions entirely, which would likely have a
material adverse effect on the Company's business, operating results and
financial condition.
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For example, in 1995, most of the major airlines placed a cap on per-ticket
commissions payable to all travel agencies for domestic airline travel. In the
first nine months of 1997, the major U.S. airlines reduced the commission rate
from 10% to 5% and maximum per-ticket commissions payable for online
reservations, which had a material adverse affect on the Company's results of
operations for the three months ended June 30, 1997 and September 30, 1997.
More recently, in September 1997, the major U.S. airlines reduced the
commission rate payable to traditional travel agencies from 10% to 8%. There
can be no assurance that airlines or other of the Company's travel suppliers
will not further reduce the amount of commissions payable to the Company.
In addition, certain travel suppliers have initiated direct online
distribution channels and, in some cases, have offered negotiated rates
directly to major corporate customers. Further, the Company's travel service
offerings are limited to those travel suppliers whose services and products
are available through the global distribution services ("GDS") systems
accessed by the Company, namely, the Apollo GDS system ("Apollo") operated by
Galileo International Partnership ("Galileo") for airlines and car rentals and
the GDS system operated by Pegasus Systems, Inc. ("Pegasus") for hotel
reservations. For example, Southwest Airlines is currently unavailable in the
Apollo GDS system, and, therefore, the Company is unable to offer access to
Southwest Airline's inventory. There can be no assurance that the Company's
current travel suppliers will continue to sell services or products through
Apollo or Pegasus on current terms with adequate compensation to the Company,
or at all, or that the Company will be able to establish new or extend current
travel supplier relationships to ensure uninterrupted access to a
comprehensive supply of the travel services. The Company's failure to do so
would likely result in a material adverse effect on its business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Reliance on Third Party Systems. The Company is dependent upon certain third
party service providers, including, without limitation, the following: AOL and
AOL's ANS Communications subsidiary (which AOL has agreed to sell to WorldCom,
Inc.), which provide AOL customers with access to the Company's online
services; GeoNet Communications, which provides the Company with access to
multiple Internet connections; Pegasus, which provides the Company with access
to a global hotel reservation system and which operates an online travel
service competitive with the Company; and Galileo, which provides the Company
with access to the Apollo GDS system.
The Company is dependent on these third party providers to continue to offer
and maintain these services. Any discontinuation of such services, or any
reduction in performance that requires the Company to replace such services,
would be disruptive to the Company's business. In particular, if the Company
were required to replace services provided by the Apollo GDS system, the
Company believes it could take up to one year and require substantial
expenditures to fully transition the Company's travel services to an
alternative service provider. In the past, these third party providers have
experienced interruptions or failures in their systems or services, which have
temporarily prevented the Company's customers from accessing or purchasing
certain travel services through the Company's online sites. Any reduction in
performance, disruption in Internet or online access or discontinuation of
services provided by AOL, ANS Communications, GeoNet Communications or any
other Internet service provider, or any disruption in the Company's ability to
access the Apollo GDS system, Pegasus or any other travel reservation systems,
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company is dependent on
Apollo and Pegasus to ensure that all software used in connection with their
GDS systems will manage and manipulate data involving the transition of dates
from 1999 to 2000 without functional or data abnormality and without
inaccurate results related to such dates. Any failure by Galileo or Pegasus to
ensure that such software complies with year 2000 requirements could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's agreements with its third party service
providers have terms of, or expire within, one year or less and in some cases
are subject to cancellation for any reason or no reason upon short notice. Any
cancellation of services, or failure to renew such services upon expiration,
by any of such third party providers without notice sufficient to allow the
Company to transition to a new service provider in a timely and cost-effective
manner would have a material adverse effect
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on the Company's business, operating results and financial condition. See
"Business--Strategic Relationships" and "--Technology."
Competition. The online travel services market is new, rapidly evolving and
intensely competitive, and the Company expects such competition to intensify
in the future. The Company competes primarily with traditional travel agency
and online travel reservation services. In the online travel services market,
the Company competes with other entities that maintain similar commercial Web
sites, such as Expedia (operated by Microsoft Corporation), Travelocity
(operated by SABREGroup Holdings Inc., a majority-owned subsidiary of American
Airlines), CUC International, Inc., TravelWeb (operated by Pegasus) and
Internet Travel Network, among others. Several traditional travel agencies,
including larger travel agencies such as American Express Travel Related
Services Co. Inc., Uniglobe Travel and Carlson Wagonlit Travel, have
established, or may establish in the future, commercial Web sites offering
online travel services.
In addition to the traditional travel agency channel, most travel suppliers
also sell their services directly to customers, predominantly by telephone. As
the market for online travel services grows, the Company believes that the
range of companies involved in the online travel services industry, including
travel suppliers, traditional travel agencies and travel industry information
providers, will increase their efforts to develop services that compete with
the Company's services. Many airlines and hotels offer travel services
directly through their own Web sites, eliminating the need to pay commissions
to third parties such as the Company. The Company is unable to anticipate
which other companies are likely to offer competitive services in the future.
There can be no assurance that the Company's online operations will compete
successfully with any current or future competitors.
In the television and in-flight programming markets, the Company's News
Travel Network division competes for airtime for its programs with news and
entertainment programming produced by local stations, broadcast and cable
networks, infomercial producers and third party syndicators. NTN competes for
national advertising sales with networks, national advertising firms and
syndicators.
Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the
Company and may enter into strategic or commercial relationships with larger,
more established and well-financed companies. Certain of the Company's
competitors may be able to secure services and products from travel suppliers
on more favorable terms, devote greater resources to marketing and promotional
campaigns and devote substantially more resources to Web site and systems
development than the Company. In addition, new technologies and the expansion
of existing technologies may increase competitive pressures on the Company. In
particular, Microsoft Corporation has publicly announced its intent to invest
heavily in the area of travel technology and services. Increased competition
may result in reduced operating margins, as well as loss of market share and
brand recognition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and competitive
pressures faced by the Company could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Competition."
Dependence on Continued Growth of Online Commerce. The Company's future
revenues and any future profits are substantially dependent upon the
widespread acceptance and use of the Internet and commercial online services
as an effective medium of commerce by consumers. For the Company to be
successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information. Convincing consumers to purchase travel
services online may be particularly difficult, as such consumers have
traditionally relied on travel agents for advice and recommendations as to
destinations and accommodations as well as bookings, and are accustomed to a
high degree of human interaction in purchasing travel services. Rapid growth
in the use of and interest in the Web, the Internet and commercial online
services is a recent phenomenon, and there can be no assurance that acceptance
and use will continue to develop or that a sufficiently broad base of
consumers will adopt, and continue to use, the Internet and commercial online
services as a medium of commerce, particularly for purchases of travel
services.
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Demand for recently introduced services and products over the Internet and
commercial online services is subject to a high level of uncertainty and there
exist few proven services and products. The development of the Internet and
commercial online services as a viable commercial marketplace is subject to a
number of factors, including continued growth in the number of users of such
services, concerns about transaction security, continued development of the
necessary technological infrastructure and the development of complementary
services and products. If the Internet and commercial online services do not
become a viable commercial marketplace, the Company's business, operating
results and financial condition would be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Associated with Advertising Revenues. During the year ended December
31, 1996 and the nine months ended September 30, 1997, approximately 58% and
41%, respectively, of the Company's total revenues were derived from the sale
of advertising in connection with its television programming and, to a much
lesser extent, its online sites. The Company's advertising customers may
terminate their advertising commitments at any time without penalty.
Consequently, the Company's advertising customers may move their advertising
to competing online sites or television programs or to other traditional media
quickly and at low cost, thereby increasing the Company's exposure to
competitive pressures and fluctuations in net revenues and operating results.
In particular, to support its television operations, which are substantially
dependent on advertising revenues that historically have been derived from a
very limited customer base, the Company must overcome significant competition
from national syndicators and broadcast stations and cable networks to obtain
advertising commitments. If the Company loses advertising customers, fails to
attract new customers or is forced to reduce advertising rates in order to
retain or attract advertising customers, the Company's business, operating
results and financial condition could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Marketing and Sales."
Management of Potential Growth. The Company has rapidly and significantly
expanded its operations, and anticipates that further significant expansion
will be required to address potential growth in its customer base and market
opportunities. The Company has also recently added a number of key managerial
and technical employees, and the Company expects to add additional key
personnel in the future. This expansion has placed, and is expected to
continue to place, a significant strain on the Company's management,
operational and financial resources. To manage the expected growth of its
operations and personnel, the Company will be required to improve existing and
implement new transaction-processing, operational, customer service and
financial systems, procedures and controls, implement a formal disaster
recovery program and expand, train and manage the Company's growing employee
base. The Company also will be required to expand its finance, administrative
and operations staff. Further, the Company's management will be required to
maintain and expand its relationships with various travel service suppliers,
other Web sites and other Web service providers, Internet and commercial
online service providers and other third parties necessary to the Company's
business. There can be no assurance that the Company's current and planned
personnel, systems, procedures and controls will be adequate to support the
Company's future operations, that management will be able to hire, train,
retain, motivate and manage required personnel or that the Company's
management will be able to successfully identify, manage and exploit existing
and potential market opportunities. If the Company is unable to manage growth
effectively, its business, operating results and financial condition could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business--Employees" and
"Management."
Dependence on Attraction and Retention of Key Employees. The Company's
performance is substantially dependent on the continued services and on the
performance of its senior management and certain other key personnel. The loss
of the services of any of its executive officers or other key employees could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company does not have long-term employment
agreements with any of its key personnel. The Company's future success also
depends on its ability to identify, attract, hire, train, retain and motivate
other highly skilled
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technical, managerial, editorial, marketing and customer service personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to successfully attract, assimilate or retain
sufficiently qualified personnel. In particular, the Company may encounter
difficulties in attracting a sufficient number of qualified software
developers for its online services and transaction-processing systems, and
there can be no assurance that the Company will be able to retain and attract
such developers. The failure to retain and attract necessary technical,
managerial, editorial, merchandising, marketing and customer service personnel
could have a material adverse effect on the Company's business, operating
results and financial condition.
Although none of the Company's employees is represented by a labor union, it
is common for employees in the television industry to belong to a union, and
there can be no assurance that the Company's employees will not join or form a
labor union or that the Company, for certain purposes, will not be required to
become a union signatory. See "Business--Employees" and "Management."
Risk of Capacity Constraints; Reliance on Internally Developed Systems;
System Development Risks. The Company's revenues depend on the number of
customers who use its online travel sites to book their travel reservations.
Accordingly, the satisfactory performance, reliability and availability of the
Company's online sites, transaction-processing systems and network
infrastructure are critical to the Company's operating results, as well as its
ability to attract and retain customers and maintain adequate customer service
levels. Any system interruptions that result in the unavailability of the
Company's online sites or reduced performance of the reservation system would
reduce the volume of reservations and the attractiveness of the Company's
service offerings, which could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company uses an internally developed system for its online sites and
substantially all aspects of transaction processing, including customer
profiling, making reservations, credit card verification and confirmations.
The Company has experienced periodic system interruptions, which it believes
will continue to occur from time to time. Any substantial increase in the
volume of traffic on the Company's online sites or the number of reservations
made by customers will require the Company to expand and upgrade further its
technology, transaction-processing systems and network infrastructure. The
Company has experienced and expects to continue to experience temporary
capacity constraints due to sharply increased traffic during "fare wars" or
other promotions, which may cause unanticipated system disruptions, slower
response times, degradation in levels of customer service, impaired quality
and speed of reservations and confirmations and delays in reporting accurate
financial information.
There can be no assurance that the Company's transaction-processing systems
and network infrastructure will be able to accommodate such increases in
traffic in the future, or that the Company will, in general, be able to
accurately project the rate or timing of such increases or upgrade its systems
and infrastructure to accommodate future traffic levels on its online sites.
In addition, there can be no assurance that the Company will be able in a
timely manner to effectively upgrade and expand its transaction-processing
systems or to successfully integrate any newly developed or purchased modules
with its existing systems. Any inability to do so could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--Technology."
Risk of System Failure; Single Site. The Company's success, in particular
its ability to successfully receive and fulfill orders online and provide
high-quality customer service, largely depends on the efficient and
uninterrupted operation of its computer and communications hardware systems.
Substantially all of the Company's computer and communications systems are
located at a single facility in San Francisco, California. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. The Company currently does not have redundant systems or a
formal disaster recovery plan and does not carry sufficient business
interruption insurance to compensate it for losses that may occur. Despite the
implementation of network security measures by the Company, its servers are
vulnerable to computer viruses, physical or electronic break-ins and
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<PAGE>
similar disruptions, which could lead to interruptions, delays, loss of data
or the inability to accept and confirm customer reservations. The occurrence
of any of the foregoing risks could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Technology" and "--Facilities."
Risks Associated with Television Operations. The Company's ability to
generate revenues from its television operations, as well as its ability to
use its television and in-flight programming to promote and enhance its online
services and brand recognition, depends upon its ability to reflect in its
programming the changing tastes of consumers, news directors and program
directors, and to secure and maintain distribution for its television and in-
flight programming on acceptable commercial terms through local stations,
domestic and international cable and broadcast networks and airlines. These
syndication agreements typically have durations of one year or less, and there
can be no assurance that such stations, networks and airlines will continue to
renew syndication agreements for the Company's programs. In addition, the
Company's ability to cost effectively update and expand its film library is
essential to its ability to continue to offer compelling content.
Although the Company maintains a back-up of its film library in offsite
storage, both the film library and the back-up library are vulnerable to
damage from fire, flood, break-ins, earthquake and similar events. Loss of
access to the Company's film library for an extended period of time could have
a material adverse effect on the Company's business, operating results and
financial condition.
Although the Company's television operations have had positive cash flow
from operations in the past, the Company has experienced negative cash flow
from television operations in each of the last two years and expects to
experience negative cash flow from television operations for the foreseeable
future. The Company must generate substantial revenues from sales of its
television programs, and, in particular, advertising sales for such programs,
in order to offset the significant fixed costs associated with its television
operations. The Company historically has derived advertising revenues from a
limited customer base. In particular, a single customer, MCI
Telecommunications Corporation ("MCI"), accounted for 49% and 58% of the
Company's television advertising revenues in 1995 and 1996, respectively.
Commencing in the first quarter of 1997, MCI began to phase out its
sponsorship of the Company's television programming, which phase-out was
completed in the quarter ended September 30, 1997. Revenues attributable to
MCI comprised 36.5% of the Company's total television revenues for the first
nine months ended September 30, 1997. However, because the Company does not
expect to receive any additional revenues from MCI for television
sponsorships, the Company expects revenues attributable to MCI to decrease
significantly in future periods. In addition, the Company faces significant
competition from national syndicators and broadcast and cable networks in its
efforts to replace MCI's sponsorship, expand its customer base and obtain
sufficient levels of advertising sales to achieve profitability in its
television operations. In certain market conditions, the Company could be
required to substantially lower its advertising rates in order to sell its
available inventory of television time and Web advertising space. There can be
no assurance that the Company will generate sufficient revenues from the
licensing of its television programs and sale of advertising to achieve
profitability, and the failure to do so could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business--Preview Travel Television Operations."
Rapid Technological Change. The Internet and the online commerce industry
are characterized by rapid technological change, changes in user and customer
requirements and preferences, frequent new product and service introductions
embodying new technologies and the emergence of new industry standards and
practices that could render the Company's existing online sites and
proprietary technology and systems obsolete. The emerging nature of these
products and services and their rapid evolution will require that the Company
continually improve the performance, features and reliability of its online
services, particularly in response to competitive offerings. The Company's
success will depend, in part, on its ability to enhance its existing services,
to develop new services and technology that address the increasingly
sophisticated and varied needs of its prospective customers and to respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. The development of online sites and other
proprietary
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technology entails significant technical and business risks and requires
substantial expenditures and lead time. There can be no assurance that the
Company will successfully use new technologies effectively or adapt its online
sites, proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. If the Company is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, its business,
operating results and financial condition could be materially adversely
affected. See "Business--Technology."
Online Commerce and Database Security Risks. A fundamental requirement for
online commerce and communications is the secure transmission of confidential
information over public networks. The Company relies on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. In addition, the Company
maintains an extensive confidential database of customer profiles and
transaction information. There can be no assurance that advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments will not result in a compromise or breach of the algorithms used
by the Company to protect customer transaction and personal data contained in
the Company's customer database. If any such compromise of the Company's
security were to occur, it could have a material adverse effect on the
Company's reputation, business, operating results and financial condition. A
party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
operations. The Company may be required to expend significant capital and
other resources to protect against such security breaches or to alleviate
problems caused by such breaches. Concerns over the security of transactions
conducted on the Internet and commercial online services and the privacy of
users may also inhibit the growth of the Internet and commercial online
services, especially as a means of conducting commercial transactions. To the
extent that activities of the Company or third-party contractors involve the
storage and transmission of proprietary information, such as credit card
numbers or other personal information, security breaches could expose the
Company to a risk of loss or litigation and possible liability. There can be
no assurance that the Company's security measures will prevent security
breaches or that failure to prevent such security breaches will not have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Technology."
Need for Additional Capital. The Company requires substantial working
capital to fund its business and expects to use a portion of the net proceeds
of this offering to fund its operating losses. In the last two years, the
Company has experienced negative cash flow from operations and expects to
continue to experience significant negative cash flow from operations for the
foreseeable future. The Company currently anticipates that the net proceeds of
the offering, together with its existing capital resources, will be sufficient
to meet the Company's capital requirements through at least the next 12
months. Thereafter, the Company may be required to raise additional funds, in
part to fund its financial obligations to AOL and Excite. There can be no
assurance that such financing will be available in sufficient amounts or on
terms acceptable to the Company, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Risks Associated with Offering New Services. The Company plans to introduce
new and expanded services and to enter into new relationships with third
parties in order to generate additional revenues, attract more consumers and
respond to competition. For example, the Company may offer travel insurance,
travel financing services and travel-related merchandise. There can be no
assurance that the Company would be able to offer such services in a cost-
effective or timely manner or that any such efforts would be successful.
Furthermore, any new service launched by the Company that is not favorably
received by consumers could damage the Company's reputation or its brand name.
Expansion of the Company's services in this manner would also require
significant additional expenses and development and may strain the Company's
management, financial and operational resources. The Company's inability to
generate revenues from such expanded services or products sufficient to offset
their cost could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Strategy."
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Liability for Internet and Television Content. As a publisher and
distributor of online and television content, the Company faces potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that the Company publishes or distributes. Such claims have been brought, and
sometimes successfully pressed, against online services. In addition, the
Company does not and cannot practically screen all of the content generated by
its users on the bulletin board system on the Company's online sites, and the
Company could be exposed to liability with respect to such content. Although
the Company carries general liability insurance, the Company's insurance may
not cover claims of these types or may not be adequate to indemnify the
Company for all liability that may be imposed. Any imposition of liability,
particularly liability that is not covered by insurance or is in excess of
insurance coverage, could have a material adverse effect on the Company's
reputation and its business, operating results and financial condition.
Uncertain Protection of Intellectual Property; Risks of Third Party
Licenses. The Company regards its copyrights, service marks, trademarks, trade
dress, trade secrets and similar intellectual property as critical to its
success, and relies on trademark and copyright law, trade secret protection
and confidentiality and/or license agreements with the Company's employees,
customers, partners and others to protect its proprietary rights. The Company
pursues the registration of certain of its key trademarks and service marks in
the United States and internationally. Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which the Company's products and services are made available online. The
Company has licensed in the past, and expects that it may license in the
future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties. While the Company attempts to ensure that the
quality of its brand is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of the Company's proprietary rights or reputation,
which could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate
or that third parties will not infringe or misappropriate the Company's
copyrights, trademarks, trade dress and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert
infringement claims against the Company. The Company may be subject to legal
proceedings and claims from time to time in the ordinary course of its
business, including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties by the Company and its
licensees. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. See "Business--
Legal Proceedings."
The Company also intends to strategically license certain content for its
online sites from third parties, including content which is integrated with
internally developed content and used on the Company's online sites to provide
key services. There can be no assurance that these third party content
licenses will be available to the Company on commercially reasonable terms or
that the Company will be able to successfully integrate such third party
content. Such content licenses may expose the Company to increased risks,
including risks associated with the assimilation of new content, the diversion
of resources from the development of the Company's content, the inability to
generate revenues from new content sufficient to offset associated acquisition
costs and the maintenance of uniform, appealing content. The inability to
obtain any of these licenses could result in delays in site development or
services until equivalent content can be identified, licensed and integrated.
Any such delays in site development or services could have a material adverse
effect on the Company's business, operating results and financial condition.
Governmental Regulation and Legal Uncertainties. Certain segments of the
travel industry are heavily regulated by the United States and international
governments, and accordingly, certain services offered by the Company are
affected by such regulations. For example, the Company is subject to United
States Department of Transportation ("DOT") regulations prohibiting unfair and
deceptive practices. In addition, DOT regulations concerning the display and
presentation of information that are currently applicable to the GDS services
accessed by the Company could be extended to the Company in the future, as
well as other laws and regulations aimed at protecting consumers accessing
online travel services or otherwise. In
15
<PAGE>
California, under the Seller of Travel Act, the Company is required to
register as a seller of travel, comply with certain disclosure requirements
and participate in the State's restitution fund. The television industry is
also subject to extensive regulation at federal, state and local levels,
including the Federal Communications Act and rules and regulations of the
Federal Communications Commission. In addition, legislative and regulatory
proposals under ongoing consideration by Congress and federal agencies may
materially affect the television industry and the Company's ability to obtain
distribution for its television programming.
The Company is also subject to regulations applicable to businesses
generally and laws or regulations directly applicable to access to online
commerce. Although there are currently few laws and regulations directly
applicable to the Internet and commercial online services, it is possible that
a number of laws and regulations may be adopted with respect to the Internet
or commercial online services covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality
of products and services. Furthermore, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies
conducting business online. The adoption of any additional laws or regulations
may decrease the growth of the Internet or commercial online services, which
could, in turn, decrease the demand for the Company's products and services
and increase the Company's cost of doing business, or otherwise have a
material adverse effect on the Company's business, operating results and
financial condition.
Moreover, the applicability to the Internet and commercial online services
of existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. For example, tax authorities in a number of states
are currently reviewing the appropriate tax treatment of companies engaged in
online commerce, and new state tax regulations may subject the Company to
additional state sales and income taxes. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business, or the application of
existing laws and regulations to the Internet and commercial online services
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Government Regulation."
Risks Associated with International Expansion. A key component of the
Company's strategy is to expand its operations into international markets. The
Company anticipates that it will expend significant financial and management
resources to establish local offices overseas, create localized user
interfaces and comply with local customs and regulations. If the revenues
generated by these international operations are insufficient to offset the
expense of establishing and maintaining such operations, the Company's
business, operating results and financial condition could be materially
adversely affected. To date, the Company has no experience in developing
localized versions of its online sites and marketing and distributing its
travel services internationally. There can be no assurance that the Company
will be able to successfully market or sell its services in these
international markets. In addition to the uncertainty as to the Company's
ability to expand its international presence, there are certain risks inherent
in conducting business on an international level, such as unexpected changes
in regulatory requirements, tariffs and other trade barriers, difficulties in
staffing and managing foreign operations, political instability, currency rate
fluctuations, seasonality in leisure travel in certain countries and
potentially adverse tax consequences. There can be no assurance that one or
more of the foregoing factors will not have a material adverse effect on the
Company's future international operations and, consequently, on its business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Risks Associated with Potential Acquisitions. The Company's current strategy
is to broaden the scope and content of its online sites through the
acquisition of existing online services and businesses specializing in travel-
related content, as well as through internally developed new travel services
offerings. Although no such acquisitions are currently being negotiated, any
future acquisitions would expose the Company to increased risks, including
risks associated with the assimilation of new operations, sites and personnel,
the diversion of resources from the Company's existing businesses, sites and
technologies, the inability to generate revenues from new sites or content
sufficient to offset associated acquisition costs, the maintenance of uniform
16
<PAGE>
standards, controls, procedures and policies and the impairment of
relationships with employees and customers as a result of any integration of
new management personnel. Acquisitions may also result in additional expenses
associated with amortization of acquired intangible assets or potential
businesses. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with
such acquisitions, and its inability to overcome such risks could have a
material adverse effect on the Company's business, operating results and
financial condition.
Lack of Prior Market and Possible Volatility of Stock Price. Prior to the
offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price for the Common Stock to be sold
by the Company will be established by negotiations among the Company and the
Representatives of the Underwriters and may bear no relationship to the price
at which the Common Stock will trade after completion of the offering. See
"Underwriting" for factors to be considered in determining such offering
price. The market price of the Common Stock could be subject to significant
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, announcements of technological innovations or new products
by the Company or its competitors, and other events or factors. For example, a
shortfall in revenues or net income, or an increase in losses from levels
expected by securities analysts, could have an immediate and significant
adverse effect on the market price of the Company's Common Stock. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations that have particularly affected the market prices of many high
technology companies and that have often been unrelated or disproportionate to
the operating performance of companies. These fluctuations, as well as general
economic and market conditions, may adversely affect the market price for the
Common Stock.
Antitakeover Effect of Certain Charter Provisions. After completion of the
offering, the Board of Directors will have the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change of control of the Company without further
action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock, which could have an adverse impact on
the market price of the Common Stock. The Company has no present plans to
issue shares of Preferred Stock. Further, certain provisions of the Company's
charter documents, including provisions eliminating the ability of
stockholders to take action by written consent and limiting the ability of
stockholders to raise matters at a meeting of stockholders without giving
advance notice, may have the effect of delaying or preventing changes in
control or management of the Company, which could have an adverse effect on
the market price of the Company's Common Stock. See "Description of Capital
Stock."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after the offering or the anticipation of such
sales could have a material adverse effect on then-prevailing market prices.
All of the 2,500,000 shares offered hereby, as well as approximately 44,943
additional shares may be resold immediately in the public market. Beginning 90
days after the date of this Prospectus, approximately 74,593 additional shares
may be resold in the public market. Beginning 180 days after the date of this
Prospectus, upon expiration of pre-existing lock-up agreements and lock-up
agreements between the representatives of the Underwriters and officers,
directors and certain stockholders of the Company, approximately 1,145,524
additional shares will be eligible for sale without restriction under Rule
144(k) under the Securities Act of 1933, as amended (the "Securities Act") and
6,331,286 additional shares (as well as an additional 1,157,914 shares
issuable upon exercise of outstanding options) will be eligible for sale
subject to compliance with the restrictions of Rule 144 and, under certain
circumstances, Rule 701 under the Securities Act. Any early release of the
lock-up agreement by the Underwriters, which, if granted, could permit sales
of a substantial number of shares and could adversely affect the trading price
of the Company's shares, may not be accompanied by an advance public
announcement by the Company. In addition, the Company intends to
17
<PAGE>
file a registration statement on Form S-8 under the Securities Act
approximately 30 days after the date of this Prospectus to register
approximately 2,362,155 shares of Common Stock reserved for issuance under the
Company's 1997 Employee Stock Purchase Plan, 1997 Directors' Stock Option Plan
and 1988 and 1997 Stock Option Plans and 1,157,914 shares subject to
outstanding options granted under the 1988 Stock Option Plan. Holders of
approximately 7,895,263 shares of Common Stock (the "Registrable Securities"),
including 881,480 shares issuable upon exercise of warrants outstanding as of
September 30, 1997 and 340,909 shares issuable upon conversion of convertible
subordinated notes outstanding as of September 30, 1997, also will have the
right to include such shares in any future registration of securities effected
by the Company and to require the Company to register their shares for future
sale, subject to certain exceptions. See "Description of Capital Stock--
Registration Rights of Certain Holders" and "Shares Eligible for Future Sale."
Dilution. The initial public offering price is expected to be substantially
higher than the book value per share of the outstanding Common Stock.
Investors purchasing shares of Common Stock in the offering will therefore
incur immediate, substantial dilution. In addition, investors purchasing
shares of Common Stock in the offering will incur additional dilution to the
extent outstanding options are exercised. See "Dilution."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company (after deducting underwriting discounts and
estimated offering expenses) from the sale of the 2,500,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share are estimated to be $24,725,000 ($28,850,000 if the
Underwriters' over-allotment option is exercised in full).
The principal purposes of this offering are to obtain additional capital, to
create a public market for the Common Stock, to facilitate future access by
the Company to public equity markets and to provide increased visibility and
credibility in a marketplace in which many of the Company's current and
potential competitors are or will be publicly held companies. The Company
intends to use a portion of the net proceeds to pay a portion of its
obligations to AOL and Excite pursuant to the Company's agreements with AOL
and Excite and to acquire redundant computer and communications systems. In
particular, the Company intends to use a portion of the net proceeds of this
offering to make a required $6.4 million prepayment of its obligations to AOL.
In addition, the Company may, when the opportunity arises, use a portion of
the net proceeds to license and acquire content for its online sites, to
establish additional distribution channels, to expand into international
markets and to acquire or invest in complementary businesses, products,
services or technologies. The Company has no specific plan for use of the
remaining proceeds and expects to use such proceeds for general corporate
purposes, including working capital to fund anticipated operating losses and
capital expenditures.
Pending such uses, the Company intends to invest such funds in short-term,
investment grade, interest-bearing obligations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock or other securities. The Company currently anticipates that its will
retain all of its future earnings for use in the expansion and operation of
its business and does not anticipate paying cash dividends in the foreseeable
future. Under the terms of the Company's current bank line of credit, the
Company's ability to pay dividends is restricted. See Note 4 of Notes to
Consolidated Financial Statements.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 (i) on an actual basis, (ii) on a pro forma basis, giving
effect to the conversion of all shares of Preferred Stock into shares of
Common Stock and (iii) as adjusted to give effect to the sale by the Company
of the 2,500,000 shares of Common Stock offered hereby at an assumed offering
price of $11.00 per share, after deducting underwriting discounts and
commissions payable by the Company, the conversion of convertible subordinated
notes and the exercise of certain warrants. This table should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED(1)
-------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total debt.................................. $ 1,055 $ 1,055 $ 305
Shareholders' equity:
Preferred Stock, $0.001 par value,
6,134,563 shares authorized; 4,483,166
shares issued and outstanding (actual);
5,000,000 shares authorized; none issued
or outstanding (pro forma and as
adjusted)................................ 6 -- --
Common Stock, $0.001 par value, 11,550,000
shares authorized, 1,929,958 shares
issued and outstanding (actual);
50,000,000 shares authorized; 6,413,124
shares issued and outstanding (pro
forma); 11,654,368 shares issued and
outstanding (as adjusted)................ 2 8 2,510
Additional paid-in capital................ 34,962 34,962 61,872
Other..................................... (86) (95) (95)
Accumulated deficit....................... (21,203) (21,194) (21,194)
-------- -------- --------
Total shareholders' equity.............. 13,681 13,681 43,093
-------- -------- --------
Total capitalization................... $ 14,736 $ 14,736 $ 43,398
======== ======== ========
</TABLE>
- ---------------------
(1) Includes an aggregate of 849,814 shares and 340,909 shares issuable upon
exercise or conversion of warrants and convertible subordinated notes,
respectively, outstanding as of September 30, 1997, substantially all of
which are expected to be exercised or converted upon completion of this
offering. Excludes (a) 1,157,914 shares issuable upon exercise of
outstanding options at a weighted average exercise price of $3.54 per
share as of September 30, 1997, (b) 31,666 shares issuable upon exercise
of outstanding warrants at a weighted average exercise price of $5.97 per
share as of such date and (c) an aggregate of 2,362,155 shares available
for future issuance under the Company's 1988 Stock Option Plan, 1997 Stock
Option Plan, 1997 Directors' Stock Option Plan and 1997 Employee Stock
Purchase Plan. See "Management--Stock Plans" and Note 9 of Notes to
Consolidated Financial Statements.
20
<PAGE>
DILUTION
As of September 30, 1997, the Company had a pro forma net tangible book
value of approximately $18,368, or $2.01 per share of Common Stock. Pro forma
net tangible book value represents total tangible assets less total
liabilities, including the effect of the conversion of convertible
subordinated notes and the exercise of certain warrants, divided by the number
of shares of Common Stock outstanding at that date including shares of Common
Stock from the conversion of the Preferred Stock immediately prior to the
consummation of the offering. Without taking into account any other changes in
the pro forma net tangible book value after September 30, 1997, other than to
give effect to the receipt by the Company of the net proceeds from the sale of
the 2,500,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $11.00 per share, the pro forma net
tangible book value at September 30, 1997 would have been approximately
$43,093, or $3.70 per share. This represents an immediate increase in net
tangible book value of $1.69 per share to existing stockholders and an
immediate dilution of $7.30 per share to new investors purchasing shares of
Common Stock in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $11.00
Pro forma net tangible book value per share as of September
30, 1997.................................................... $2.01
Increase per share attributable to new investors............. 1.69
-----
Pro forma net tangible book value per share after the offering. 3.70
------
Dilution per share to new investors............................ $ 7.30
======
</TABLE>
The following table summarizes, on a pro forma basis, as of September 30,
1997, the differences between the number of shares of Common Stock purchased
from the Company, the aggregate consideration paid and the average price per
share paid by existing stockholders and new investors purchasing shares of
Common Stock in this offering:
<TABLE>
<CAPTION>
SHARES AVERAGE PRICE
PURCHASED TOTAL CONSIDERATION PER SHARE
-------------- --------------------- -------------
NUMBER PERCENT AMOUNT PERCENT
------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1).................... 9,154 78.5% $ 36,882 57.3% $ 4.03
New investors (1)....... 2,500 21.5 27,500 42.7 11.00
------ ----- ---------- --------
Total................. 11,654 100.0% $ 64,382 100.0%
====== ===== ========== ========
</TABLE>
- ---------------------
(1) The foregoing tables includes an aggregate of 849,814 shares and 340,909
shares issuable upon exercise or conversion of warrants and convertible
subordinated notes, respectively, outstanding as of September 30, 1997,
substantially all of which are expected to be exercised or converted upon
completion of this offering. Excludes (a) 1,157,914 shares issuable upon
exercise of outstanding options at a weighted average exercise price of
$3.54 per share as of September 30, 1997, (b) 31,666 shares issuable upon
exercise of outstanding warrants at a weighted average exercise price of
$5.97 per share as of such date and (c) an aggregate of 2,362,155 shares
available for future issuance under the Company's 1988 Stock Option Plan,
1997 Stock Option Plan, 1997 Directors' Stock Option Plan and 1997
Employee Stock Purchase Plan. See "Management--Stock Plans" and Note 9 of
Notes to Consolidated Financial Statements.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
December 31, 1994, 1995 and 1996 and the nine-month period ended September 30,
1997 and as of December 31, 1995 and 1996 and September 30, 1997 have been
derived from the Company's consolidated financial statements included
elsewhere in this Prospectus which have been audited by Coopers & Lybrand
L.L.P., independent public accountants, whose report thereon is also included
elsewhere in this Prospectus. The following selected consolidated financial
data for the years ended December 31, 1992 and 1993 and as of December 31,
1992, 1993 and 1994 have been derived from the audited consolidated financial
statements of the Company not included in this Prospectus. The selected
consolidated financial data for the nine-month period ended September 30, 1996
have been derived from the Company's unaudited consolidated financial
statements included elsewhere in this Prospectus. Results of operations for
interim periods are not necessarily indicative of results to be expected for
the entire year. The following information is qualified by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Online................. $ -- $ -- $ -- $ 579 $ 2,573 $ 1,336 $ 4,226
Television............. 7,944 12,309 9,598 9,564 9,801 8,070 5,901
----- ------ ------------ ------------ ------------ -------- ---------
Total revenues........ 7,944 12,309 9,598 10,143 12,374 9,406 10,127
----- ------ ------------ ------------ ------------ -------- ---------
Cost of revenues:
Online................. -- -- -- 1,078 2,308 1,459 2,672
Television............. 5,491 9,972 9,103 8,393 7,000 5,200 4,339
----- ------ ------------ ------------ ------------ -------- ---------
Total cost of reve-
nues................. 5,491 9,972 9,103 9,471 9,308 6,659 7,011
----- ------ ------------ ------------ ------------ -------- ---------
Gross profit............ 2,453 2,337 495 672 3,066 2,747 3,116
----- ------ ------------ ------------ ------------ -------- ---------
Operating expenses:
Marketing and sales.... -- -- 2,759 2,687 4,373 2,874 4,540
Research and develop-
ment.................. -- -- -- 626 1,314 894 1,202
General and administra-
tive.................. -- -- 1,162 2,026 2,880 1,966 2,954
Loss on cancelled pro-
gramming (1).......... -- -- 2,166 -- -- -- --
----- ------ ------------ ------------ ------------ -------- ---------
Total operating ex-
penses (2)........... 2,268 2,617 6,087 5,339 8,567 5,734 8,696
----- ------ ------------ ------------ ------------ -------- ---------
Income (loss) from oper-
ations................. 185 (280) (5,592) (4,667) (5,501) (2,987) (5,580)
----- ------ ------------ ------------ ------------ -------- ---------
Interest income (ex-
pense) (2)............. -- -- (246) (264) (89) (120) 3
----- ------ ------------ ------------ ------------ -------- ---------
Income (loss) before in-
come taxes............. 185 (280) (5,838) (4,931) (5,590) (3,107) (5,577)
Income benefit (loss)... (74) (23) 420 (2) (2) (1) (2)
----- ------ ------------ ------------ ------------ -------- ---------
Net income (loss)....... $ 111 $ (303) $ (5,418) $ (4,933) $ (5,592) $ (3,108) $ (5,579)
===== ====== ============ ============ ============ ======== =========
Historical net income
(loss) per share (3)... $0.02 $(0.10) $ (1.82) $ (1.61) $ (1.60) $ (0.90) $ (1.56)
===== ====== ============ ============ ============ ======== =========
Weighted average shares
used in historical net
income (loss) per share
calculation............ 4,917 2,914 2,997 3,085 3,488 3,468 3,581
===== ====== ============ ============ ============ ======== =========
SUPPLEMENTAL FINANCIAL
DATA (UNAUDITED):
Gross bookings (4)...... $ -- $ -- $ -- $ 2,043 $ 20,263 $ 9,530 $ 54,007
===== ====== ============ ============ ============ ======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA: (IN THOUSANDS)
Cash and cash equivalents... $ 490 $ 765 $ 138 $1,064 $6,016 $13,640
Total assets................ 10,829 13,011 8,593 9,066 12,554 20,922
Long-term obligations (5)... 3,819 6,197 6,164 4,993 4,656 3,094
Total shareholders' equity.. 4,613 4,336 (1,027) 1,249 4,411 13,681
</TABLE>
- ------------------
(1) Effective September 30, 1994, the Company cancelled all further
development of environmental-related programming, primarily IMPACT
Environmental Reports, a series of daily 90-second environmental news
inserts licensed to local broadcast television stations.
(2) Prior to 1994, the Company did not classify operating expenses, interest
income or interest expense. As a result, only total operating expenses
(including interest income and interest expense) are presented for 1992
and 1993.
(3) See Note 1 of Notes to Consolidated Financial Statements for a description
of the method used to determine the number of shares used in computing net
loss per share.
(4) Represents the total purchase price of all travel services booked through
the Company's online reservation system. This presentation of gross
bookings does not affect the Company's operating results, and gross
bookings are not included in revenues. Management believes that gross
bookings provide a more consistent comparison between historical periods
than do online revenues. Gross bookings are not required by GAAP and
should not be considered in isolation or as a substitute for other
information prepared in accordance with GAAP, and period-to-period
comparisons of gross bookings are not necessarily meaningful due to, among
other things, changes in commission rates, and, as with operating results,
should not be relied upon as an indication of future performance. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(5) Long-term obligations include capital lease obligations, long-term notes
payable, line of credit, subordinated convertible notes payable,
subordinated notes payable and bank equipment note.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
Prospectus contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results and the timing of certain events
could differ materially from those discussed in the forward-looking statements
as a result of certain factors, including those set forth under "Risk Factors"
and elsewhere in this Prospectus.
OVERVIEW
Preview Travel is a leading provider of branded online travel services for
leisure and small business travelers. Since its inception in 1985, the Company
has operated as a producer of travel-related programming for broadcast
television stations and cable networks around the world. In 1994, the Company
began offering travel services by developing television programs
("infomercials") designed to generate interest in vacation packages offered by
the Company. The Company sold these vacation packages directly to consumers by
telephone. At the time, the commercial online services industry was beginning
to develop as a new medium to entertain, inform and transact with consumers.
In response to strong interest in travel from its television audience and in
recognition of new opportunities presented by the online market, the Company
adopted a new business model to address this demand in a more cost-effective
manner. Consequently, the Company shifted its business focus and resources
from infomercials to online travel services. The Company launched its online
service on AOL in January 1995 and on the Web in December 1995, providing
users with access to travel information and the ability to book travel
services by telephone. In May 1996, the Company launched its online airline
reservation service and, in the first half of 1997, enhanced its online
reservation service to include hotels and car rentals. In April 1997, the
Company launched its co-branded Web site for Excite's Travel Channel
(City.Net). In the third quarter of 1997, the Company expanded and extended
its relationships with Excite and AOL, respectively, by entering into new
five-year distribution agreements. See "Business--Strategic Relationships."
Overview of Television Operations. From inception through 1994, the Company
derived all of its revenues from its television operations. In 1995, 1996 and
the nine months ended September 30, 1997, the Company's television operations
accounted for approximately 94%, 79% and 58% of the Company's total revenues,
respectively. Television revenues are derived primarily from fees associated
with the licensing of travel-related news and entertainment programming and
sales of advertising time. Program license revenues are recognized when all of
the following conditions are met: (i) the license period begins, (ii) the
license fee and the production costs are known and (iii) the program has been
accepted by the licensee and is available for telecast. Advertising revenues
are recognized when all the terms of the advertising agreement are met, and
advertising is shown on various media as designated by the agreement.
The Company produces travel-related news inserts and news and entertainment
programs that are syndicated in exchange for either cash or commercial
advertising time. The Company also syndicates third party news inserts. The
local commercial advertising time earned for providing these programs is
aggregated and sold to advertisers seeking to reach a national audience. To
fulfill such advertisers' requirements to reach a national audience, the
Company from time to time purchases commercial advertising time for resale in
selected markets. In addition, the Company produces in-flight programs for
several airlines, primarily Northwest Airlines. In 1996, the Company
discontinued its practice of exchanging commercial advertising time on its
news and entertainment programming for travel services such as airline
tickets, hotel rooms and car rentals ("travel inventory"). During the year
ended December 31, 1996, the Company significantly reduced its travel
inventory and wrote off the remaining balance of unused travel inventory.
In 1995 and 1996, advertising revenue from MCI comprised 49% and 58%,
respectively, of the Company's total television revenues. Commencing in the
first quarter of 1997, MCI began to phase out its
23
<PAGE>
sponsorship of the Company's television programming, which phase-out was
completed in the quarter ended September 30, 1997. Revenues attributable to
MCI comprised 36.5% of the Company's total television revenues for the nine
months ended September 30, 1997. However, because the Company does not expect
to receive any additional revenues from MCI for television sponsorships, the
Company expects revenues attributable to MCI to decrease significantly in
future periods.
The Company's television operations historically have generated positive
operating cash flows with respect to such operations; however, there can be no
assurance that the Company's television operations will generate positive
operating cash flows in future periods. As a result of the amortization of the
Company's film library as well as depreciation and other factors, the
Company's television operations have incurred net operating losses in each of
the last four years, and the Company anticipates that its television
operations will continue to incur net operating losses for the foreseeable
future. As a result of these losses and the Company's anticipated increase in
operating expenses primarily for its online operations, the Company believes
that its future success depends on its ability to maintain its current level
of television revenues and to significantly increase revenues from its online
operations, for which it has a limited operating history. See "Risk Factors--
Limited Operating History of Online Business; Accumulated Deficit; Anticipated
Losses," "--Dependence on the Travel Industry," "--Uncertain Acceptance of the
Preview Travel Brand; Dependence on Increased Bookings," "--Dependence on
Continued Growth of Online Commerce," "--Risks Associated with Advertising
Revenues," "--Management of Potential Growth," "--Risks Associated with
Television Operations" and "--Risks Associated with International Expansion."
Overview of Online Operations. The Company's online revenues are
predominantly comprised of commissions paid by airlines, hotels, rental car
agencies, cruise lines and vacation packagers (collectively, "travel
suppliers") for travel services booked through the Company and, to a much
lesser extent, the sale of advertisements on the Company's online sites. In
addition, certain travel suppliers pay performance-based compensation known as
"override commissions" to travel agencies. Commission revenues for air travel,
hotel rooms, car rentals and travel packages, net of allowances for
cancellations, are recognized upon the confirmation of the reservation.
Overrides are recognized on a cash basis, which reflects the performance in
the prior monthly or quarterly period.
The Company's online travel services have experienced substantial growth
since the Company first enabled customers to book travel services online in
May 1996. Gross bookings of travel services online increased from
approximately $2.8 million in the second quarter of 1996 to $22.1 million in
the third quarter of 1997, which resulted in online revenues of approximately
$424,000 and $1.6 million, respectively, for the corresponding periods. The
commission rates paid by travel suppliers, in addition to overrides, are
determined by individual travel suppliers and are subject to change.
Historically, typical standard base commission rates paid by travel suppliers
have been approximately 10% for hotel reservations and car rentals and 10% to
15% for cruises and vacation packages. During the quarter ended June 30, 1997,
the commissions paid by most of the major airlines for online reservations was
changed from a typical base rate of 10% to approximately 5% (excluding
overrides). Travel suppliers can further reduce current industry commission
rates or eliminate such commissions entirely, which would likely have a
material adverse effect on the Company's revenues and operating results. See
"Risk Factors--Reliance on Travel Suppliers; Potential Adverse Changes in
Commission Payments."
Since launching its online operations, the Company's cost of revenues and
operating expenses have grown substantially and are expected to continue to
grow substantially in absolute dollars for the foreseeable future. In
particular, the Company's new agreements with AOL and Excite require minimum
aggregate payments of approximately $56 million over the next five years in
exchange for their providing distribution, marketing and other services. There
can be no assurance that the Company will achieve sufficient online traffic,
travel bookings or commissions to realize economies of scale that justify the
Company's significant fixed financial obligations to AOL and Excite. Further,
there can be no assurance that the Company will satisfy the minimum levels of
travel services bookings, or provide satisfactory content on the specified
time schedule, required to maintain the AOL agreements. Failure to do either
of the foregoing would likely have a material adverse effect
24
<PAGE>
on the Company's business, operating results and financial condition. See
"Risk Factors--Reliance on Distribution Agreements with American Online and
Excite."
Gross Margins. Gross margins may be impacted by a number of different
factors, including the mix of television revenues versus online revenues, the
mix of online commission revenues versus online advertising revenues, the mix
of travel services sold, the mix of revenues from AOL, Excite and the
Company's Web site, the mix of airline ticket commissions (which vary from
airline to airline) and the amount of override commissions. The Company
typically realizes higher gross margins on advertising revenues than
commission revenues, higher commissions on vacation packages than hotel rooms
and car rentals, higher commissions on hotel rooms and car rentals than
airline tickets, higher gross margins on advertising revenues from its own Web
site than through AOL or Excite, higher commissions from certain airlines than
others, and higher gross margins in periods of higher overrides. Any change in
one or more of the foregoing factors could materially adversely affect the
Company's gross margins and operating results in future periods. See "Risk
Factors--Unpredictability of Future Revenues; Fluctuations in Quarterly
Results."
Anticipated Losses. The Company has incurred significant operating losses
and, as of September 30, 1997, had an accumulated deficit of $21.2 million.
The Company believes that its success will to a large part depend on its
ability to greatly increase sales volume to realize economies of scale. The
Company expects to continue to incur significant operating losses on a
quarterly and annual basis for the foreseeable future, and the rate at which
such losses will be incurred is expected to increase significantly from
current levels, resulting in corresponding decreases in working capital, total
assets and shareholders' equity. In particular, the Company's operating
expenses are expected to increase substantially in the fourth quarter of 1997
as compared to the second and third quarters of 1997, primarily due to
commencement of the Company's payment obligations to AOL and Excite and
promotional and marketing expenses for the Company's online travel services,
resulting in corresponding increases in operating losses and decreases in
working capital, total assets and shareholders' equity. See "Risk Factors--
Limited Operating History of Online Business; Accumulated Deficit; Anticipated
Losses."
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's consolidated statement of
operations to total revenues, except as indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- ----------------
1994 1995 1996 1996 1997
----- ----- ----- ------ -------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Online............................ --% 5.7% 20.8% 14.2% 41.7%
Television........................ 100.0 94.3 79.2 85.8 58.3
----- ----- ----- ------ -------
Total revenues.................. 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Online............................ -- 10.6 18.7 15.5 26.4
Television........................ 94.8 82.8 56.6 55.3 42.8
----- ----- ----- ------ -------
Total cost of revenues.......... 94.8 93.4 75.3 70.8 69.2
----- ----- ----- ------ -------
Gross profit........................ 5.2 6.6 24.7 29.2 30.8
Operating expenses:
Marketing and sales............... 28.8 26.4 35.3 30.5 44.8
Research and development.......... -- 6.2 10.6 9.5 11.9
General and administrative........ 12.1 20.0 23.3 20.9 29.2
Loss on cancelled programming..... 22.6 -- -- -- --
----- ----- ----- ------ -------
Total operating expenses........ 63.5 52.6 69.2 60.9 85.5
Loss from operations................ (58.3) (46.0) (44.5) (31.7) (55.1)
----- ----- ----- ------ -------
Interest income (expense)........... (2.6) (2.6) (0.7) (1.3) --
----- ----- ----- ------ -------
Loss before income taxes............ (60.9) (48.6) (45.2) (33.0) (55.17)
Income tax benefit.................. 4.4 -- -- -- --
----- ----- ----- ------ -------
Net loss............................ (56.5)% (48.6)% (45.2)% (33.0)% (55.1)%
===== ===== ===== ====== =======
AS A PERCENTAGE OF RELATED REVENUES:
Cost of online revenues............. --% 186.2% 89.7% 109.2 % 63.2%
Cost of service revenues............ 94.8% 87.8% 71.4% 64.4% 73.5%
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Revenues
Online Revenues. Online revenues increased from $1.3 million for the first
nine months of 1996 to $4.2 million for the first nine months of 1997, due
primarily to greater bookings and the offering of new online services. The
Company commenced its online airline reservation service in May 1996 and
enhanced the service to include hotels and car rentals in the first half of
1997. As a result, online revenues for the first nine months of 1996 included
only five months of airline commissions and no commissions on hotels or car
rentals. Gross bookings increased from $9.5 million for the first nine months
of 1996 to $54.0 million for the first nine months of 1997, as a result of the
expansion of the Company's travel service offerings, strategic relationships
and customer base, as well as repeat purchases by existing customers. The
Company's database of customer profiles grew from approximately 390,000
profiles as of September 30, 1996 to over 2.1 million profiles as of
September 30, 1997. Repeat purchases from the Company's existing customer base
represented approximately 36% of the number of online transactions during the
nine months ended September 30, 1997. In 1996, the Company marketed its travel
services primarily through AOL. During the first nine months of 1997, the
Company expanded its online presence beyond AOL by marketing its own Web site
and by entering
26
<PAGE>
into a strategic relationship with Excite. The Company's gross bookings from
Excite and the Web comprised approximately 33% of the Company's total gross
bookings for the third quarter of 1997.
Television Revenues. Television revenues decreased 27% from $8.1 million for
the first nine months of 1996 to $5.9 million for the first nine months of
1997, primarily due to the loss of MCI as an advertising sponsor for the
Company's television programming in the first nine months of 1997, lower
international revenue, price reductions for programs licensed to cable
networks and reduced advertising revenues from the Company's in-flight
programs. The reduction in advertising revenues from the Company's in-flight
programs was caused by a reduction by Northwest Airlines in the number of
flights on which such programs were shown. For the first nine months of 1996
and 1997, 72% and 64% of television revenues, respectively, were derived from
the sale of advertising. Further, in the first nine months of 1997, the
Company reduced the price for its television programming licensed to The
Travel Channel. As a result of the foregoing factors, the Company expects
television revenues to decline in the fourth quarter of 1997 and possibly in
future quarters.
Cost of Revenues
Cost of Online Revenues. Cost of online revenues includes equipment and
staffing costs associated with operating the Company's transaction system and
customer reservation service center, GDS charges and printing and delivery
costs for tickets and other documents. Cost of online revenues increased from
approximately $1.5 million for the first nine months of 1996 to $2.7 million
for the first nine months of 1997. As a percentage of online revenues, cost of
online revenues fell from 109% for the first nine months of 1996 to 63% for
the first nine months of 1997, reflecting efficiencies associated with the
increase in transaction volume in the first nine months of 1997.
Cost of Television Revenues. Cost of television revenues includes
advertising agency commissions, staffing costs, costs of custom productions
that have a limited useful life, amortization costs relating to the Company's
film library and the costs of purchasing commercial advertising time to
fulfill advertiser requirements. Expenditures relating to non-custom program
production are capitalized and amortized over a period not to exceed five
years, and expenditures relating to custom programs are expensed in the same
period as revenues are recognized. Cost of television revenues decreased from
$5.2 million for the first nine months of 1996 to $4.3 million for the first
nine months of 1997, primarily reflecting reduced costs for commercial
advertising time purchased by the Company in the first nine months of 1997. As
a percentage of television revenues, cost of television revenues rose from 64%
for the first nine months of 1996 to 74% for the first nine months of 1997,
primarily reflecting the fixed costs associated with the television operations
and the decrease in television revenues in the first nine months of 1997. Film
library amortization was approximately $1.1 million for the first nine months
of 1996 and $959,000 for the first nine months of 1997.
Operating Expenses
Marketing and Sales. Marketing and sales expenses consist primarily of
payroll and related expenses, consulting fees, advertising, public relations
and promotional expenditures and costs relating to the development and
acquisition of content and distribution for the Company's online sites.
Marketing and sales expenses increased 58% from $2.9 million for the first
nine months of 1996 to $4.5 million for the first nine months of 1997. As a
percentage of total revenues, marketing and sales expenses rose from 31% for
the first nine months of 1996 to 45% for the first nine months of 1997. The
increase in marketing and sales expenses was attributable primarily to the
Company's development of new content and services, as well as increased
expenditures for public relations, advertising and promotional programs. The
Company intends to pursue an aggressive branding and marketing campaign,
including significant advertising expenditures. In addition, the Company is
obligated to make minimum payments totalling $56 million to AOL and Excite
over the next five years, which payments will be accounted for as marketing
and sales expense. As a result, the Company expects marketing and sales
expenses to increase significantly in absolute dollars in future periods.
27
<PAGE>
Research and Development. Research and development expenses consist
principally of personnel and equipment expenses and consulting fees for
development and enhancement of the Company's transaction processing system and
online services, costs of content development in connection with the Company's
strategic relationships with Excite and AOL and costs associated with network
operations, systems and telecommunications infrastructure. Research and
development expenses increased 35% from approximately $894,000 for the first
nine months of 1996 to $1.2 million for the first nine months of 1997. As a
percentage of total revenues, research and development expenses rose from 10%
for the first nine months of 1996 to 12% for the first nine months of 1997.
The increase in research and development expenses was attributable primarily
to expansion of the Company's online services and content. The Company
believes that continued investment in research and development is critical to
attaining the Company's strategic objectives and, as a result, expects
research and development expenses to increase significantly in absolute
dollars in future periods.
General and Administrative. General and administrative expenses consist of
payroll and related expenses for management, accounting and administrative
personnel, recruiting, professional services, facilities and other general
corporate expenses. General and administrative expenses increased 45% from
$2.0 million for the first nine months of 1996 to $2.9 million for the first
nine months of 1997. As a percentage of total revenues, general and
administrative expenses rose from 21% for the first nine months of 1996 to 29%
for the first nine months of 1997. The increase in general and administrative
expenses was due primarily to the expansion of facilities, the addition of
staff for the Company's online operations and expenses related to the issuance
of a warrant in connection with an equipment lease. The Company expects
general and administrative expenses to increase in absolute dollars in future
periods as the Company expands its staff and incurs additional costs related
to the growth of its business and being a public company.
Deferred Compensation. The Company grants stock options to hire and retain
employees. With respect to the grant of certain stock options to employees in
1997, the Company recorded aggregate deferred compensation of $251,000 in June
1997 and $320,000 in September 1997. Deferred compensation is recorded as a
reduction of shareholders' equity and is amortized ratably over the vesting
period of the applicable options, generally four years. The Company currently
expects to record amortization of deferred compensation for options granted of
approximately $62,000, $143,000, $143,000, $143,000 and $80,000 for 1997,
1998, 1999, 2000 and 2001, respectively. The amortization of deferred
compensation will be recorded as operating expenses in such periods.
Interest Expense
Interest expense, net of interest income, was approximately $120,000 for the
first nine months of 1996 and interest income, net of interest expense, was
approximately $3,000 for the first nine months of 1997. The decrease in net
interest expense was attributable to the retirement of $2.0 million in
subordinated debt, a reduction in borrowings under the Company's line of
credit and interest income earned on higher cash balances in 1997, primarily
from equity financings completed in June 1996 and September 1997.
Income Taxes
The provision for income taxes recorded in the first nine months of 1997
represents minimum state tax expense. The Company expects to incur a net loss
for 1997; therefore, no provision for federal income taxes has been recorded
in the first nine months of 1997.
28
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Revenues
Online Revenues. In 1994, no online revenues were recorded. In 1995, online
revenues consisted entirely of the sale of vacation packages by telephone. In
May 1996, the Company began to book airline tickets through its online
services, and commissions from these bookings constituted the majority of
online revenues for the year. Online revenues increased from $579,000 in 1995
to $2.6 million in 1996 due to the introduction of online airline
reservations. The number of airline transactions grew from approximately 2,000
in the second quarter of 1996 to over 32,000 in the fourth quarter of 1996. In
1996, the Company's online gross bookings were $20.3 million.
Television Revenues. From 1994 to 1995, television revenues remained flat at
$9.6 million and increased 3% to $9.8 million from 1995 to 1996. Advertising
revenues constitute a majority of the Company's television revenues and
comprised 45%, 75% and 73% of television revenues in 1994, 1995 and 1996,
respectively.
Cost of Revenues
Cost of Online Revenues. No cost of online revenues was recorded in 1994.
Cost of online revenues increased from $1.1 million in 1995 to $2.3 million in
1996, due to the increased volume of transactions in 1996. As a percentage of
online revenues, cost of online revenues fell from 186% in 1995 to 90% in
1996, due to start-up costs incurred in 1995 and efficiencies associated with
the increased transaction volume in 1996.
Cost of Television Revenues. Cost of television revenues decreased from $9.1
million in 1994 to $8.4 million in 1995, and decreased to $7.0 million in
1996. As a percentage of television revenues, cost of television revenues fell
from 95% in 1994 to 88% in 1995 and 71% in 1996. The reduction in cost of
television revenues from 1994 to 1995 was due primarily to a decrease in the
amortization of the Company's film library in 1995. From 1995 to 1996, the
decrease in the cost of television revenues was a result of lower film library
amortization in 1996 and decreased purchases of media advertisement time in
1995. Film library amortization was $2.5 million, $1.7 million and $1.5
million in 1994, 1995 and 1996, respectively.
Operating Expenses
Marketing and Sales. Marketing and sales expenses were relatively flat at
$2.8 million in 1994 and $2.7 million in 1995, and increased 63% to $4.4
million in 1996. As a percentage of total revenues, marketing and sales
expenses fell from 29% in 1994 to 26% in 1995, and rose to 35% in 1996. The
increase in marketing and sales expenses from 1995 to 1996 was attributable
primarily to expenses associated with the Company's online operations,
including the hiring of additional personnel for development of online content
and expenditures related to the Company's initial strategic agreement with
AOL.
Research and Development. No research and development expense was recorded
in 1994. Research and development expenses increased 110% from $626,000 in
1995 to $1.3 million in 1996. As a percentage of total revenues, research and
development expenses rose from 6% in 1995 to 11% in 1996. The increase from
1995 to 1996 was attributable primarily to increased staffing and consulting
fees, as well as increased costs related to enhancing the features, content
and functionality of the Company's online services and enhancing or updating
transaction-processing systems.
General and Administrative. General and administrative expenses increased
74% from $1.2 million in 1994 to $2.0 million in 1995, and increased 42% to
$2.9 million in 1996. As a percentage of total revenues, general and
administrative expenses rose from 12% in 1994 to 20% in 1995 to 23% in 1996.
The increase in general and administrative expenses in all three years was due
primarily to increased salaries and expenses associated with the hiring of
personnel related to the Company's online operations.
29
<PAGE>
Loss on Cancelled Programming. Loss on cancelled programming consists of
unamortized production costs written off in September 1994 as a result of the
Company's cancellation of its IMPACT Environmental Reports television program.
Interest Income (Expense)
Interest expense, net of interest income, was approximately $246,000,
$264,000 and $89,000 in 1994, 1995 and 1996, respectively. The decrease in net
interest expense from 1995 to 1996 was attributable to a reduction in
borrowings under the Company's line of credit and interest income earned on
higher cash balances in 1996, primarily from an equity financing completed in
June 1996.
Income Taxes
No provision for income taxes has been recorded in 1995 or 1996 as a result
of net operating losses incurred in each of these years. In 1994, the Company
recorded a deferred tax benefit totalling $420,000. As of December 31, 1996,
the Company had net operating loss carryforwards of approximately $14.5
million and $7.3 million for federal and state income tax purposes,
respectively. These carryforwards, if not utilized to offset future taxable
income and income taxes payable, will expire from 2001 through 2011 for
federal taxes and from 1998 through 2001 for state taxes. Due to changes in
the Company's ownership in 1995 and 1996, future utilization of the Company's
net operating loss carryforwards will be subject to certain limitations or
annual restrictions as defined by the Tax Reform Act of 1986. Due to the
uncertainty surrounding the realization of these favorable tax attributes in
future tax returns, the Company has recorded a valuation allowance against its
otherwise recognizable net deferred tax asset. See Note 3 of Notes to
Consolidated Financial Statements.
30
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statement of
operations data for the seven quarters ended September 30, 1997, as well as
such data expressed as a percentage of the Company's total revenues (except as
indicated) for the periods indicated. This data has been derived from
unaudited consolidated financial statements that, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information when read
in conjunction with the Company's annual audited consolidated financial
statements and notes thereto.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Online.................. $ 167 $ 424 $ 745 $ 1,237 $ 1,496 $ 1,174 $ 1,556
Television.............. 2,390 2,875 2,805 1,731 2,023 2,033 1,845
------- ------ ------- ------- ------- ------- -------
Total revenues......... 2,557 3,299 3,550 2,968 3,519 3,207 3,401
Cost of revenues:
Online.................. 387 471 602 848 910 853 909
Television.............. 1,594 1,730 1,875 1,801 1,386 1,503 1,450
------- ------ ------- ------- ------- ------- -------
Total cost of revenues. 1,981 2,201 2,477 2,649 2,296 2,356 2,359
------- ------ ------- ------- ------- ------- -------
Gross profit............. 576 1,098 1,073 319 1,223 851 1,042
Operating expenses:
Marketing and sales..... 871 881 1,122 1,499 1,335 1,181 2,024
Research and
development............ 312 176 406 420 405 296 501
General and
administrative......... 625 615 727 913 1,009 914 1,031
------- ------ ------- ------- ------- ------- -------
Total operating
expenses.............. 1,808 1,672 2,255 2,832 2,749 2,391 3,556
------- ------ ------- ------- ------- ------- -------
Loss from operations..... (1,232) (574) (1,182) (2,513) (1,526) (1,540) (2,514)
Interest income
(expense), net.......... (67) (75) 23 30 21 (1) (17)
------- ------ ------- ------- ------- ------- -------
Loss before income taxes. (1,299) (649) (1,159) (2,483) (1,505) (1,541) (2,531)
Income taxes............. -- (1) -- (1) -- (1) (1)
------- ------ ------- ------- ------- ------- -------
Net loss................. $(1,299) $ (650) $(1,159) $(2,484) $(1,505) $(1,542) $(2,532)
======= ====== ======= ======= ======= ======= =======
Pro forma net loss per
share (1)............... $ (0.16) $(0.08) $ (0.13) $ (0.27) $ (0.16) $ (0.17) $ (0.28)
Weighted average shares
used in pro forma net
loss per share
calculation (1)......... 7,958 8,008 9,194 9,208 9,221 9,231 9,275
SUPPLEMENTAL FINANCIAL
DATA:
Gross bookings (2)....... $ 537 $2,786 $ 6,207 $10,733 $14,117 $17,816 $22,074
======= ====== ======= ======= ======= ======= =======
<CAPTION>
AS A PERCENTAGE OF TOTAL
REVENUES:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Online.................. 6.5 % 12.9 % 21.0 % 41.7 % 42.5 % 36.6 % 45.8 %
Television.............. 93.5 87.1 79.0 58.3 57.5 63.4 54.2
------- ------ ------- ------- ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Online.................. 15.1 14.3 17.0 28.6 25.9 26.6 26.7
Television.............. 62.4 52.4 52.8 60.7 39.4 46.9 42.6
------- ------ ------- ------- ------- ------- -------
Total cost of revenues. 77.5 66.7 69.8 89.3 65.3 73.5 69.3
Gross profit............. 22.5 33.3 30.2 10.7 34.7 26.5 30.7
Operating expenses:
Marketing and sales..... 34.1 26.7 31.6 50.5 37.9 36.8 59.5
Research and
development............ 12.2 5.3 11.4 14.2 11.5 9.2 14.7
General and
administrative......... 24.4 18.6 20.5 30.8 28.7 28.5 30.3
------- ------ ------- ------- ------- ------- -------
Total operating
expenses.............. 70.7 50.6 63.5 95.5 78.1 74.5 104.5
------- ------ ------- ------- ------- ------- -------
Loss from operations..... (48.2) (17.3) (33.3) (84.7) (43.4) (48.0) (73.8)
Interest income
(expense), net.......... (2.7) (2.3) 0.6 1.0 0.6 0.0 (0.5)
------- ------ ------- ------- ------- ------- -------
Loss before income taxes. (50.9) (19.6) (32.7) (83.7) (42.8) (48.0) (74.3)
Income taxes............. -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------- -------
Net loss................. (50.9)% (19.6)% (32.7)% (83.7)% (42.8)% (48.0)% (74.3)%
======= ====== ======= ======= ======= ======= =======
<CAPTION>
AS A PERCENTAGE OF RELATED
REVENUES:
<S> <C> <C> <C> <C> <C> <C> <C>
Cost of online revenues.. 231.1 % 111.1 % 80.8 % 68.6 % 60.8 % 72.7 % 58.4 %
Cost of television
revenues................ 66.7 % 60.2 % 66.8 % 104.0 % 68.5 % 73.9 % 78.6 %
</TABLE>
- ---------------------
See footnotes on following page.
31
<PAGE>
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the method used to determine the number of shares used in computing pro
forma net loss per share.
(2) Represents the total purchase price of all travel services booked through
the Company's online reservation system. This presentation of gross
bookings does not affect the Company's operating results, and gross
bookings are not included in revenues. Management believes that gross
bookings provide a more consistent comparison between historical periods
than do online revenues. Gross bookings are not required by GAAP and
should not be considered in isolation or as a substitute for other
information prepared in accordance with GAAP, and period-to-period
comparisons of gross bookings are not necessarily meaningful due to, among
other things, changes in commission rates, and, as with operating results,
should not be relied upon as an indication of future performance. See Note
1 of Notes to Consolidated Financial Statements.
The Company's gross bookings have increased significantly in all quarters
presented due to expansion of the Company's distribution channels, travel
services and customer base and due to repeat purchases by existing customers.
Online revenues grew in conjunction with the growth of gross bookings except
for the second quarter of 1997, which was negatively impacted by the reduction
in the commission rate paid by most of the major airlines for online bookings.
Television revenues decreased in the fourth quarter of 1996 primarily as a
result of the Company's decision to write-off certain travel inventory.
Television revenues continued to be adversely impacted through the first nine
months of 1997 due to the loss of MCI as a sponsor for the Company's
television programming. Operating expenses have fluctuated in absolute dollars
on a quarter-to-quarter basis, but have generally increased from the first
quarter of 1996 to the third quarter of 1997, reflecting increased spending on
developing the Company's online operations and expanding its AOL relationship.
As a result of the Company's limited operating history in online commerce
and the emerging nature of the markets in which the Company competes, the
Company is unable to accurately forecast its revenues. The Company's current
and future expense levels are based predominantly on its operating plans and
estimates of future revenues and are to a large extent fixed. The Company may
be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. Accordingly, any significant shortfall in
revenues would likely have an immediate material adverse effect on the
Company's business, operating results and financial condition. Further, the
Company currently intends to substantially increase its operating expenses to
develop and offer new and expanded travel services, to fund increased sales
and marketing and customer service operations and to develop its technology
and transaction-processing systems. To the extent such expenses precede or are
not subsequently followed by increased revenues, the Company's operating
results will fluctuate and anticipated net losses in a given quarter may be
greater than expected.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of other factors, many of which
are outside the Company's control. Factors that may adversely affect the
Company's quarterly operating results include, but are not limited to (i) the
Company's ability to retain existing customers, attract new customers at a
steady rate and maintain customer satisfaction, (ii) changes in inventory
availability from third party suppliers or commission rates paid by travel
suppliers, such as the reduction in commissions paid by major airlines for
online bookings implemented during the first nine months of 1997, (iii) the
announcement or introduction of new or enhanced sites, services and products
by the Company or its competitors, (iv) general economic conditions and
economic conditions specific to the Internet, online commerce or the travel
industry, (v) the level of use of online services and consumer acceptance of
the Internet and commercial online services for the purchase of consumer
products and services such as those offered by the Company, (vi) the Company's
ability to upgrade and develop its systems and infrastructure and to attract
new personnel in a timely and effective manner, (vii) the level of traffic on
the Company's online sites, (viii) technical difficulties, system downtime or
Internet brownouts, (ix) the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business, operations and
infrastructure, (x) governmental regulation and (xi) unforeseen events
affecting the travel industry.
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In addition, the Company expects that it will experience seasonality in its
business, reflecting seasonal fluctuations in the travel industry, Internet
and commercial online service usage and advertising expenditures. The Company
anticipates that travel bookings will typically increase during the second
quarter in anticipation of summer travel and will typically decline during the
fourth quarter. Internet and commercial online service usage and the rate of
growth of such usage may be expected typically to decline during the summer.
In addition, advertising sales in traditional media, such as broadcast and
cable television, generally decline in the first and third quarters of each
year. Depending on the extent to which the Internet and commercial online
services are accepted as an advertising medium, seasonality in the level of
advertising expenditures could become more pronounced for Internet-based
advertising. Seasonality in the travel industry, Internet and commercial
online service usage, and advertising expenditures is likely to cause
fluctuations in the Company's operating results and could have a material
adverse effect on the Company's business, operating results and financial
condition.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as an indication of future performance. It is likely
that the Company's future quarterly operating results from time to time will
not meet the expectations of security analysts or investors. In such event,
the price of the Company's Common Stock would likely be materially and
adversely affected. See "Risk Factors--Unpredictability of Future Revenues;
Fluctuations in Quarterly Results."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of common stock and convertible preferred stock, which totaled
$34.3 million in aggregate net proceeds through September 30, 1997. The
Company has also financed its operations through issuance of convertible
notes, which totaled $750,000 in principal amount at September 30, 1997. As of
September 30, 1997, the Company also had a $2.0 million line of credit, of
which approximately $800,000 was available at September 30, 1997, based on 80%
of the Company's accounts receivable. See Note 4 of Notes to Consolidated
Financial Statements.
Net cash provided by operating activities of $2.1 million in 1994 was
attributable primarily to an increase in accounts payable and accrued
liabilities of $1.2 million, depreciation of $602,000, amortization of film
library of $2.5 million, a noncash loss of $2.2 million from the cancellation
of the IMPACT Environmental Reports television program and a decrease in
accounts receivable and prepaid production and other assets, offset by a net
loss of $5.4 million. Cash used in operating activities in 1995 of $2.3
million was attributable primarily to a net loss of $4.9 million and a
decrease in accounts payable and accrued liabilities, partly offset by
decreases in accounts receivable, travel inventory, prepaid production and
other assets and deferred revenues, as well as depreciation of $671,000 and
amortization of film library of $1.7 million. For 1996, cash used in operating
activities of $1.3 million was primarily attributable to a net loss of $5.6
million and increases in accounts receivable, partly offset by an increase in
accounts payable and accrued liabilities and decreases in prepaid production
and other assets and travel inventory, as well as depreciation of $828,000 and
amortization of film library of $1.5 million. Net cash used by operating
activities in the first nine months of 1997 was attributable primarily to a
net loss of $5.5 million, increases in accounts receivables, prepaid
production and other assets and a decrease in accounts payable, partly offset
by depreciation of $697,000 and film library amortization of $959,000.
Cash used in investing activities was $2.5 million in 1994, $1.9 million in
1995, $977,000 in 1996 and $1.8 million for the first nine months of 1997.
Cash used in investing activities in all periods was primarily for acquisition
of equipment and additions to the film library.
In 1994, cash used by financing activities was approximately $281,000, which
consisted primarily of payments of obligations under capital leases. In 1995,
cash provided by financing activities of $5.1 million consisted primarily of
proceeds from the issuance of preferred stock, warrants and equipment
financing notes, as well as proceeds from the exercise of stock options,
partly offset by repayment of long-term debt and
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payments under capital leases. In 1996, cash provided by financing activities
totalled $7.2 million consisting primarily of proceeds from the issuance of
preferred stock and a convertible note, partly offset by repayment of long-
term debt and payments under capital leases. For the first nine months of
1997, cash provided by financing activities of $14.8 million consisted
primarily of proceeds from the issuance of preferred stock, partly offset by
repayment of an equipment lease line and payment of obligations under capital
leases.
As of September 30, 1997, the Company had $13.6 million of cash and cash
equivalents. As of that date, the Company's principal commitments consisted of
obligations outstanding under a bank equipment loan and shareholder notes
payable. See Note 4 of Notes to Consolidated Financial Statements for a
summary of the principal terms of these commitments. Although the Company has
no material commitments for capital expenditures, it anticipates an increase
in its capital expenditures and lease commitments consistent with anticipated
growth in operations, infrastructure and personnel. The Company may establish
additional operations as it expands globally. In addition, pursuant to its
arrangement with AOL, the Company is obligated to make minimum payments
totaling $32 million to AOL, as well as pay a percentage of commissions earned
by the Company in excess of certain thresholds. Pursuant to its arrangement
with Excite, the Company is obligated to make minimum payments totaling
$24 million to Excite, as well as pay a percentage of commissions earned by
the Company in excess of certain thresholds. In addition, the Company is
required to develop a content areas featured on AOL and Excite, sponsored
primarily by advertising revenues, of which the Company will be entitled to
receive a share. However, there can be no assurance that the Company will
receive significant revenues, if any, from such payments. See "Risk Factors--
Reliance on Distribution Agreements with America Online and Excite" and Notes
4, 5 and 15 of Notes to Consolidated Financial Statements.
The Company believes that the net proceeds from this offering, together with
its current cash and cash equivalents, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at
least twelve months. If cash generated from operations is insufficient to
satisfy the Company's liquidity requirements, the Company may seek to sell
additional equity or debt securities or to obtain a credit facility. The sale
of additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. There can be no assurance that
financing will be available in sufficient amounts or on terms acceptable to
the Company, if at all. See "Risk Factors--Need for Additional Capital."
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require, companies to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. The Company has elected to account for stock-
based compensation in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense for stock-based awards
is recorded on the date of grant only if the current fair value of the
underlying stock exceeds the exercise price.
In February 1997, SFAS No. 128, "Earnings Per Share," was issued and is
effective for the Company's year ending December 31, 1997. In March 1997, SFAS
No. 129, "Disclosure of Information About Capital Structure," was issued and
is effective for the Company's year ending December 31, 1998. In June 1997,
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures
About Segments of an Enterprise and Required Information," were issued and are
effective for the year ended December 31, 1998. The Company has not determined
the impact of the implementation of these pronouncements.
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BUSINESS
OVERVIEW
Preview Travel is a leading provider of branded online travel services for
leisure and small business travelers. The Company operates its own Web sites
(www.previewtravel.com, www.reservations.com and www.vacations.com), the
primary travel service on America Online, Inc. ("AOL") (AOL keyword:
previewtravel) and a co-branded travel Web site with Excite, Inc. ("Excite")
(City.Net). The Company offers one-stop travel shopping and reservation
services, providing reliable, real-time access to schedule, pricing and
availability information for over 500 airlines, 13,000 hotels and all major
car rental companies. The Company's proprietary technology and user-friendly
interface enable customers to easily and quickly access travel information 24
hours a day, seven days a week, to make informed choices about their travel
purchases. In addition to its reservation and ticketing service, the Company
offers vacation packages, discounted and promotional fares, travel news and
destination content. The Company complements its compelling content and user-
friendly interface with a high level of customer service.
Through its News Travel Network, Inc. division ("NTN"), Preview Travel
produces entertainment programming for broadcast and cable television and the
in-flight market. NTN also produces 90 second news inserts for local
television station newscasts. NTN has compiled and continually updates an
extensive library of over 6,000 hours of proprietary, broadcast quality
footage featuring over 2,000 destinations around the world. NTN employs an in-
house sales staff that syndicates this programming to television stations
worldwide and sells the commercial airtime within these programs to national
advertisers.
To broaden its online presence and build brand recognition, the Company
entered into long-term agreements with AOL, the leading online service
provider with over nine million members, and Excite, a leading search engine
provider with over two million visitors per day. The Company is AOL's primary
and preferred provider of online travel services and the exclusive provider of
travel reservations services on the Company's co-branded Web site for Excite's
Travel Channel (City.Net) in the U.S. and on the WebCrawler Travel Channel.
Through such long term agreements, the Company's travel services are
prominently featured on the AOL and Excite travel channels and contextually
integrated throughout the AOL and Excite services.
Since launching its online booking service in May 1996, the Company has
experienced significant growth in its gross bookings. As of September 30,
1997, over two million users had registered on the Company's online site, and
over $74 million in gross bookings of travel services had been purchased by
approximately 145,000 customers in over 217,000 transactions. Of the customers
who had purchased the Company's travel services as of September 30, 1997,
approximately 35% were repeat customers.
INDUSTRY BACKGROUND
Growth of the Internet and Online Commerce
The Internet and commercial online services such as AOL are emerging as
significant global communications media enabling millions of people to share
information and conduct business electronically. A number of factors have
contributed to the growth in the Internet and commercial online services
usage, including the large and growing installed base of advanced personal
computers in the home and workplace, improvements in network infrastructure,
easier, faster and cheaper access to the Internet and commercial online
services, the introduction of alternative Internet access devices and
increased awareness of the Internet and commercial online services among
consumer and business users. International Data Corporation ("IDC") estimates
that the number of World Wide Web (the "Web") users will grow from
approximately 28 million in 1996 to approximately 129 million by 2000.
The functionality and accessibility of the Internet and commercial online
services have made them an increasingly attractive commercial medium by
providing features that historically have been unavailable through traditional
channels. For example, the Internet and commercial online services provide
users with
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convenient access to large volumes of dynamic data to support their
investment, purchase and other decisions. Online retailers are able to
communicate effectively with customers by providing frequent updates of
featured selections, content, pricing and visual presentations and provide
tailored services by capturing valuable data on customer tastes, preferences,
shopping and buying patterns. Unlike most traditional distribution channels,
online retailers do not have the burden of managing and maintaining numerous
local facilities to provide their services on a global scale. In contrast,
online retailers benefit from the relatively low cost of reaching and
electronically serving customers worldwide from a central location. Because of
these advantages, an increasingly broad base of products and services are
being sold online, including books, brokerage services, computers and music,
as well as travel services. IDC estimates that the total value of services and
products purchased over the Web grew from $296 million in 1995 to
approximately $2.6 billion in 1996, and will increase to approximately $123
billion by 2000.
Moreover, as the number of online content, commerce and service providers
has expanded, strong brand recognition and strategic alliances have become
critical to the success of such companies. Brand development is especially
important for online retailers due to the need to establish trust and loyalty
among consumers in the absence of face-to-face interaction. In addition, some
online retailers have begun to establish long-term strategic partnerships and
alliances with content, commerce and service providers to rapidly build brand
recognition and trust, enhance their service offerings, stimulate traffic,
build repeat business, take advantage of cross-marketing opportunities and
create barriers to entry.
The Traditional Travel Industry
The travel industry is large and growing, with travelers in the United
States spending over $470 billion on travel and tourism in 1996, according to
the Travel Industry Association of America. Historically, airlines, hotels,
rental car agencies, cruise lines and vacation packagers (collectively,
"travel suppliers") have relied on internal sales departments and travel
agencies as their primary distribution channels. According to the American
Society of Travel Agents ("ASTA"), travel agency sales in the United States
grew from $86 billion in 1991 to $101 billion in 1995, of which approximately
half was spent on leisure travel. The traditional travel agency channel is
highly fragmented, with few nationally recognized brands. According to ASTA,
there are over 23,000 travel agencies operating in more than 33,000 locations
in the United States, with the average travel agency generating less than $3
million in annual gross bookings per location. Furthermore, in 1995, the top
50 travel agencies accounted for less than 33% of all airline bookings.
Travel agents are compensated primarily through commissions paid by travel
suppliers on services booked. Some travel agencies also charge service fees to
their customers. Traditionally, typical standard base commission rates paid by
travel suppliers to travel agents have been approximately 10% for airline
tickets (subject to a maximum of $25 and $50 for one-way and round trip
tickets, respectively), 10% for hotel reservations and car rentals, and 10% to
15% for cruises and vacation packages. In addition, travel agencies can earn
significant performance-based incentive compensation ("override commissions")
from travel suppliers, which can substantially impact financial performance.
These commission rates and override commissions are determined by travel
suppliers and are subject to frequent change. For example, in a move to lower
distribution costs, in September 1997, the major U.S. airlines reduced the
commission rate payable to traditional travel agencies from 10% to 8%,
following a similar move by the major U.S. airlines in the first nine months
of 1997 reducing the commission rate payable to online travel services from
10% to 5%. Due to the limited profitability of many traditional travel
agencies, the Company believes that the downward pressure on commission rates
paid to traditional travel agencies, such as the recent reduction imposed by
most major airlines, may cause these agencies to charge service fees to their
customers, shift their focus to higher margin non-air travel services or
reduce the level of customer service in an effort to lower costs.
Travel agencies typically book reservations through electronic global
distribution services ("GDS") such as Galileo International Partnership's
Apollo system ("Apollo") and SABREGroup Holdings Inc.'s SABRE system
("SABRE"), which provide real-time access to voluminous data on fares,
availability and other travel information. The GDS data is constantly
changing, with as many as one million airfare changes being made
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daily. Customers traditionally have relied on travel agents to access and
interpret such rapidly changing information via complex and proprietary
interfaces to GDS systems. As a result, the ability of customers to obtain the
most favorable schedules and fares has been subject to the skill and
experience of individual travel agents, whose availability may be limited.
The Online Travel Opportunity
Recent trends in the traditional travel industry have contributed to a need
for a more effective and efficient means of purchasing and distributing travel
services to address the changing needs of consumers and travel suppliers. The
increasing complexity and time-sensitivity of pricing structures for travel
services have generally outpaced traditional means of delivering accurate and
reliable information to customers. Moreover, at a time when many traditional
travel agencies may be experiencing pressure to reduce levels of service as a
result of recent reductions in commission rates, many customers are demanding
greater convenience and flexibility in how, where and when they shop for
travel services. In an effort to reduce their distribution costs and develop
more direct relationships with their customers, travel suppliers seek ways to
distribute their services outside of the traditional travel agency channel. In
addition, the fragmentation of the travel agency channel often limits the
ability of travel suppliers to quickly implement effective marketing programs
targeted to specific customer segments.
As a result of these trends, the Internet and commercial online services
have emerged as an attractive medium through which travel services can be
purchased. According to Jupiter Communications, online travel bookings were
$274 million in 1996 and are expected to grow from $816 million in 1997 to
$8.6 billion in 2002, representing a projected compounded annual growth rate
of 77% for the period 1996 through 2002. The electronic nature of the online
medium enables participants to automate the processing and confirmation of
travel reservations, thus facilitating lower cost fulfillment of services and
reducing the need for investment in local facilities. The online medium also
provides travel suppliers with an effective advertising and promotional
vehicle. According to Competitive Media Reporting, in 1995 the travel industry
purchased over $2.3 billion in advertising through traditional vehicles such
as broadcast and cable television, radio, print and outdoor media to reach and
influence customers. Jupiter Communications reported that advertising revenue
on online travel-related sites was $2.3 million in 1996 and is expected to
grow from $11.0 million in 1997 to $281.5 million in 2002, representing a
projected compounded annual growth rate of 129% for the period 1996 through
2002.
Notwithstanding the attractive opportunities presented by the online travel
service market, significant barriers exist which make it increasingly
difficult to cost-effectively enter the online travel marketplace. In order to
succeed in the online travel service industry, entrants must establish broad
distribution to drive online traffic and achieve economies of scale to
overcome the following barriers: (1) required investments in technology and
technical infrastructure, (2) reduced level of commissions paid on airline
bookings made online, (3) cost of building a brand, and (4) challenges of
creating compelling content. Further, the Company believes that the largest
traditional travel agencies that sell services through franchisee or
representative networks may be hesitant to engage in online sales of travel
services, which would directly compete with their networks and result in lower
average commissions.
PREVIEW TRAVEL SOLUTION
Preview Travel is a leading provider of branded online travel services for
leisure and small business travelers, offering one-stop travel shopping for
airline tickets, hotel rooms, car rentals and vacation packages. The Company
operates its own Web sites (www.previewtravel.com, www.reservations.com, and
www.vacations.com), the primary travel service on America Online (AOL keyword:
previewtravel) and a co-branded travel Web site with Excite (City.Net).
Preview Travel has already become one of the most widely known, used and cited
online services for travel. As of September 30, 1997, over two million users
had registered on the Company's online site, and over $74 million in gross
bookings of travel services had been purchased by approximately 145,000
customers in over 217,000 transactions. Of the customers who had purchased the
Company's travel services as of September 30, 1997, approximately 35% were
repeat customers.
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Preview Travel's online reservation service was launched in May 1996 to
respond to its customers' needs for consistent and more immediate access to
rapidly changing travel-related information, and to capitalize on
opportunities created by the emergence of online commerce and the existing
inefficiencies of the traditional travel industry. The Company's full-featured
reservations and ticketing services enable customers to book their own travel
arrangements 24 hours a day, seven days a week. Preview Travel provides
reliable, real-time access to relevant schedule, pricing and availability
information for over 500 airlines, 13,000 hotels worldwide and all major car
rental companies. The Company's technology and proprietary interface enable
customers to easily and quickly access this information to make informed
choices about their travel purchases. Customers also can find extensive
destination information, photos, streaming video and Web links, providing them
with valuable resources for planning their travel.
The Company believes that, in addition to benefiting consumers, its online
travel services benefit travel suppliers by providing them with an efficient
channel to reach travel-oriented consumers. In effect, Preview Travel creates
an electronic marketplace that matches the purchasing needs of consumers with
the available inventory of travel suppliers. Travel suppliers also can realize
cost savings from distributing their services through the Company. In the
airline industry, for example, a higher percentage of tickets booked online
are issued as electronic tickets, representing a substantial savings in
transaction costs for the airlines. Through customer profiles, the Company
compiles demographic and behavioral data about its customers, which data can
be analyzed and used in cooperation with the Company's travel supplier
partners to develop personalized marketing and services for individual
customers and groups of customers.
Key features of the Preview Travel solution include:
Easy-to-Find. The Company's online travel services can be accessed through
AOL as well as the Web 24 hours a day, seven days a week, enabling customers
to shop for and purchase travel services at their convenience. Through its
long-term agreements with AOL, the leading online service provider with over
nine million members, and Excite, a leading search engine provider with over
two million visitors per day, the Company's travel services are prominently
featured on the AOL and Excite travel channels and also contextually
integrated throughout the AOL and Excite services. According to Media Metrix,
the Company's Web sites, combined with Excite's Travel Channel (City.Net),
generated more Internet traffic than all other branded consumer online travel
sites combined in July 1997.
Easy-to-Use. The Company has developed a graphical user interface with a
unique "look and feel" emphasizing ease of use. The Company continually
enhances its interface based on feedback from regularly conducted focus groups
and market research conducted on the Company's behalf. In addition, the
Company provides online help and assistance designed to ensure that consumers
get the full benefit of Preview Travel's services, including tips on how to
find the best available rates and fares. The Company's customer service
center, staffed by travel professionals, provides toll-free telephone support
and fulfillment services 24 hours a day, seven days a week.
Comprehensive, Up-to-Date Selection. The Company provides comprehensive,
accurate and timely travel information to enable customers to prioritize among
price, convenience and services without going through a traditional travel
agent intermediary. Through a computerized search and retrieval process,
customers are presented with a wide array of travel service options available
in the GDS systems accessed by the Company, updated on a real-time basis. For
example, the Company's Farefinder service presents the lowest fares available
in the Apollo GDS system for roundtrip airline travel to key cities selected
by the user.
Personalized Service. By compiling a profile of each online customer who
purchases travel services from the Company and tracking the preferences and
behavioral patterns of its customers, the Company obtains key customer
information that enables Preview Travel to tailor value-added services for its
customers, such as e-mail notifications for schedule changes and flight
cancellations, last-minute travel opportunities and other targeted marketing
programs developed in conjunction with travel suppliers.
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Compelling Content. The Company produces and acquires compelling content for
its online areas, including developing an easy-to-use interface with a
customer-oriented "look and feel" and links to numerous other travel-related
sites. In addition, the Company leverages the resources of its editorial and
production staff to deliver entertaining and informative content in connection
with its online travel services. The Company provides daily travel news
reports online that are produced by NTN's News Programming group.
Transaction Security. The Company believes that account and transaction
security are critical factors in the success of the online travel industry.
The Company uses a combination of proprietary and industry-standard encryption
and authentication measures designed to protect its customers' information. As
an added level of protection for its customers, the Company neither retains
credit card information nor sells the information in its customer database to
third parties.
STRATEGY
Preview Travel's objective is to be the leading provider of branded online
travel services for leisure and small business travelers. The Company plans to
attain this goal through the following key strategies:
Deliver Compelling Value to Customers. The Company seeks to deliver
comprehensive, accurate and easily accessible information, innovative tools
and high levels of personalized service to enable customers to make informed
purchases of travel services based on their preferred combination of
convenience, price, class of service and amenities. In addition, the Company
seeks to offer its customers a high-quality online experience through
relevant, informative and entertaining content, as well as simple and
efficient navigation and search capabilities.
Build Customer Loyalty and Brand Recognition. By focusing on customer
service and striving to deliver the highest-quality online experience to its
customers, the Company seeks to expand its customer base and build strong
customer loyalty. The Company also seeks to build global brand recognition by
combining world-class customer service with the Company's distinctive online
presence, as well as by employing a variety of marketing and promotional
efforts, including public relations activities, targeted advertising across a
variety of electronic and print media and strategic distribution arrangements.
In addition, the Company intends to continue promoting its online services
through its national and international television programs.
Enhance and Expand Strategic Relationships. The Company intends to continue
to leverage its strategic relationships with AOL, Excite and travel suppliers
to increase awareness of the Company's online travel services through a
variety of joint marketing programs, including targeted e-mail, online
promotions, booking incentives and interactive and co-op advertising. The
Company also intends to broaden its online visibility and expand its customer
base by entering into relationships with additional domestic and international
Internet access providers, content and commerce providers, search engines and
other Web sites.
Broaden Existing Offerings and Pursue Incremental Revenue Opportunities. The
Company intends to capitalize on its brand, online commerce experience,
operating infrastructure and customer base to broaden its online travel
offerings to include a broader selection of hotels and cruises, vacation
packages and special interest tours. The Company plans to aggressively pursue
media sales to targeted advertisers based on increased traffic to its online
sites. The Company also plans to offer additional services and products to
meet its customers' needs, such as travel insurance, travel financing services
and travel-related merchandise.
Leverage Travel Programming and Television Relationships. The Company
leverages the editorial, syndication and advertising resources of its
television operations to enhance its online sites. Consistent with this
strategy, Preview Travel sells online advertising bundled with television
advertising to targeted sponsors, promotes its online travel services on its
television programs and adapts television content for the Company's online
sites. For example, the Company uses content from its extensive travel film
library to present vacation destinations to customers online via streaming
video technology.
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Continue Investment in Technology. The Company uses scaleable, industry-
standard hardware and software that enable rapid deployment of additional
capacity. In addition, the Company intends to continue to invest substantial
resources in developing, acquiring and implementing technology-driven
enhancements to its online services and sites, including continuing to make
its user interface faster, more user-friendly and intuitive, providing
increasingly valuable personalized information and incorporating multimedia
content.
Expand into International Markets. The Company intends to expand its brand,
operating infrastructure and strategic relationships globally. To achieve this
objective, the Company intends to localize the user interface and its customer
service operations to offer native language capability, travel services and
content that complies with local regulations and customs.
PREVIEW TRAVEL ONLINE SERVICE
Through the Company's Web sites or on AOL, customers can easily access the
wide selection of Preview Travel online travel services in order to shop for
and book airline tickets, car rentals and hotel reservations.
The Preview Travel Experience. Visitors to the Company's online sites are
presented with a wide variety of travel information, including airline ticket
prices for popular destinations (Farefinder), travel specials, travel news and
vacation get-away contests. To use the Company's reservation services or
purchase a ticket, each customer completes a profile that includes required
information such as name, street address, e-mail address and telephone number,
as well as optional information such as preferred home airport, seating
assignment, special meals, airline, car and hotel preferences, club
memberships and frequent flier information. This information is stored in the
Company's database and is used solely by the Company to customize its
services.
By completing personal travel profiles, customers can automatically access
the Company's reservation system on subsequent visits, thus expediting the
reservation process. Once a customer accesses the reservation system, fares
and schedules of over 500 airlines, 13,000 hotels and the major car rental
companies may be searched and reservations booked through the Company's
system. Guided by an easy-to-use interface, the customer selects travel
options such as departure and destination cities, airline preference, class of
service and hotel and car selection. A key feature of the Company's service is
the ability to shop and compare many combinations of prices and schedules,
enabling customers to maximize their travel dollar. For domestic air travel,
the Company's Best Fare Finder service automatically finds the lowest
published fares available in the Apollo GDS system on the dates of travel
selected by the customer.
To complete a transaction, the customer enters a credit card number, which
is validated and transmitted to the GDS system. The customer receives an e-
mail confirmation soon thereafter. Depending on the departure date and method
of ticketing, tickets and itineraries are sent to the customer at no
additional charge by express delivery or through regular mail. Prior to the
date of departure, another e-mail message is sent automatically to the
customer which highlights links to Web sites with relevant information
regarding the customer's destination. Upon returning from his or her trip, the
customer automatically receives another e-mail that includes a thank-you
message and a customer satisfaction survey.
Online Travel Services Content. In addition to accessing the Company's
reservation services, customers can use the following travel-related services
to make better informed travel purchase decisions:
. Farefinder. This service provides quick and easy access to the lowest
airfares available in the Apollo GDS system from a customer's home city
to destinations around the world. Farefinder searches the Apollo GDS
system four times daily to update the posted fares.
. Find-a-Trip. This feature allows the customer to select from a variety
of vacation packages matching the customer's preferences as to
activities, location and price. In addition, Find-a-Trip provides the
customer with extensive information about hotels and destinations, which
in many instances is illustrated by photos and streaming video.
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. Travel Specials and Low Fares. This feature provides customers with
timely information on the latest travel bargains by highlighting daily
listings of discounted airfares, special hotel rates and car rental
offers.
. Vacations. This service offers complete vacation packages (airline,
hotel and car rental), cruises and specialty tours, with an emphasis on
providing value to customers. Customers can also find extensive
destination information, photos, video and links to relevant Web sites.
. Travel News and Content. Preview Travel's destination information
features up-to-date editorial content enhanced by extensive multimedia
content. The Company's travel experts search for the latest travel
trends and bargains so that customers can take advantage of special
opportunities offered by travel suppliers and produces a wide range of
news and feature articles for online distribution.
. Close-Ups. This service features weekly reports on different vacation
destinations, events and activities, with photos and links to relevant
Web sites.
. Resources. The Company's online Traveler Resource Center offers helpful
information and tips for the traveler. Customers can review pending
itineraries and complete feedback surveys.
Customer Service. The Company has invested and will continue to invest in
systems, personnel and training to maintain a premier in-house customer
service operation, which the Company believes is essential to establishing and
maintaining long-term customer relationships. In addition to extensive online
help, Preview Travel's customers have access to e-mail support and 24-hour
toll-free telephone support to help them with any problems or changes before,
during or after their travel.
STRATEGIC RELATIONSHIPS
Preview Travel pursues strategic relationships to increase its access to
online customers, to build brand recognition and to expand the Company's
online presence. To date, the Company has established the following alliances,
among others, for distribution and product enhancement:
America Online. Preview Travel and America Online, the leading Internet
online service provider with over nine million members, have entered into an
agreement establishing Preview Travel as AOL's primary and preferred provider
of travel services through a Preview Travel content area on the AOL network
and AOL's Web site (aol.com) (the "AOL Online Area"). The Company's original
agreement with AOL was entered into in November 1995 and was restated to
expand the relationship in September 1997. In addition to establishing the
Company as AOL's primary and preferred provider of travel services, AOL has
agreed to exclusively promote and advertise Preview Travel in online areas
controlled by AOL and to deliver a minimum number of annual page views to the
online areas promoting Preview Travel. Over the next five years, the Company
is obligated to make minimum payments totaling $32 million to AOL, as well as
pay a percentage of commissions earned by the Company in excess of certain
thresholds. The Company has also agreed to deliver content through the AOL
Online Area, provide travel services that are competitive in price and
performance and manage, operate and support such content and travel services.
The Company and AOL both have the right to sell advertising in the Company's
content areas distributed through AOL, subject to the Company's obligation to
pay a percentage of advertising revenues above certain threshold amounts to
AOL after the second year of the arrangement. Under a separate agreement, the
Company has agreed to develop and manage a travel-related destination database
for AOL in exchange for the right to receive all advertising revenues
generated from such database up to a certain threshold, and share in
advertising revenues thereafter. The Company's agreements with AOL expire in
September 2002, or earlier in the event of a material breach or the Company's
failure to deliver satisfactory content to the database or achieve specified
annual levels of travel services bookings. See "Certain Transactions" for a
description of the Company's relationship with AOL. Travel services sold
through AOL accounted for 89%, 77% and 67% of the Company's total online
revenues for the three months ended March 31, 1997, June 30, 1997 and
September 30, 1997 respectively. Accordingly, the AOL arrangement represents a
significant distribution channel for the Company's travel services and any
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termination of the Company's agreements with AOL would likely have a material
adverse effect on the Company's business, operating results and financial
condition. See "Risk Factors--Reliance on Distribution Arrangements with
America Online and Excite."
Excite. Preview Travel and Excite, a leading search engine provider with
over two million visitors a day, have entered into an agreement under which
Preview Travel will be the exclusive provider of travel reservations services
for Excite's Travel Channel (City.Net) in the U.S. and on the WebCrawler
Travel Channel. In addition, Preview Travel and Excite have agreed to create
co-branded content for the Excite Travel Channel and Preview Travel's online
sites that will leverage the Company's substantial library of travel news and
information. Excite has agreed to exclusively promote and advertise the Excite
Travel Channel throughout the Excite network and to deliver a minimum number
of annual page views to the Excite Travel Channel. In addition, the Company is
eligible to receive payments from Excite representing a share of advertising
revenues received by Excite in connection with the online areas featuring the
Company's travel services; however, there can be no assurance that such
payments, if any, will be significant. Over the next five years, the Company
is obligated to make minimum payments totaling $24 million to Excite as well
as pay a percentage of commissions earned by the Company in excess of certain
thresholds. The Company has agreed to promote the Excite service and has
agreed not to enter into any comparable agreements with any competitors of
Excite. The Company and Excite will cooperate in selling, and share revenues
from, advertising on the Excite Travel Channel. The Company's arrangement with
Excite expires in September 2002, or earlier in the event of a material
breach. The Company plans to make a significant investment in the Excite
Travel Channel, as it will represent an important distribution channel for the
Company's travel services.
There can be no assurance that the Company will achieve sufficient online
traffic, travel bookings or commissions to realize economies of scale that
justify the Company's significant fixed financial obligations to AOL and
Excite or that the Company will satisfy the minimum levels of travel services
bookings and content delivery required to maintain the AOL agreements, and
failure to do so would likely have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--
Reliance on Distribution Arrangements with America Online and Excite.'
NBC Interactive. Preview Travel and NBC Interactive have entered into an
agreement under which Preview Travel will be the primary travel site on the
NBC Interactive Neighborhood. NBC Interactive has agreed to promote Preview
Travel's online travel services within the NBC Interactive Neighborhood, a Web
site offered by NBC to its affiliates to showcase television content to their
viewers, on a minimum number of NBC affiliated television stations. Under the
agreement, in addition to an up-front fee, Preview Travel is obligated to pay
NBC Interactive a percentage of commissions earned by the Company through the
NBC Interactive Neighborhood. The Company's arrangement with NBC Interactive
expires in September 1999, or earlier in the event of a material breach.
MARKETING AND SALES
Preview Travel's marketing strategy is to strengthen the Company's brand
name, enhance customer awareness, develop loyalty programs to better serve the
Company's customers, continue to add new customers to the Company's database
and pursue complementary revenue opportunities by leveraging the Company's
distribution capabilities, compelling content and extensive customer database.
The Company's sales strategy is focused in part on generating advertising and
promotional revenue from sponsors who seek a cost-effective way to reach a
travel-oriented audience online.
The Company maintains a proprietary customer database comprised of
demographic profiles, customer preferences, shopping and buying patterns and
other key customer attributes. This data enables the Company to create and
quickly implement marketing programs targeted to specific customer segments.
The Company also employs a variety of traditional media programs and
promotional activities to enhance the effectiveness of the Company's marketing
initiatives:
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Advertising. To supplement its strategic relationships with AOL and Excite,
the Company invests in online advertising to drive traffic to its online
sites. By placing advertisements on selected high volume sites, as well as
purchasing targeted keywords on several popular search engines such as Yahoo!,
Lycos, Infoseek and others, the Company seeks to cost-effectively generate
traffic to the Preview Travel online site. Preview Travel also plans to
continue to advertise in traditional media such as print, radio and broadcast
to increase the awareness of its services.
Public Relations. Preview Travel proactively pursues public relations
opportunities to build brand awareness. The Company targets traditional print,
radio, syndicated news services and broadcast outlets with its public
relations programs and has been covered widely by the travel, business,
technology and consumer press. The Company also pursues coverage by online
publications, search engines and directories. More than 300 independent Web
sites have hyperlinks to the Company's Web sites, helping to increase brand
awareness and generate traffic to its online sites. Preview Travel also
actively participates in industry events and conferences.
Co-marketing/Promotions. The Company has established a number of significant
co-marketing relationships to promote its service and to sponsor contests that
offer travel-related prizes. These programs typically involve participation
with airlines, hotels, car rental agencies and online service providers. The
Company intends to enter into additional co-marketing relationships in support
of its marketing strategy.
From time to time, the Company offers various incentives and awards to its
customer base. These incentives are designed to increase customer loyalty and
awareness of Preview Travel's brand and travel services. For example, the
Company has provided customers with bonus frequent flier miles and special
companion fares during targeted promotional periods. The Company also engages
in promotional programs with hotels and car rental agencies.
Online Media Sales. The Company believes that the sale of online advertising
will become an increasingly important source of revenue. Accordingly, the
Company intends to increase its investment in media sales that target key
advertisers who seek to reach a travel-oriented online audience. Client
advertisements are incorporated into the Company's online sites in the form of
banners, links and buttons that encourage viewers to click through for
additional information. In addition, Preview Travel can develop extensive
editorial and marketing content to support the various marketing initiatives
of sponsors. In conjunction with the NTN media sales team, the Company offers
integrated media programs that incorporate presence on the Company's online
sites, participation in targeted e-mail programs and advertising time in the
Company's broadcast television and in-flight programs. Recent online
advertisers include AT&T, American Airlines, American Tourister Luggage, AVIS
Rental Car, Celebrity Cruises, Hilton Hotels and Resorts, InterContinental
Hotels, MasterCard and Northwest Airlines.
TECHNOLOGY
The Company's transaction-processing system automates the processing of
customer orders, interacts with the systems of third party travel suppliers,
searches and filters travel information and provides real-time operational
reports to management. The Company has developed proprietary applications that
interact with third party systems such as GDS systems to present an integrated
easy-to-use interface to the Company's customers, accessible by either
standard Web browsers or AOL client software to access travel reservation
information and make purchases. In addition, the Company's systems support
automated e-mail communications with customers to facilitate confirmations of
orders, provide customer support, obtain customer feedback and engage in
targeted marketing programs. The Company's online sites also utilize a number
of proprietary search, screen-scraping and database tools. While the system is
built on a combination of proprietary and commercial software and hardware,
the Company seeks to utilize industry-standard technology whenever possible
and focuses its development efforts on creating and enhancing proprietary
software that is unique to its business, as well as enhancing its existing
service offerings and creating new products.
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Preview Travel maintains a relational database containing information
compiled from customer profiles, shopping patterns and sales data. The Company
has developed, and continues to develop, techniques for analyzing the
information in this database to develop targeted marketing programs, to
provide personalized and enhanced customer service and to take advantage of
short-term opportunities in the travel marketplace. The Company does not
retain credit card information from its customers and has committed to its
customers not to sell or rent customer data to third parties. The Company's
complex database was designed to be scaleable to permit large transaction
volumes with no significant software changes. In most circumstances, capacity
is increased through the addition of new servers or the addition of processing
boards to existing servers. The Company believes that the scaleability of its
architecture has been demonstrated by serving over two million registered
users since May 1996.
Internet users are linked to the Company's servers over multiple T1 lines
from the Company's Internet access provider, GeoNet Communications, and AOL
users are linked to the servers through a single T1 line from AOL's ANS
Communications unit. Additional 56 Kbp leased lines are used for data
communications between the servers and systems run by third party reservation
systems such as Galileo's Apollo GDS system and the global hotel reservation
system operated by Pegasus. The Company has significantly expanded its data
communications capacities in recent months and anticipates implementing
substantial increases in data communications bandwidth in the near future to
support increased growth. The Company maintains an Internet firewall to
protect its internal systems and all credit card transactions are processed
using encryption and authentication technology, including public key
cryptography technology and secure socket layer technology. There can be no
assurance that the Company's security measures will prevent security breaches
or that failure to prevent such security breaches will not have a material
adverse effect on the Company's business, operating results and financial
condition. See "Risk Factors--Online Commerce and Database Security Risks."
Any reduction in performance, disruption in the Internet access or
discontinuation of services provided by AOL, ANS Communications, GeoNet
Communications or any other Internet service provider, or any disruption in
the Company's ability to access the systems of Galileo, Pegasus or any other
travel reservation systems, could have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Reliance on Third Party Systems." There can be no assurance that the
Company's transaction-processing systems and network infrastructure will be
able to accommodate increases in traffic in the future, or that the Company
will, in general, be able to accurately project the rate or timing of such
increases or upgrade its systems and infrastructure to accommodate future
traffic levels on its online sites. In addition, there can be no assurance
that the Company will be able in a timely manner to effectively upgrade and
expand its transaction-processing systems or to successfully integrate any
newly developed or purchased modules with its existing systems. See "Risk
Factors--Risk of Capacity Constraints; Reliance on Internally Developed
Systems; System Development Risks." There can be no assurance that the Company
will successfully utilize new technologies or adapt its online sites,
proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. See "Risk Factors--Rapid
Technological Change."
Substantially all of the Company's computer and communications hardware is
located at a single facility in San Francisco, California. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. The Company currently does not have redundant systems or a
formal disaster recovery plan and does not carry sufficient business
interruption insurance to compensate it for losses that may occur. Despite the
implementation of network security measures by the Company, its servers are
vulnerable to computer viruses, physical or electrical break-ins and similar
disruptions, which could lead to interruptions, delays, loss of data or the
inability to accept and confirm customer reservations. See "Risk Factors--Risk
of System Failure; Single Site."
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PREVIEW TRAVEL TELEVISION OPERATIONS
In addition to its online service, Preview Travel owns and operates its
television programming division, NTN. NTN is an independent producer of
travel-related programming for broadcast and cable television and the in-
flight market. NTN clients include affiliates of all major broadcast networks
in the United States and broadcast, cable and satellite networks in over 100
countries around the world. NTN handles program production, domestic program
syndication and media sales in-house.
NTN's film library, built up over 16 years, has grown to over 6,000 hours of
proprietary, broadcast-quality footage of over 2,000 destinations around the
world. Through the efforts of a staff of award-winning producers, writers and
editors, this library is updated and expanded by over 50 new on-location
productions per year. The library has been logged and indexed in a searchable
text database allowing easy access to the library content for use by the
Company.
Program Production. NTN's News Programming group produces five 90-second
travel-related news inserts per week for distribution to local broadcast
stations for use in local newscasts. The Company's Consumer Travel Reports is
shown daily in over 60 markets throughout the United States. In addition, the
News Programming group produces a weekly half-hour newscast titled Travel News
Now which is seen nine times per week on The Travel Channel, a subsidiary of
Paxon Communications, Inc., five to ten daily text stories for Preview
Travel's online news service and fifty-minute documentaries for the sell-
through video market. The first of these documentaries was titled "Civil War
River Journey," and a three-part series titled "America's Lakes and Rivers" is
currently in production.
NTN's Entertainment Programming group produces a variety of half-hour
specialty programs for the domestic and international television and in-flight
markets. Included in these programs is a weekly half-hour magazine-style
program called Travel Update that can be seen in over 90 markets throughout
the United States. Travel Update features travel news and destination features
with links to online resources including travelupdate.com to enable users to
easily find additional information online. NTN's international programming
portfolio includes Globe-Trotter, World's Weirdest Places, Earth Journeys, the
e-Report, Holiday USA and Bon Voyage. The Company also licenses certain video
content from its library to third parties for use in non-competitive programs.
In-flight programs include Northwest World Update, On Arrival and Northwest
Network Business Channel, which are produced under an agreement with Northwest
Airlines.
Program Syndication. The Company employs an in-house staff of sales
professionals that syndicates Travel Update and Consumer Travel Reports, as
well as two other news insert series produced by third parties: Dr. Dean
Edell's Medical Reports and CNET Technology Reports. These news inserts are
syndicated to local broadcast television stations in exchange for either cash
or commercial time during their local newscasts. These local commercial time
slots are packaged and sold to national advertisers. Travel Update is
syndicated to local stations in exchange for a portion of the total commercial
time within the program, which is then sold by the Company to national
advertisers. Internationally, programs are licensed for specific uses and
limited times for cash fees negotiated with the broadcast or cable network.
The Company's ability to generate revenues from its television operations,
as well as its ability to use its television programming to promote and
enhance its online services and brand recognition, depends upon its ability to
reflect in its programming the changing tastes of consumers, news directors
and program directors, and to secure and maintain distribution for its
television programming on acceptable commercial terms through local stations,
and domestic and international cable and broadcast networks. These syndication
agreements typically have durations of one year or less, and there can be no
assurance that such stations and networks will continue to renew syndication
agreements for the Company's programs. In addition, the Company's ability to
cost-effectively update and expand its film library is essential to its
ability to continue to offer compelling content. Although the Company
maintains a back-up of the film library in offsite storage, both the film
library and the back-up library are vulnerable to damage from fire, flood,
break-ins, earthquake and similar events. Loss of access to its film library
for an extended period of time could have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Risks Associated with Television Operations."
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COMPETITION
The online travel services market is new, rapidly evolving and intensely
competitive, and the Company expects such competition to intensify in the
future. The Company competes primarily with traditional travel agency
reservation methods and online travel reservation services. In the online
travel services market, the Company competes with other entities that maintain
similar commercial Web sites, such as Expedia (operated by Microsoft
Corporation), Travelocity (operated by SABREGroup Holdings Inc., a majority-
owned subsidiary of American Airlines), CUC International, Inc., TravelWeb
(operated by Pegasus) and Internet Travel Network, among others. Several
traditional travel agencies, including larger travel agencies such as American
Express Travel Related Services Co. Inc., Uniglobe Travel and Carlson Wagonlit
Travel, have established, or may establish in the future, commercial Web sites
offering online travel services.
In addition to the traditional travel agency channel, most travel suppliers
also sell their services directly to customers, predominantly by telephone. As
the market for online travel services grows, the Company believes that the
range of companies involved in the online travel services industry, including
travel suppliers, traditional travel agencies and travel industry information
providers, will increase their efforts to develop services that compete with
the Company's services. Many airlines and hotels offer travel services
directly through their own Web sites, eliminating the need to pay commissions
to third parties such as the Company. The Company is unable to anticipate
which other companies are likely to offer competitive services in the future.
There can be no assurance that the Company's online operations will compete
successfully with any current or future competitors.
In the television and in-flight programming markets, the Company's News
Travel Network division competes for airtime for its programs with news and
entertainment programming produced by local stations, broadcast and cable
networks, infomercial producers and third party syndicators. NTN competes for
national advertising sales with networks, national advertising representation
firms and syndicators.
Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the
Company and may enter into strategic or commercial relationships with larger,
more established and well-financed companies. Certain of the Company's
competitors may be able to secure services and products from travel suppliers
on more favorable terms, devote greater resources to marketing and promotional
campaigns and devote substantially more resources to Web site and systems
development than the Company. In addition, new technologies and the expansion
of existing technologies may increase competitive pressures on the Company. In
particular, Microsoft Corporation has publicly announced its intent to invest
heavily in the area of travel technology and services. Increased competition
may result in reduced operating margins, loss of market share and brand
recognition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and competitive
pressures faced by the Company may have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Competition."
PROPRIETARY RIGHTS
The Company regards its copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success,
and relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with the Company's employees,
customers, partners and others to protect its proprietary rights. The Company
pursues the registration of certain of its key trademarks and service marks in
the United States and internationally. Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which the Company's products and services are made available online. The
Company has licensed in the past, and expects that it may license in the
future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties. While the Company attempts to ensure that the
quality of its brand is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of the
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Company's proprietary rights or reputation, which could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate or that third parties will not
infringe or misappropriate the Company's copyrights, trademarks, trade dress
and similar proprietary rights. In addition, there can be no assurance that
other parties will not assert infringement claims against the Company. The
Company may be subject to legal proceedings and claims from time to time in
the ordinary course of its business, including claims of alleged infringement
of the trademarks and other intellectual property rights of third parties by
the Company and its licensees. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
See "Business--Legal Proceedings."
The Company also intends to strategically license certain content for its
online sites from third parties, including content which is integrated with
internally developed content and used on the Company's online sites to provide
key services. There can be no assurance that these third party content
licenses will be available to the Company on commercially reasonable terms or
that the Company will be able to successfully integrate such third party
content. Such content licenses may expose the Company to increased risks,
including risks associated with the assimilation of new content, the diversion
of resources from the development of the Company's content, the inability to
generate revenues from new content sufficient to offset associated acquisition
costs and the maintenance of uniform, appealing content. The inability to
obtain any of these licenses could result in delays in site development or
services until equivalent content could be identified, licensed and
integrated. Any such delays in site development or services could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Uncertain Protection of Intellectual
Property; Risks of Third Party Licenses."
GOVERNMENT REGULATIONS
Certain segments of the travel industry are heavily regulated by the United
States and international governments, and accordingly certain services offered
by the Company are affected by such regulations. For example, the Company is
subject to United States Department of Transportation ("DOT") regulations
prohibiting unfair and deceptive practices. In addition, DOT regulations
concerning the display and presentation of information that are currently
applicable to the GDS services accessed by the Company could be extended to
the Company in the future, as well as other laws and regulations aimed at
protecting consumers accessing online travel services or otherwise. In
California, under the Seller of Travel Act, the Company is required to
register as a seller of travel, comply with certain disclosure requirements
and participate in the State's restitution fund. The television industry is
also subject to extensive regulation at the federal, state and local levels,
including the Federal Communications Act and rules and regulations of the
Federal Communications Commission. In addition, legislative and regulatory
proposals under ongoing consideration by Congress and federal agencies may
materially affect the television industry and the Company's ability to obtain
distribution for its television programming.
The Company is also subject to regulations applicable to businesses
generally and laws or regulations directly applicable to access to online
commerce. Although there are currently few laws and regulations directly
applicable to the Internet and commercial online services, it is possible that
a number of laws and regulations may be adopted with respect to the Internet
or commercial online services covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality
of products and services. Furthermore, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies
conducting business online. The adoption of any additional laws or regulations
may decrease the growth of the Internet or commercial online services, which
could, in turn, decrease the demand for the Company's products and services
and increase the Company's cost of doing business, or otherwise have a
material adverse effect on the Company's business, operating results and
financial condition.
Moreover, the applicability to the Internet and commercial online services
of existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is
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uncertain and may take years to resolve. For example, tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in online commerce, and new state tax regulations may
subject the Company to additional state sales and income taxes. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Internet and
commercial online services could have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Governmental Regulation and Legal Uncertainties."
EMPLOYEES
As of September 30, 1997, the Company employed 149 full-time employees and
23 part-time employees, of whom 117 where involved in online travel service
operations and 55 were involved in television operations. Of these employees,
43 were involved in sales and marketing, 46 were involved in customer service,
22 were involved in technology and development and 62 were involved in
finance, administration and operations. The Company's ability to attract and
retain highly qualified employees will be the principal determinant of its
success in maintaining online leadership. The Company has a policy of using
equity-based compensation programs to reward and motivate significant
contributors among its employees. Competition for qualified personnel in the
Company's industry is intense. There can be no assurance that the Company's
current and planned staffing will be adequate to support the Company's future
operations or that management will be able to hire, train, retain, motivate
and manage required personnel. Although none of the Company's employees is
represented by a labor union, it is common for employees in the television
industry to belong to a union, and there can be no assurance that the
Company's employees will not join or form a labor union or that the Company,
for certain purposes, will not be required to become a union signatory. The
Company has not experienced any work stoppages and considers its relations
with its employees to be good. See "Risk Factors--Management of Potential
Growth" and "--Dependence on Attraction and Retention of Key Employees."
FACILITIES
The Company is headquartered in San Francisco, California, where it leases
an aggregate of approximately 34,000 square feet of space, housing its
principal administrative, sales and marketing, customer service, computer and
communications systems and product development facilities. The Company's lease
for such space expires on June 30, 2001, with an option to renew such lease
for an additional five-year term. The Company anticipates that it will require
additional space within the next 12 months, and there can be no assurance that
such additional space will be available on commercially reasonable terms, if
at all.
LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the ordinary course of its business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company and their ages as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Kenneth J. Orton............ 46 President, Chief Executive Officer and
Director
James J. Hornthal........... 43 Chairman and Director
David E. Lambert............ 45 Executive Vice President and President of
Preview Travel Online, Inc.
Kenneth R. Pelowski......... 38 Executive Vice President of Finance and
Administration,
Chief Financial Officer and Secretary
Christopher Lee McAndrews... 33 Senior Vice President of Online Media Sales
John M. Petrone............. 35 Senior Vice President of Technology
Barrie Seidenberg........... 32 Senior Vice President of Online Services
Roy F. Walkenhorst.......... 54 President of News Travel Network, Inc.
Thomas W. Cardy (1)......... 41 Director
Thomas A. Cullen (1)........ 38 Director
William R. Hearst, III...... 48 Director
Theodore J. Leonsis......... 40 Director
Douglas J. Mackenzie (2).... 37 Director
James E. Noyes.............. 51 Director
David S. Pottruck (2)....... 49 Director
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Kenneth J. Orton joined the Company in April 1994 as President and Chief
Operating Officer, and in June 1997, was appointed to serve as the President
and Chief Executive Officer and a director of the Company. From September 1989
to March 1994, Mr. Orton was Vice President and General Manager of the San
Francisco division of Epsilon, a database marketing firm and a wholly owned
subsidiary of American Express Company. Prior to his employment with Epsilon,
Mr. Orton was Vice President of M/A/R/C Inc., a market research and database
marketing company, and Vice President of Sales and Marketing for Future
Computing. Mr. Orton also serves as a director of ONSALE, Inc. Mr. Orton
received a B.A. degree from California State University, Fullerton.
James J. Hornthal founded the Company in 1985 and has served as Chairman
since inception. Mr. Hornthal also served as President of the Company until
April 1994 and as Chief Executive Officer until June 1997. Prior to starting
Preview Travel, Mr. Hornthal was a General Partner at Oak Grove Ventures, a
venture capital firm, and a Consultant for The Boston Consulting Group, a
management consulting firm. Mr. Hornthal also serves as a director of several
privately held technology-based and media companies. Mr. Hornthal received an
A.B. degree from Princeton University and an M.B.A. degree from Harvard
Business School, where he was a Baker Scholar.
David E. Lambert joined the Company in June 1995 and served as Senior Vice
President of Finance and Administration, Chief Financial Officer, Secretary
and Treasurer until September 1997, when he was appointed Executive Vice
President of the Company and President of Preview Travel Online, Inc., a
wholly owned subsidiary of the Company. From December 1992 to June 1995, Mr.
Lambert was Executive Vice President, Chief Financial Officer, Treasurer and
Secretary of Excalibur Technologies Corp., a software company. From April 1985
to May 1991, he was President and Chief Executive Officer of Grand American
Fare, Inc., a restaurant company, and from October 1981 to April 1985, he
served as Executive Vice President and Chief Operating Officer of Colony
Hotels, Inc., a resort hotel subsidiary of Radisson Hotels. Mr. Lambert
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serves as a director of Sunstone Hotel Investors, Inc., a publicly traded real
estate investment trust. Mr. Lambert received a B.A. degree from Occidental
College and an M.B.A. degree from the University of California at Los Angeles.
Kenneth R. Pelowski joined the Company as Executive Vice President of
Finance, Chief Financial Officer and Secretary in September 1997. From June
1996 to September 1997, he was Vice President, Corporate Development of
General Instrument Corporation. From May 1995 to June 1996, Mr. Pelowski was
Vice President, Corporate Planning and Development of Quantum Corporation, and
from 1989 to 1995, he was Senior Director, Corporate Planning and Development
at Sun Microsystems, Inc. Mr. Pelowski received B.S.E. and M.B.A. degrees from
the University of Michigan and an M.S.E. degree from Wayne State University.
Roy F. Walkenhorst joined the Company in 1986 when News Travel Network, Inc.
("NTN") was acquired by the Company. Mr. Walkenhorst founded NTN in July 1981
and has served as its President since such time. Prior to founding NTN, Mr.
Walkenhorst served as a reporter and news anchor with KCRA-TV, a television
station in Sacramento, California, and was a reporter with Newsday and the St.
Louis Globe- Democrat. Mr. Walkenhorst received a B.A. degree from Washington
University and an M.S. degree in Journalism from Columbia University.
Christopher Lee McAndrews joined the Company as Senior Vice President of
Online Media Sales in September 1997. From 1994 to 1997, he held a series of
executive marketing and sales positions, including Vice President of National
Accounts, at International Data Group ("IDG"), an information technology media
and research company. Mr. McAndrews received a B.A. degree from Harvard
University and an M.B.A. degree from Stanford University.
John M. Petrone joined the Company in August 1995 as Vice President of
Technology and in September 1997 was promoted to the position of Senior Vice
President of Technology. From August 1993 to August 1995, he was a Practice
Manager at Oracle Corporation, a database software company, from April 1993 to
August 1993, he was a Consulting Engineer at Lotus Development Corporation, a
software company, and from September 1992 to April 1993, he was a Consulting
Manager with Marathon Systems, a software consulting firm. Mr. Petrone
received a B.S. degree from the University of Maryland.
Barrie Seidenberg joined the Company as Director of Consumer Marketing in
April 1995. In November 1995, she became Vice President of Online Services and
was promoted to the position of Senior Vice President of Online Services in
September 1997. From January 1994 to March 1995, she was an Account Manager at
Epsilon, a database marketing company. From July 1992 to January 1994, she was
a Customer Acquisition Planner at Williams-Sonoma, Inc., a catalog and retail
company. Ms. Seidenberg received a B.A. degree from Yale University and an
M.B.A. degree from Stanford University.
Thomas W. Cardy has been a director of the Company since December 1991.
Since September 1988, Mr. Cardy has been employed with Communications Equity
Associates, Inc. ("CEA"), an investment banking firm, and is currently
Executive Vice President, Entertainment and New Media at CEA. Prior to joining
CEA in 1988, Mr. Cardy was Senior Manager with Arthur Andersen & Co., a public
accounting firm. Mr. Cardy received a B.A. degree from the University of
Florida and is a certified public accountant.
Thomas A. Cullen has been a director of the Company since April 1997. Since
August 1989, Mr. Cullen has served in various senior management positions with
U S WEST, Inc., a telecommunications and media company, and, since April 1997,
he has been President of the Interactive Services Group of U S WEST Media
Group, a subsidiary of U S WEST, Inc. Mr. Cullen also serves as a director of
SportsLine USA, Inc. Mr. Cullen received a B.S.B.A. degree from Northern
Arizona University and an M.B.A. degree from the University of Colorado.
William R. Hearst, III has been a director of the Company since February
1995. Since January 1995, Mr. Hearst has served as a general partner of
Kleiner Perkins Caufield & Byers, a venture capital firm. From
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May 1995 to July 1995, he was the Chief Executive Officer of At Home
Corporation, an Internet services company. Mr. Hearst has been a director of
At Home Corporation since August 1995 and has served as the Vice Chairman of
its Board of Directors since July 1996. Prior to joining Kleiner Perkins
Caufield & Byers, Mr. Hearst was Editor and Publisher of the San Francisco
Examiner newspaper. Mr. Hearst also serves as a director of Hearst-Argyle
Television, Inc. He is a Fellow of the American Association for the
Advancement of Science and a Trustee of the Carnegie Institute of Washington
and the California Academy of Sciences. Mr. Hearst received an A.B. degree
from Harvard University.
Theodore J. Leonsis has been a director of the Company since June 1985.
Since November 1996, Mr. Leonsis has served as President and Chief Executive
Officer of AOL Studios, an operating division of America Online, Inc., an
online services company ("AOL"), and from September 1994 to November 1996, he
served as President of America Online Services Company. Prior to joining AOL,
Mr. Leonsis was the founder and President of Redgate Communications
Corporation, a media marketing company he founded in 1986, which was
subsequently acquired by AOL in May 1994. Mr. Leonsis also serves as a
director of several privately held companies. Mr. Leonsis received a B.A.
degree from Georgetown University.
Douglas J. Mackenzie has been a director of the Company since February 1995.
Since June 1989, Mr. Mackenzie has been employed with Kleiner Perkins Caufield
& Byers, a venture capital firm, of which he has been a general partner since
1994. Mr. Mackenzie serves as a director of Visio Corporation and several
private technology-based companies. Mr. Mackenzie received a B.A. degree in
Economics and an M.S. degree in Industrial Engineering from Stanford
University, and an M.B.A. degree from Harvard University.
James E. Noyes has been a director of the Company since January 1996. Since
July 1996, Mr. Noyes has served as a director and Executive Vice President of
Signature Resorts, Inc., a developer and operator of vacation ownership
resorts. From 1988 to June 1996, Mr. Noyes served as President of The Trase
Miller Group, a travel technology services company and previously served as
its Vice President of Marketing and Sales since 1980. Mr. Noyes also serves as
a director of Ball Horticultural, Inc. Mr. Noyes received a B.A. degree from
Dartmouth College and an M.B.A. degree from Stanford University.
David S. Pottruck has been a director of the Company since September 1997.
Since 1984, Mr. Pottruck has served in various senior management positions
with The Charles Schwab Corporation ("Schwab"), a financial services company,
and is currently the President and Chief Operating Officer and a director of
Schwab. He is also President and Chief Executive Officer of Charles Schwab &
Co., Inc., the brokerage subsidiary of Schwab. Mr. Pottruck serves as a
director of McKesson Corporation and Decibel Instruments, Inc. Mr. Pottruck
received B.A. and M.B.A. degrees from the University of Pennsylvania.
BOARD COMPOSITION
The Company's Bylaws currently provide for a Board of Directors consisting
of nine members. All directors hold office until the next annual meeting of
stockholders of the Company and until their successors have been elected and
qualified. The officers of the Company are appointed annually and serve at the
discretion of the Board of Directors. Mr. Cullen was elected to the Board of
Directors by holders of the Company's Series E Preferred Stock pursuant to the
Company's Certificate of Incorporation in effect immediately prior to this
offering. Such special voting rights will terminate upon completion of this
offering. Messrs. Hearst, Leonsis and Mackenzie were elected to the Board of
Directors pursuant to a voting agreement by and among the Company and certain
principal stockholders of the Company. Such voting agreement will terminate
upon completion of this offering.
BOARD OF DIRECTORS COMMITTEES
The Audit Committee of the Board of Directors reviews the internal
accounting procedures of the Company and consults with and reviews the results
and scope of the audit and other services provided by the Company's
independent auditors. The Committee is currently comprised of Messrs. Cardy
and Cullen.
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The Compensation Committee of the Board of Directors reviews and approves
the compensation and benefits for the Company's executive officers,
administers the Company's stock purchase and stock option plans and makes
recommendations to the Board of Directors regarding such matters. The
committee is currently comprised of Messrs. Mackenzie and Pottruck. Except as
set forth in "Certain Relationships and Related Transactions," no interlocking
relationship exists between the Company's Board of Directors or Compensation
Committee and the board of directors or compensation committee of any other
company, nor has any such interlocking relationship existed in the past.
BOARD COMPENSATION
Except for reimbursement for reasonable travel expenses relating to
attendance at Board meetings and the grant of stock options, directors are not
compensated for their services as directors. Directors who are employees of
the Company are eligible to participate in the Company's 1988 and 1997 Stock
Option Plans and will be eligible to participate in the Company's 1997
Employee Stock Purchase Plan. Directors who are not employees of the Company
will be eligible to participate in the Company's 1997 Stock Option Plan and
1997 Directors' Stock Option Plan. See "Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are currently Messrs. Mackenzie and Pottruck, both of whom were
appointed to the Compensation Committee in September 1997. Prior to September
1997 and during the year ended December 31, 1996, Messrs. Hearst and Leonsis
comprised the Compensation Committee. None of Messrs. Mackenzie, Pottruck,
Hearst or Leonsis has at any time been an officer or employee of the Company
or any subsidiary of the Company. See "Certain Relationships and Related
Transactions" for a description of certain transactions and relationships with
Messrs. Mackenzie, Hearst and Leonsis and entities affiliated with such
persons.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that a
director of a corporation will not be personally liable for monetary damages
for breach of such individual's fiduciary duties as a director except for
liability (i) for any breach of such director's duty of loyalty to the Company
or to its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which a director derives an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its officers, employees and other
agents to the full extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross
negligence on the part of an indemnified party. The Company's Bylaws also
permit the Company to advance expenses incurred by an indemnified party in
connection with the defense of any action or proceeding arising out of such
party's status or service as a director, officer, employee or other agent of
the Company upon an undertaking by such party to repay such advances if it is
ultimately determined that such party is not entitled to indemnification.
The Company has entered into separate indemnification agreements with each
of its directors and officers. These agreements require the Company, among
other things, to indemnify such director or officer against expenses
(including attorney's fees), judgments, fines and settlements (collectively,
"Liabilities") paid by such individual in connection with any action, suit or
proceeding arising out of such individual's status or service as a director or
officer of the Company (other than Liabilities arising from willful misconduct
or conduct that is knowingly fraudulent or deliberately dishonest) and to
advance expenses incurred by such individual in connection with any proceeding
against such individual with respect to which such individual
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may be entitled to indemnification by the Company. The Company believes that
its Certificate of Incorporation and Bylaw provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers. The Company also maintains directors' and officers' liability
insurance.
At present the Company is not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of the Company in which
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded to, earned by,
or paid to the Company's Chief Executive Officer and the Company's five other
most highly compensated executive officers whose total cash compensation
exceeded $100,000 during the year ended December 31, 1996 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
------------------ ---------- --------- ------------ ------------------
<S> <C> <C> <C> <C>
Kenneth J. Orton,
President and Chief
Executive Officer...... $ 157,125 $25,000 30,000 $1,323
James J. Hornthal,
Chairman............... 167,425 -- -- 1,440
David E. Lambert,
Executive Vice
President, President of
Preview Travel Online,
Inc.................... 132,761 -- 25,000 486
Roy F. Walkenhorst,
President, News Travel
Network, Inc........... 123,481 41,680 3,125 2,737
John M. Petrone, Senior
Vice President of
Technology............. 98,000 47,500 10,000 --
Barrie Seidenberg,
Senior Vice President
of Online Services..... 90,000 27,500 10,000 --
</TABLE>
- ---------------------
(1) Consists of travel benefits and life insurance premiums paid by the
Company.
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<PAGE>
The following table shows certain information regarding stock options
granted to the Named Executive Officers during the year ended December 31,
1996. No stock appreciation rights were granted to these individuals during
the year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
NUMBER OF OF STOCK PRICE
SHARES PERCENTAGE OF APPRECIATION FOR
UNDERLYING TOTAL OPTIONS EXERCISE OPTION TERM(2)
OPTIONS GRANTED TO PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) EMPLOYEES SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kenneth J. Orton........ 30,000 11.79% $2.40 5/16/2001 $ 19,892 $ 43,957
David E. Lambert........ 25,000 9.83 $2.60 6/6/2001 17,958 39,683
Roy F. Walkenhorst...... 3,125 1.23 $2.60 6/6/2001 2,245 4,960
John M. Petrone......... 10,000 3.93 $2.40 4/15/2001 6,631 14,652
Barrie Seidenberg....... 10,000 3.93 $2.40 4/15/2001 6,631 14,652
</TABLE>
- ---------------------
(1) These stock options, which were granted under the 1988 Stock Option Plan,
become exercisable at a rate of 25% of the total number of shares of
Common Stock subject to the option on the first anniversary of the date of
grant, and 2.083% of the total number of shares monthly thereafter, as
long as the optionee remains an employee with, consultant to, or director
of the Company.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the Securities and Exchange Commission. There is no
assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the 10-
year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from the option grants
made to the executive officers.
OPTION EXERCISES AND HOLDINGS
The following table provides certain summary information concerning the
shares of Common Stock represented by outstanding stock options held by each
of the Named Officers as of December 31, 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES VALUE AT DECEMBER 31, 1996(#) AT DECEMBER 31, 1996($)(2)
ACQUIRED ON REALIZED ------------------------- ------------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth J. Orton........ -- -- 72,222 77,778 $ 28,889 $ 25,111
James J. Hornthal....... -- -- 190,000 -- 34,200 --
David E. Lambert........ -- -- 24,375 65,625 9,750 16,250
Roy F. Walkenhorst...... 10,000 $19,000 4,687 10,312 1,875 2,875
John M. Petrone......... -- -- 13,333 36,667 5,333 12,667
Barrie Seidenberg....... -- -- 8,697 31,303 3,479 10,521
</TABLE>
- ---------------------
(1) The amount set forth represents the difference between the fair market
value of the shares on the date of exercise as determined by the Board of
Directors and the exercise price of the option.
(2) Based on the fair market value as of December 31, 1996, as determined by
the Board of Directors, minus the exercise price, multiplied by the number
of shares underlying the option.
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<PAGE>
In addition, subsequent to December 31, 1996, the Company has granted
options to certain of the Named Executive Officers as follows: In January
1997, the Company granted options to purchase 5,000 shares and 10,000 shares
to John Petrone and Barrie Seidenberg, respectively. In February 1997, the
Company granted options to purchase 25,000 shares, 15,000 shares and 15,000
shares to James J. Hornthal, Kenneth J. Orton and David E. Lambert,
respectively. In June 1997, the Company granted an additional option to
purchase 105,000 shares to Mr. Orton. In September 1997, the Company granted
options to purchase 125,000 shares, 12,500 shares, 15,000 shares and 20,000
shares to Kenneth Pelowski, Roy Walkenhorst, Mr. Petrone and Ms. Seidenberg,
respectively.
In March 1997, the Company entered into an agreement with Mr. Orton pursuant
to which, in the event of the involuntary termination of Mr. Orton's
employment with the Company (other than for cause) prior to February 26, 1998,
Mr. Orton will be retained as a consultant to the Company for a period of up
to 12 months, for which Mr. Orton will receive a monthly consulting fee equal
to one-twelfth of his most recent annual compensation. In addition, each of
Mr. Orton's then outstanding stock options were amended to provide that Mr.
Orton may pay the exercise price under such options by executing a promissory
note for the applicable exercise price.
STOCK PLANS
1988 Stock Option Plan
The Company's 1988 Stock Option Plan (the "1988 Stock Option Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in April 1988. As of September 30, 1997, options to purchase a total
of 410,680 shares of Common Stock had been exercised, options to purchase a
total of 1,157,914 shares at a weighted average exercise price of $3.54 per
share were outstanding, and 113,155 shares remained available for future
option grants.
The 1988 Stock Option Plan provides for the grant to employees of the
Company (including officers and employee directors) of "incentive stock
options" within the meaning of Section 422 of the Code, for the grant of
nonstatutory stock options to employees, officers, directors and consultants
of the Company; provided, however, that non-employee directors shall not be
eligible for option grants after the effective date of this offering. To the
extent an optionee would have the right in any calendar year to exercise for
the first time one or more incentive stock options for shares having an
aggregate fair market value (under all plans of the Company and determined for
each share as of the date the option to purchase the share was granted) in
excess of $100,000, any such excess options shall be treated as nonstatutory
stock options.
The 1988 Stock Option Plan is administered by the Board of Directors or a
committee of the Board of Directors (the "Administrator"). The Administrator
determines the terms of options granted under the 1988 Stock Option Plan,
including the number of shares subject to the option, exercise price, term and
exercisability. The exercise price of all incentive stock options granted
under the 1988 Stock Option Plan must be at least equal to the fair market
value of the Common Stock of the Company on the date of grant. The exercise
price of any stock option granted to an optionee who owns stock representing
more than 10% of the voting power of the Company's outstanding capital stock
(a "10% Stockholder") must equal at least 110% of the fair market value of the
Common Stock on the date of grant. The exercise price of all nonstatutory
stock options granted to persons who are not 10% Stockholders cannot be less
than 85% of the fair market value of the Common Stock of the Company on the
date of grant. Payment of the exercise price may be made in cash, delivery of
shares of the Company's Common Stock or other consideration determined by the
Administrator. The Administrator determines the term of options. The term of
an incentive stock option granted under the 1988 Stock Option Plan may not
exceed 10 years; provided, however, that the term may not exceed five years
for 10% Stockholders. No option may be transferred by the optionee other than
by will or the laws of descent or distribution. Each option may be exercised
during the lifetime of the optionee only by such optionee. Options granted to
each employee under the 1988 Stock Option Plan prior to March 1995 generally
become exercisable at the rate of 1/36th of the total number of shares subject
to the options monthly following a six-
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<PAGE>
month waiting period after the date of grant, and options granted after March
1995 generally become exercisable at the rate of 25% of the total number of
shares subject to the options after the first anniversary following the date
of grant, with 2.083% vesting monthly thereafter.
In the event of certain changes in control of the Company, the 1988 Stock
Option Plan requires that each outstanding option be assumed or an equivalent
option substituted by the successor corporation. In the event that a successor
corporation refuses to assume each option or substitute an equivalent option,
the Administrator shall provide for the optionee to have the right to exercise
the option as to all of the shares covered by the option, including shares as
to which the option would not otherwise be exercisable, in which case each
option will be exercisable for 30 days from the date of such determination.
The Administrator has the authority to amend or terminate the 1988 Stock
Option Plan as long as such action does not adversely affect any outstanding
option and provided that stockholder approval shall be required for an
amendment to increase the number of shares subject to the 1988 Stock Option
Plan, or any change in the designation of the class of persons eligible to be
granted options, or a material increase in benefits accruing to participants
under the 1988 Stock Option Plan if the Company is registered under Section 12
of the Exchange Act. If not terminated earlier, the 1988 Stock Option Plan
will terminate in 1998.
1997 Stock Option Plan
The Company's 1997 Stock Option Plan (the "1997 Stock Option Plan") was
adopted by the Board of Directors in October 1997 and will be submitted for
approval by the stockholders of the Company prior to completion of this
offering. A total of 1,500,000 shares of Common Stock has been reserved for
issuance under the 1997 Stock Option Plan, and, as of September 30, 1997, no
options had been granted under such plan.
The 1997 Stock Option Plan provides for the grant to employees of the
Company (including officers and employee directors) of "incentive stock
options" within the meaning of Section 422 of the Code, for the grant of
nonstatutory stock options to employees, officers, directors (including non-
employee directors) and consultants of the Company. To the extent an optionee
would have the right in any calendar year to exercise for the first time one
or more incentive stock options for shares having an aggregate fair market
value (under all plans of the Company and determined for each share as of the
date the option to purchase the share was granted) in excess of $100,000, any
such excess options shall be treated as nonstatutory options.
The 1997 Stock Option Plan is administered by the Board of Directors or a
committee of the Board of Directors (the "Administrator"). The Administrator
determines the terms of options granted under the 1997 Stock Option Plan,
including the number of shares subject to the option, exercise price, term and
exercisability; provided, however, the maximum number of shares which may be
subject to options granted to any one person for any fiscal year of the
Company shall be 1,500,000. Such limitation shall not take effect until the
earliest date required under Section 162(m) of the Code. The exercise price of
all incentive stock options granted under the 1997 Stock Option Plan must be
at least equal to the fair market value of the Common Stock of the Company on
the date of grant. The exercise price of any incentive stock option granted to
an optionee who owns stock representing more than 10% of the voting power of
the Company's outstanding capital stock (a "10% Stockholder") must equal at
least 110% of the fair market value of the Common Stock on the date of grant.
The exercise price of all nonstatutory stock options cannot be less than 85%
of the fair market value of the Common Stock of the Company on the date of
grant. Payment of the exercise price may be made in cash, delivery of shares
of the Company's Common Stock or other consideration determined by the
Administrator. The Administrator determines the term of options. The term of
an incentive stock option granted under the 1997 Stock Option Plan may not
exceed 10 years; provided, however, that the term may not exceed five years
for 10% Stockholders. An option may not be transferred by the optionee other
than by will or the laws of descent or distribution, provided, however, that
the Administrator may in its discretion grant transferable nonstatutory stock
options. Each option may be exercised during the lifetime of the optionee only
by such optionee or by a permitted transferee. Options granted to each
employee under the 1997 Stock Option Plan generally become exercisable at the
rate of 25% of the total number of shares subject to the options after the
first anniversary following the date of grant, with 2.083% vesting monthly
thereafter.
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<PAGE>
In the event of certain changes in control of the Company, the 1997 Stock
Option Plan requires that each outstanding option be assumed or an equivalent
option substituted by the successor corporation, unless the Administrator
determines in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the optionee will have the right to exercise
the option as to some or all of the shares covered by the option, including
shares as to which the option would not otherwise be exercisable, in which
case each option will be exercisable for 30 days from the date of such
determination. The Administrator has the authority to amend or terminate the
1997 Stock Option Plan as long as such action does not adversely affect any
outstanding option and provided that stockholder approval shall be required
for an amendment to increase the number of shares subject to the 1997 Stock
Option Plan, or any change in the designation of the class of persons eligible
to be granted options, or an increase in the annual limitation on grants to
employees, or any other amendment requiring stockholder approval under the
federal securities laws. If not terminated earlier, the 1997 Stock Option Plan
will terminate in 2007.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in October 1997 and will be submitted for
approval by the stockholders prior to completion of the offering. A total of
500,000 shares of Common Stock has been reserved for issuance under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section
423 of the Code, generally will be implemented in a series of offering periods
of 24 months duration with new offering periods (other than the first offering
period) commencing on or about February 1 and August 1 of each year. Each
offering period will consist of four consecutive purchase periods of six
months duration, with the last day of each period being designated a purchase
date. However, the first such offering period is expected to commence on the
date of the offering and continue through January 31, 1999, with the first
purchase date occurring on July 31, 1998, and subsequent purchase dates to
occur every six months thereafter. The Purchase Plan will be administered by
the Board of Directors or by a committee appointed by the Board of Directors.
Employees (including officers and employee directors) of the Company, or of
any majority owned subsidiary designated by the Board of Directors, are
eligible to participate if they are employed by the Company or any such
subsidiary for at least 20 hours per week and more than 5 months per year. The
Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 15% of an employee's compensation, at
a price equal to the lower of 85% of the fair market value of the Company's
Common Stock at the beginning of the offering period or the purchase date. If
the fair market value of the Common Stock on a purchase date is less than the
fair market value at the beginning of the offering period, a new 24-month
offering period will automatically begin on the first business day following
the purchase date with a new fair market value. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the
Company. In addition, participants may decrease their level of payroll
deductions once during an offering period.
The Purchase Plan provides that in the event of a merger of the Company with
or into another corporation or a sale of substantially all of the Company's
assets, each right to purchase stock under the plan will be assumed or an
equivalent right substituted by the successor corporation unless the Board of
Directors shortens the offering period so that employees' rights to purchase
stock under the plan are exercised prior to the merger or sale of assets. The
Board of Directors has the power to amend or terminate the Purchase Plan as
long as such action does not adversely affect any outstanding rights to
purchase stock thereunder. If not terminated earlier, the Purchase Plan will
have a term of 20 years.
1997 Directors' Stock Option Plan
The 1997 Directors' Stock Option Plan (the "Directors' Plan") was adopted by
the Board of Directors in October 1997 and will be submitted for approval by
the stockholders prior to completion of the offering. A total of 250,000
shares of Common Stock has been reserved for issuance under the Directors'
Plan. The Directors' Plan provides for the automatic grant of nonstatutory
stock options to nonemployee directors of
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the Company. The Directors' Plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the Board of Directors. The Directors' Plan becomes effective on
the effectiveness of the registration statement relating to this offering.
The Directors' Plan provides that each person who first becomes a
nonemployee director of the Company after the date of the offering shall be
granted a nonstatutory stock option to purchase 20,000 shares of Common Stock
(the "First Option") on the date on which the optionee first becomes a
nonemployee director of the Company. The First Option will not be granted to
individuals serving as nonemployee directors as of the date of the offering.
Thereafter, on the date of each annual meeting of the Company's stockholders
following which a nonemployee director is serving on the Board of Directors,
each nonemployee director (including directors who were not granted a First
Option prior to the date of such annual meeting) shall be granted an option to
purchase 5,000 shares of Common Stock (a "Subsequent Option") if, on such
date, he or she has served on the Company's Board of Directors for at least
six months.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method
of making a grant. No option granted under the Directors' Plan is transferable
by the optionee other than by will or the laws of descent or distribution or
pursuant to a qualified domestic relations order, and each option is
exercisable, during the lifetime of the optionee, only by such optionee or by
a permitted transferee. The Directors' Plan provides that the First Option
shall become exercisable in installments cumulatively as to 25% of the total
number of shares subject to the First Option on each of the first, second,
third and fourth anniversaries of the date of grant of the First Option; each
Subsequent Option shall become exercisable in full on the first anniversary of
the date of grant of that Subsequent Option. The exercise price of all stock
options granted under the Directors' Plan shall be equal to the fair market
value of a share of the Company's Common Stock on the date of grant of the
option. The fair market value of any option granted concurrently with the
initial effectiveness of the Plan shall be the Price to Public set forth in
the final prospectus relating to this offering. Options granted under the
Directors' Plan have a term of ten years.
In the event of the dissolution or liquidation of the Company, a sale of all
or substantially all of the assets of the Company, the merger of the Company
with or into another corporation in which the Company is not the surviving
corporation or any other capital reorganization in which more than 50% of the
shares of the Company entitled to vote are exchanged, the Company shall give
to each nonemployee director either (i) a reasonable time within which to
exercise the option, including any part of the option that would not otherwise
be exercisable, prior to the effectiveness of any such transaction at the end
of which time the Option shall terminate, or (ii) the right to exercise the
option, including any part of the option that would not otherwise be
exercisable (or receive a substitute option with comparable terms) as to an
equivalent number of shares of stock of the corporation succeeding the Company
or acquiring its business by reason of any such transaction. The Board of
Directors may amend or terminate the Directors' Plan; provided, however, that
no such action may adversely affect any outstanding option, and the provisions
regarding the grant of options under the plan may be amended only once in any
six-month period, other than to comport with changes in the Code or the
Employee Retirement Income Security Act of 1974, as amended. If not terminated
earlier, the Directors' Plan will have a term of ten years.
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain stock option grants to directors and executive officers of the
Company are described herein under the caption "Management--Executive
Compensation."
Since January 1, 1994, the Company has issued, in private placement
transactions (collectively, the "Private Placement Transactions"), shares of
Preferred Stock as follows: an aggregate of 1,492,976 shares of Series D
Preferred Stock at $4.20 per share in January 1995 and an aggregate of
2,518,675 shares of Series E Preferred Stock at $9.00 per share in June 1996
and September 1997. The following table summarizes the shares of Preferred
Stock purchased by Named Executive Officers, directors and 5% stockholders of
the Company and persons and entities associated with them in the Private
Placement Transactions:
<TABLE>
<CAPTION>
SERIES D SERIES E
PREFERRED PREFERRED
INVESTOR(1) STOCK STOCK
----------- --------- ---------
<S> <C> <C>
America Online, Inc. (Theodore Leonsis) (2)............. 595,238 27,333
General Electric Capital Corporation (2)................ -- 555,555
KLAS, Inc. (2).......................................... 119,047 --
Kleiner Perkins Caufield & Byers (William R. Hearst, III
and Douglas J. Mackenzie) (2) (3)...................... 714,285 27,077
U S WEST Interactive Services, Inc. (Thomas A. Cullen)
(2).................................................... -- 922,540
Thomas W. Cardy (4)..................................... -- 1,666
James J. Hornthal (2) (5)............................... 2,500 6,145
David E. Lambert........................................ -- 1,477
James E. Noyes.......................................... -- 222
David S. Pottruck....................................... -- 22,222
</TABLE>
---------------------
(1) Shares held by affiliated persons and entities have been aggregated.
See "Principal Stockholders."
(2) Holder is a 5% stockholder.
(3) Includes shares held by KPCB Information Sciences Zaibatsu Fund II and
KPCB VII Founders Fund.
(4) Includes shares held by the Thomas W. Cardy Family Trust.
(5) Includes shares held by the Hornthal Living Trust.
59
<PAGE>
In May 1996, the Company issued and sold convertible subordinated notes in
the aggregate principal amount of $1,000,000 to certain investors, which
investors included certain of the Named Executive Officers, directors and 5%
stockholders. The entire principal balances under such notes, together with
accrued and unpaid interest, were converted into shares of Series E Preferred
Stock in connection with the sale and issuance of Series E Preferred Stock in
June 1996. In connection with the issuance of such notes, the Company also
issued warrants to purchase an aggregate of 19,076 shares of Common Stock at
an exercise price of $2.40 per share. The Company expects that substantially
all of such warrants will be exercised upon completion of the offering. The
following table summarizes the shares of Preferred Stock purchased by Named
Executive Officers, directors and 5% stockholders of the Company and persons
and entities associated with them in the Private Placement Transactions:
<TABLE>
<CAPTION>
COMMON
STOCK
INVESTOR (1) WARRANT
------------ -------
<S> <C>
America Online, Inc. (Theodore J. Leonsis) (2)..................... 4,692
Kleiner Perkins Caufield & Byers VII (William R. Hearst, III and
Douglas J. Mackenzie) (2) (3) 4,648
Thomas W. Cardy (4)................................................ 381
James J. Hornthal (2) (5).......................................... 953
David E. Lambert................................................... 253
James E. Noyes..................................................... 38
</TABLE>
- ---------------------
(1) Warrants held by affiliated persons and entities have been aggregated. See
"Principal Stockholders."
(2) Holder is a 5% stockholder.
(3) Includes warrants held by KPCB Information Sciences Zaibatsu Fund II and
KPCB VII Founders Fund.
(4) Includes warrants held by the Thomas W. Cardy Family Trust and
Communications Equity Associates, Inc.
(5) Includes warrants held by the Hornthal Living Trust.
In February 1995, the Company issued and sold convertible subordinated notes
in the aggregate principal amount of $750,000 to Kleiner Perkins Caufield &
Byers VII and KPCB VII Founders Fund. The outstanding principal amount under
such notes will be converted into 340,909 shares of Common Stock upon
completion of this offering.
Since July 1994, the Company has maintained a relationship with AOL pursuant
to which the Company developed and launched online travel services through a
Preview Travel content area on the AOL network and AOL's Web site (aol.com)
(together, the "AOL Online Area") in January 1995. Theodore J. Leonsis
currently serves as President and Chief Executive Officer of AOL Studios, an
operating division of AOL, and previously served as President of America
Online Services Company. In September 1997, the Company entered into an
agreement with AOL pursuant to which the Company serves as AOL's primary and
preferred provider of travel services on the AOL Online Area. In addition, AOL
has agreed to exclusively promote and advertise Preview Travel in online areas
controlled by AOL and to deliver a minimum number of annual page views to the
online areas promoting the Company. Over the next five years, the Company is
obligated to make minimum payments totaling $32 million to AOL, as well as pay
a percentage of commissions earned by the Company in excess of certain
quarterly thresholds. The Company has also agreed to deliver content through
the AOL Online Area and to provide travel services that are competitive in
price and performance. The Company and AOL both have the right to sell
advertising in the Company's content areas distributed through AOL, subject to
the Company's obligation to pay a percentage of advertising revenues above
certain threshold amounts to AOL after the second year of the agreement. Under
a separate agreement, the Company has agreed to develop and manage a travel-
related destination database for AOL in exchange for the right to receive all
advertising revenues generated from such database up to a certain threshold,
and share in advertising revenues thereafter. The Company's agreements with
AOL expires in September 2002, or earlier in the event of a material breach or
the Company's failure to deliver satisfactory content to the database or
60
<PAGE>
achieve specified annual levels of travel services bookings. Frank J.
Caufield, a director of AOL, is a general partner of KPCB VII Associates, the
general partner of each of Kleiner Perkins Caufield & Byers VII, KPCB VII
Founders Fund and KPCB Information Sciences Zaibatsu Fund II.
In addition, the Company has issued the following warrants to AOL in
connection with this relationship: a warrant to purchase 160,000 shares of
Common Stock at an exercise price of $2.20 per share, a warrant to purchase
377,619 shares of Series D Preferred Stock at an exercise price of $4.20 per
share, and a warrant to purchase 75,000 shares of Series E Preferred Stock at
an exercise price of $9.00 per share. In connection with the Company's
strategic agreement with AOL, the Company and AOL agreed to amend the terms of
AOL's warrant for Series D Preferred Stock to accelerate the exercisability of
such warrant and to provide that the warrant would expire upon the occurrence
of certain events, including the completion of this offering. The Company
anticipates that the warrants to purchase Common Stock, Series D Preferred
Stock and Series E Preferred Stock will be exercised by AOL upon completion of
this offering.
Until February 1997, the Company retained travel-related fulfillment and
consulting services from The Trase Miller Group ("Trase Miller"). Mr. Noyes, a
member of the Company's Board of Directors, served as the President of Trase
Miller from 1989 to June 1996. Total amounts paid to Trase Miller in
connection with such services were approximately $558,000 in 1996 and $84,000
in 1997.
In August 1997, the Company entered into an agreement with Excite, pursuant
to which Excite has agreed to use Preview Travel as the exclusive provider of
travel reservation services for Excite's Travel Channel (City.Net) in the U.S.
and the WebCrawler Travel Channel, and to deliver a minimum number of annual
page views to the Excite Travel Channel. The Company is obligated to make
minimum payments to Excite totaling $24 million over five years, as well as to
pay a percentage of commissions earned by the Company in excess of certain
thresholds. In addition, the agreement provides for the sharing of revenues
from advertising on co-branded areas of the Excite Travel Channel and, under
certain circumstances, requires the Company to pay a portion of commissions
derived from such co-branded areas. Vinod Khosla, a director of Excite, is a
limited partner of KPCB VII Associates, the general partner of each of Kleiner
Perkins Caufield & Byers VII, KPCB VII Founders Fund and KPCB Information
Sciences Zaibatsu Fund II (the "KPCB Funds"). In addition, the KPCB Funds and
AOL are principal stockholders of Excite.
In September 1997, the Company entered into an agreement with NBC
Interactive, an affiliate of The National Broadcasting Company ("NBC"),
pursuant to which Preview Travel will be the primary travel site on the NBC
Interactive Neighborhood. In addition, the Company has issued to an affiliate
of NBC Interactive a warrant to purchase 94,500 shares of Series E Preferred
Stock at a purchase price of $9.00 per share. The Company expects that such
warrant will be exercised upon completion of this offering. NBC is an
affiliate of General Electric Capital Corporation. See "Business--Strategic
Relationships."
The Company's Restated Certificate of Incorporation filed in connection with
the reincorporation of the Company in Delaware provides that the holders of
the Company's Series E Preferred Stock, voting as a separate class, have the
right to elect one member of the Company's Board of Directors. Pursuant to its
terms, this provision will expire upon the closing of this offering. In
addition, in September 1997 the Company and certain stockholders entered into
a voting agreement pursuant to which such stockholders have agreed to vote
their shares in any election so as to elect one designee of U S WEST
Interactive Services, Inc. to the Board of Directors. Pursuant to its terms,
such agreement will automatically terminate upon the completion of this
offering. In addition, Messrs. Hearst, Leonsis and Mackenzie were elected to
the Board of Directors pursuant to a voting agreement dated as of January 31,
1995, by and among the Company and certain principal stockholders of the
Company. Such voting agreement will terminate upon completion of this
offering.
The Company has entered into indemnification agreements with each of its
officers and directors containing provisions which may require the Company,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a
culpable nature) and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
61
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of September 30, 1997,
and as adjusted to reflect the sale of Common Stock offered hereby, as to (i)
each person (or group of affiliated persons) known by the Company to own
beneficially more than 5% of the Company's outstanding Common Stock, (ii) each
of the Company's directors, (iii) each of the Named Executive Officers, and
(iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
OWNED(1)
-----------------
NUMBER OF BEFORE AFTER
NAME AND ADDRESS SHARES(1) OFFERING OFFERING
---------------- --------- -------- --------
<S> <C> <C> <C>
America Online, Inc. (2)........................... 1,317,982 15.4% 11.9%
8619 Westwood Center Drive
Vienna, Virginia 22182-2285
Entities affiliated with Kleiner Perkins Caufield & 1,251,419 15.1 11.6
Byers (3).........................................
2750 Sand Hill Road
Menlo Park, CA 94025
U S WEST Interactive Services, Inc................. 932,540 11.7 8.9
9000 East Nichols Avenue, Suite 100
Englewood, CO 80112
General Electric Capital Corporation (4)........... 650,055 8.7 6.2
60 Long Ridge Road
Stamford, CT 06927
KLAS, Inc.......................................... 635,457 8.0 6.1
3228 Channel 8 Drive
Las Vegas, NV 89114
Kenneth J. Orton (5)............................... 118,611 1.5 1.1
James J. Hornthal (6).............................. 1,075,000 13.2 10.1
David E. Lambert (7)............................... 49,854 * *
Barrie Seidenberg (8).............................. 19,530 * *
Roy F. Walkenhorst (9)............................. 81,349 * *
John M. Petrone (10)............................... 26,458 * *
Thomas W. Cardy (11)............................... 207,047 2.6 2.0
Thomas A. Cullen (12).............................. 932,540 11.7 8.9
William R. Hearst, III (3)......................... 1,251,419 15.1 11.6
Theodore J. Leonsis (2)............................ 1,317,982 15.4 11.9
Douglas J. Mackenzie (3)........................... 1,251,419 15.1 11.6
James E. Noyes (13)................................ 45,974 * *
David S Pottruck................................... 22,222 * *
All directors and executive officers as a group (15 5,147,985 55.1 43.5
persons) (14).....................................
</TABLE>
- ---------------------
* Less than 1%.
(1) Applicable percentage of beneficial ownership is based on 7,963,645
shares of Common Stock outstanding as of September 30, 1997, together
with applicable options and warrants for such stockholder. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission. The number of shares beneficially owned by a
person includes shares of Common Stock subject to options held by that
person that are currently exercisable or exercisable within 60 days of
September 30, 1997. Such shares issuable pursuant to such options are
deemed outstanding for computing the percentage ownership of the person
holding such options but are not deemed outstanding for the purposes of
computing the percentage ownership of each other person. To the Company's
knowledge, the persons named in this table have sole voting and
investment power with respect to all shares of Common Stock shown as
owned by them, subject to community property laws where applicable and
except as indicated in the other footnotes to this table. Unless
otherwise indicated, the address of
62
<PAGE>
each of the individuals named above is: c/o Preview Travel, Inc., 747 Front
Street, San Francisco, California 94111.
(2) Includes 617,311 shares issuable upon exercise of warrants held by
America Online, Inc. ("AOL"), all of which are expected to be exercised
by AOL upon completion of the offering. Also includes 78,100 shares held
by Theodore J. Leonsis, a director of the Company. Mr. Leonsis is
President and Chief Executive Officer of AOL Studios, an operating
division of AOL. Mr. Leonsis disclaims beneficial ownership of the shares
held by AOL, except to the extent of his pecuniary interest therein.
(3) Includes 820,708 shares, 84,477 shares and 677 shares held by Kleiner
Perkins Caufield & Byers VII, KPCB VII Founders Fund and KPCB Information
Sciences Zaibatsu Fund II, respectively. Also includes 4,086 shares, 446
shares and 116 shares issuable upon exercise of warrants held by Kleiner
Perkins Caufield & Byers VII, KPCB VII Founders Fund and KPCB Information
Sciences Zaibatsu Fund II, respectively, all of which are expected to be
exercised upon completion of the offering. Also includes 306,818 shares
and 34,091 shares issuable upon conversion of convertible subordinated
notes held by Kleiner Perkins Caufield & Byers VII and KPCB VII Founders
Fund, respectively. Both of such notes are expected to be converted into
shares of Common Stock upon completion of the offering. William R.
Hearst, III and Douglas J. Mackenzie, both directors of the Company, are
limited partners of KPCB VII Associates, the general partner of each of
Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund and KPCB
Information Sciences Zaibatsu Fund II. Each of Messrs. Hearst and
Mackenzie disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
(4) Includes 94,500 shares issuable upon exercise of a warrant held by an
affiliate of NBC Interactive, an affiliate of General Electric Capital
Corporation.
(5) Includes 118,611 shares issuable upon exercise of outstanding options
exercisable within 60 days of September 30, 1997.
(6) Includes 190,000 shares issuable upon exercise of outstanding options
exercisable within 60 days of September 30, 1997. A portion of the shares
issuable upon exercise of such stock options is subject to repurchase by
the Company at the original exercise price in the event of termination of
employment, which repurchase right lapses over time. Also includes
793,758 shares held by Hornthal Living Trust and an aggregate of 68,384
shares held in trusts of which Mr. Hornthal is a trustee and has voting
power.
(7) Includes 48,124 shares issuable upon exercise of outstanding options
exercisable within 60 days of September 30, 1997.
(8) Includes 19,530 shares issuable upon exercise of outstanding options
exercisable within 60 days of September 30, 1997.
(9) Includes 8,849 shares issuable upon exercise of outstanding options
exercisable within 60 days of September 30, 1997.
(10) Includes 26,458 shares issuable upon exercise of outstanding options
exercisable within 60 days of September 30, 1997.
(11) Includes 2,500 shares held by Eugenia C. Cardy, 11,666 shares held by
Thomas W. Cardy Family Trust and 381 shares issuable upon a warrant held
by Thomas W. Cardy Family Trust, which warrant is expected to be
exercised upon completion of the offering. Also includes 172,500 shares
held by CEA Preview Investors Ltd. Mr. Cardy is a limited partner of CEA
Preview Investors Ltd. and disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein.
(12) Includes 932,540 shares held by U S WEST Interactive Services, Inc., of
which Mr. Cullen is President. Mr. Cullen disclaims beneficial ownership
of such shares except to the extent of his pecuniary interest therein.
(13) Includes 38 shares issuable upon exercise of a warrant, which warrant is
expected to be exercised upon completion of the offering.
(14) Includes 411,572 shares issuable upon exercise of stock options
exercisable within 60 days of September 30, 1997. A portion of the shares
issued or issuable upon exercise of such stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time. Also
includes 622,378 shares and 340,909 shares issuable upon exercise of
warrants and conversion of convertible subordinated notes, respectively.
Such warrants and notes are expected to be exercised or converted upon
completion of the offering.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following the closing of the sale of the shares offered hereby, the
authorized capital stock of the Company will consist of 50,000,000 shares of
Common Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock,
$0.001 par value.
COMMON STOCK
As of September 30, 1997, there were 7,963,645 shares of Common Stock
outstanding that were held of record by approximately 175 stockholders after
giving effect to the conversion of the Company's Preferred Stock into Common
Stock at a one-to-one ratio and assuming no exercise or conversion of
outstanding convertible securities after September 30, 1997. There will be
10,463,645 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise or conversion of
outstanding options, warrants or convertible subordinated notes after
September 30, 1997) after giving effect to the sale of the shares of Common
Stock offered hereby.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions available to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
Effective upon the closing of the offering, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors will have the authority to issue the undesignated Preferred Stock in
one or more series and to determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series of undesignated Preferred Stock and to fix the number
of shares constituting any series and the designation of such series, without
any further vote or action by the stockholders. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the stockholders and may
adversely affect the voting and other rights of the holders of Common Stock.
At present, the Company has no plans to issue any shares of Preferred Stock.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 7,895,263 shares of Common Stock (the "Registrable
Securities"), including 881,480 shares issuable upon exercise of warrants and
340,909 shares issuable upon conversion of convertible subordinated notes, or
their transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between the Company and the holders
of Registrable Securities. Subject to certain limitations in the agreement,
the holders of the Registrable Securities may require, on two occasions at any
time after four months from the effective date of the offering, that the
Company use its best efforts to register the Registrable Securities for public
resale, provided that the proposed aggregate offering price is at least
$5,000,000. If the Company registers any of its Common Stock either for its
own account or for the account of other security holders, the holders of
Registrable Securities are entitled to include their shares of Common Stock in
the registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in the offering. All fees, costs and expenses of such
registrations must be borne by the Company and all selling expenses (including
underwriting discounts, selling commissions and stock transfer taxes) relating
to Registrable Securities must be borne by the holders of the securities being
registered.
64
<PAGE>
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware Law.
In general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale or other transaction resulting in a financial benefit to
the stockholder, and an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior, did own)
15% or more of the corporation's outstanding voting stock. This provision may
have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the stockholders. In addition, upon
completion of the offering, certain provisions of the Company's charter
documents, including a provision eliminating the ability of stockholders to
take actions by written consent, may have the effect of delaying or preventing
changes in control or management of the Company, which could have an adverse
effect on the market price of the Company's Common Stock. The Company's stock
option and purchase plans generally provide for assumption of such plans or
substitution of an equivalent option of a successor corporation or,
alternatively, at the discretion of the Board of Directors, exercise of some
or all of the options stock, including non-vested shares, or acceleration of
vesting of shares issued pursuant to stock grants, upon a change of control or
similar event. The Board of Directors has authority to issue up to 5,000,000
shares of Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further
vote or action by the stockholders. The rights of the holders of the Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such Preferred
Stock may have other rights, including economic rights senior to the Common
Stock, and, as a result, the issuance of such Preferred Stock could have a
material adverse effect on the market value of the Common Stock. The Company
has no present plan to issue shares of Preferred Stock.
WARRANTS, CONVERTIBLE SUBORDINATED NOTES AND OTHER RIGHTS
As of September 30, 1997, warrants were outstanding to purchase an aggregate
of 881,477 shares of Common Stock at a weighted average exercise price of
$4.66 per share. Of such warrants, warrants to purchase an aggregate of
849,811 shares of Common Stock at a weighted average exercise price of $4.61
per share are expected to be exercised upon the completion of the offering. In
addition, as of September 30, 1997, convertible subordinated notes were
outstanding in the aggregate principal amount of $750,000. Such notes will be
converted into an aggregate of 340,909 shares of Common Stock upon completion
of the offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is U. S.
Stock Transfer Corporation.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol "PTVL."
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding
10,463,645 shares of Common Stock, assuming no exercise of outstanding
warrants, no conversion of outstanding convertible subordinated debentures and
no exercise of options after September 30, 1997. Of these shares, the shares
sold in the offering will be freely tradeable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 of the Securities Act.
The remaining 7,963,645 shares outstanding upon completion of the offering
will be "restricted securities" as that term is defined under Rule 144 (the
"Restricted Shares") and may not be sold publicly unless they are registered
under the Securities Act or are sold pursuant to Rule 144 or another exemption
from registration. All directors and executive officers and certain other
stockholders of the Company, holding in the aggregate 7,844,070 of the shares
of Common Stock outstanding prior to the offering, have agreed not to sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus (the "Lockup Period") without the prior written
consent of Hambrecht & Quist LLC. See "Underwriting." The number of shares of
Common Stock available for sale in the public market is further limited by
restrictions under the Securities Act.
Because of the restrictions noted above, on the date of this Prospectus and
until 180 days after the effective date of the offering (assuming no release
of the Lockup Period by the Company or by Hambrecht & Quist LLC), no shares
other than the 2,500,000 shares offered hereby and 44,943 currently
outstanding shares will be eligible for sale in the public market. Beginning
90 days after the date of this Prospectus, approximately 74,593 additional
shares may be resold in the public market. Beginning 180 days after the date
of this Prospectus, upon expiration of the Lockup Period, approximately
1,145,524 additional shares will be eligible for sale without restriction
under Rule 144(k) under the Securities Act, and approximately 6,331,286
Restricted Shares (as well as an additional 1,157,914 shares of Common Stock
issuable upon exercise of currently outstanding options) will be eligible for
sale in the public market, subject in some cases to certain volume
limitations. The remaining 492,260 shares held by stockholders will become
eligible for sale at various times over a period of less than one year,
subject on some cases to volume and manner of sale limitations.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the number of shares of
Common Stock then outstanding or the average weekly trading volume of the
Common Stock as reported through the Nasdaq National Market during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned for at least two years the shares proposed to be
sold, would be entitled to sell such shares under Rule 144(k) without regard
to the requirements described above.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended, in reliance upon Rule 144 but without compliance with
certain restrictions, including the holding period requirements, contained in
Rule 144. In addition, the Company intends to file a registration statement on
Form S-8 under the Securities Act approximately 30 days after the date of this
Prospectus to register approximately 2,362,155 shares of Common Stock reserved
for issuance under the Company's 1997 Employee Stock Purchase Plan, 1997
Directors' Stock Option Plan and 1988 and 1997 Stock Option Plans and
1,157,914 shares subject to outstanding options granted under the 1988 Stock
Option Plan. Such registration will permit the resale of shares so registered
by non-affiliates in the public market without restriction under the
Securities Act.
66
<PAGE>
Prior to the offering, there has been no public market for securities of the
Company. No prediction can be made as to the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock of the Company in the public market after the lapse of the
restrictions described below could adversely affect the prevailing market
price and the ability of the Company to raise equity capital in the future at
a time and price which it deems appropriate. In addition, after the offering,
the holders of 7,895,263 shares of Common Stock (the "Registrable
Securities"), including 881,480 shares issuable upon exercise of warrants and
340,909 shares issuable upon conversion of convertible subordinated notes,
will be entitled to certain demand and piggyback rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
such registration. See "Description of Capital Stock--Registration Rights of
Certain Holders." If such holders, by exercising their demand registration
rights, cause a larger number of securities to be registered and sold in the
public market, such sales could have an adverse effect on the market price for
the Company's Common Stock. If the Company were to include in a Company
initiated registration any Registrable Securities pursuant to the exercise of
piggyback registration rights, such sales may have an adverse effect on the
Company's ability to raise needed capital.
67
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, Hambrecht & Quist LLC
and NationsBanc Montgomery Securities, Inc., have severally agreed to purchase
from the Company the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Hambrecht & Quist LLC..............................................
NationsBanc Montgomery Securities, Inc.............................
---------
Total.............................................................. 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other
dealers. After the offering, the offering price and other selling terms may be
changed by the Representatives. The Representatives have informed the Company
that the Underwriters do not intend to confirm sales to accounts over which
they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the offering price, less the underwriting
discount, set forth on the cover page of this Prospectus. To the extent the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the above
table bears to the total number of shares of Common Stock offered hereby. The
Company will be obligated, pursuant to the option, to sell such shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The officers and directors who are stockholders of the Company and certain
of the other stockholders of the Company, who will own in the aggregate
7,844,070 shares of Common Stock after the offering, have agreed, subject to
certain exceptions, that they will not, without the prior written consent of
Hambrecht &
68
<PAGE>
Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock owned by them
during the 180-day period following the date of this Prospectus. The Company
has agreed that it will not, without the prior written consent of Hambrecht &
Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock during the 180-day
period following the date of this Prospectus, except that the Company may
issue shares upon the exercise of options granted prior to the date hereof,
and may grant additional options under its Plans, provided that, without the
prior written consent of Hambrecht & Quist LLC, such additional options shall
not be exercisable during such period.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiations between the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price set forth
on the cover of this preliminary prospectus is subject to change as a result
of market conditions and other factors.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of Common Stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq Stock Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by its counsel, Venture Law Group, A Professional Corporation, 2800
Sand Hill Road, Menlo Park, California 94025. Mark A. Medearis, a director of
Venture Law Group, is the Assistant Secretary of the Company. Mr. Medearis
beneficially owns an aggregate of 904 shares of Common Stock, and certain
attorneys employed by Venture Law Group beneficially own an aggregate of 1,905
shares of Common Stock. Certain legal matters will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
650 Page Mill Road, Palo Alto, California 94304. Certain members of Wilson
Sonsini Goodrich & Rosati beneficially own an aggregate of 6,073 shares of
Common Stock.
EXPERTS
The consolidated balance sheets as of December 31, 1995 and 1996 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996, included in
this Prospectus, have been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
69
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement
and the exhibits and schedules thereto for further information with respect to
the Company and the Common Stock offered hereby. Statements contained herein
concerning the provisions of any documents are not necessarily complete, and
in each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. Copies of the Registration Statement, including
exhibits and schedules filed therewith, may be inspected without charge at the
Commission's principal office in Washington, D.C. or obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a World Wide Web site
on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding companies that file
electronically with the Commission. The Company has filed the Registration
Statement, including the exhibits and schedules thereto, electronically with
the Commission via the Commission's Electronic Data Gathering, Analysis, and
Retrieval (EDGAR) system. The Company intends to distribute to its
stockholders annual reports containing audited financial statements and will
make available copies of quarterly reports for the first three quarters of
each fiscal year containing unaudited interim financial information.
70
<PAGE>
PREVIEW TRAVEL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Shareholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Preview Travel,
Inc.:
We have audited the accompanying consolidated balance sheets of Preview
Travel, Inc. and Subsidiaries (the Company) as of December 31, 1995 and 1996
and September 30, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996 and the nine months ended September 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Preview Travel, Inc. and Subsidiaries as of December 31, 1995 and 1996 and
September 30, 1997, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 and the nine
months ended September 30, 1997 in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
San Francisco, California
October 27, 1997, except for
Note 15 for which the date
is
- ---------------------
The foregoing report is in the form that will be signed upon the completion of
the reincorporation of the Company in Delaware and the related exchange of
common and preferred shares as described in Note 15 to the Consolidated
Financial Statements.
San Francisco, California
October 29, 1997
F-2
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30,
------------------ SEPTEMBER 30, 1997
1995 1996 1997 (NOTE 1)
-------- -------- ------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents..... $ 1,064 $ 6,016 $ 13,640
Accounts receivable, net...... 928 1,259 1,537
Travel inventory.............. 602 -- --
Prepaid production costs and
other assets................. 877 212 428
-------- -------- --------
Total current assets.... 3,471 7,487 15,605
Film library, net of
accumulated amortization of
$2,496, $4,823, and $4,982,
respectively................. 3,756 2,967 2,538
Property and equipment, net... 1,839 2,100 2,726
Other assets.................. -- -- 52
-------- -------- --------
Total assets............ $ 9,066 $ 12,554 $ 20,922
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable.............. 832 938 388
Accrued liabilities........... 1,171 1,951 2,852
Deferred revenues............. 820 598 336
Convertible notes payable..... 750 750 750
Current portion of notes
payable and line of credit... 2,754 2,136 136
Current portion of capital
lease obligations............ 605 722 943
Current portion of deferred
compensation................. -- -- 142
-------- -------- --------
Total current
liabilities............ 6,932 7,095 5,547
Capital lease obligations,
less current portion......... 478 776 1,097
Notes payables, long term..... 407 272 169
Deferred compensation......... -- -- 428
-------- -------- --------
Total liabilities....... 7,817 8,143 7,241
-------- -------- --------
Commitments (Notes 5 and 15).
Shareholders' equity:
Series A through E
Convertible Preferred Stock;
$0.001 par value:
Authorized: 3,984,536
shares in 1995, 6,134,563
shares in 1996 and at
September 30, 1997 and
5,000,000 shares pro forma;
Issued and outstanding:
3,366,797 shares in 1995,
4,322,666 shares in 1996
and 6,033,687 at September
30, 1997 and no pro forma
shares (unaudited)......... 4 5 6
(Liquidation preference:
$33,772,548)
Common stock, $0.001 par
value:
Authorized: 7,300,000 shares
in 1995 and 10,000,000
shares in 1996 and at
September 30, 1997 and
50,000,000 shares pro forma;
Issued and outstanding:
1,564,380 shares in 1995,
1,701,731 shares in 1996,
1,929,958 shares at
September 30, 1997, and
11,654,368 shares pro forma
(unaudited)................. 1 2 2 8
Additional paid-in capital.... 10,991 19,796 34.962 34,962
Other shareholders' equity.... 276 223 (95) (95)
Accumulated deficit........... (10,023) (15,615) (21,194) (21,194)
-------- -------- -------- --------
Total shareholders'
equity................. 1,249 4,411 13,681 13,681
-------- -------- -------- --------
Total liabilities and
shareholders' equity....... $ 9,066 $ 12,554 $ 20,922
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Online........................ $ -- $ 579 $ 2,573 $ 1,336 $ 4,226
Television.................... 9,598 9,564 9,801 8,070 5,901
------- ------- ------- ------- -------
Total revenues............... 9,598 10,143 12,374 9,406 10,127
Costs of revenues:
Online........................ -- 1,078 2,308 1,459 2,672
Television.................... 9,103 8,393 7,000 5,200 4,339
------- ------- ------- ------- -------
Total cost of revenues......... 9,103 9,471 9,308 6,659 7,011
Gross profit................. 495 672 3,066 2,747 3,116
Operating expenses:
Marketing and sales........... 2,759 2,687 4,373 2,874 4,540
Research and development...... -- 626 1,314 894 1,202
General and administrative.... 1,162 2,026 2,880 1,966 2,954
Loss on cancelled programming
(Note 11).................... 2,166 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses....... 6,087 5,339 8,567 5,734 8,696
Loss from operations......... (5,592) (4,667) (5,501) (2,987) (5,580)
Interest income (expense), net. (246) (264) (89) (120) 3
------- ------- ------- ------- -------
Loss before income taxes..... (5,838) (4,931) (5,590) (3,107) (5,577)
Income tax benefit (expense)... 420 (2) (2) (1) (2)
------- ------- ------- ------- -------
Net loss....................... $(5,418) $(4,933) $(5,592) $(3,108) $(5,579)
======= ======= ======= ======= =======
Net loss per share............. $ (1.82) $ (1.61) $ (1.60) $ (0.90) $ (1.56)
======= ======= ======= ======= =======
Weighted average shares
outstanding used in per share
calculation................... 2,997 3,085 3,488 3,468 3,581
======= ======= ======= ======= =======
Net loss per share, pro forma
(Note 1)...................... $ (0.65) $ (0.60)
======= =======
Weighted average shares
outstanding used in pro forma
per share calculation......... 8,592 9,242
======= =======
SUPPLEMENTAL INFORMATION
(UNAUDITED) (NOTE 1)
Gross bookings................. $ -- $ 2,043 $20,263 $ 9,530 $54,007
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
CONVERTIBLE EARNINGS TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER (ACCUMU- SHAREHOLDERS'
----------------- ------------- PAID-IN SHAREHOLDERS' LATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL EQUITY DEFICIT) (DEFICIT)
-------- ------- ------ ------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993.................... 1,874 $ 2 1,100 $ 1 $ 4,075 $(74) $ 328 $ 4,331
Issuance of common
stock.................. 97 66 66
Issuance of warrants... 4 4
Interest on notes
receivable............. (11) (11)
Net loss............... (5,418) (5,418)
-------- ------ ----- --- ------- ---- -------- -------
Balance, December 31,
1994.................... 1,874 2 1,197 1 4,141 (81) (5,090) (1,027)
Issuance of common
stock.................. 367 692 692
Repayment of note...... 77 77
Issuance of Series D
preferred stock........ 1,492 2 6,158 6,160
Issuance of common
stock warrants......... 1 1
Issuance of Series D
preferred stock
warrants............... 279 279
Net loss............... (4,933) (4,933)
-------- ------ ----- --- ------- ---- -------- -------
Balance, December 31,
1995.................... 3,366 4 1,564 1 10,991 276 (10,023) 1,249
Issuance of common
stock.................. 138 1 244 (234) 11
Repayment of note...... 8 8
Issuance of Series E
preferred stock........ 956 1 8,561 8,562
Issuance of common
stock warrants......... 11 11
Issuance of Series E
preferred stock
warrants............... 162 162
Net loss............... (5,592) (5,592)
-------- ------ ----- --- ------- ---- -------- -------
Balance, December 31,
1996.................... 4,322 5 1,702 2 19,796 223 (15,615) 4,411
Issuance of common
stock.................. 228 758 758
Exercise of Series C
preferred stock
warrants .............. 149 406 (4) 402
Issuance of Series E
preferred stock........ 1,563 1 14,002 14,003
Issuance of warrants... 118 118
Unearned compensation
in connection with
issuance of stock
options................ (536) (536)
Repayment of note...... 207 207
Issuance of notes
receivable............. (103) (103)
Net loss............... (5,579) (5,579)
-------- ------ ----- --- ------- ---- -------- -------
Balance, September 30,
1997.................... 6,034 $ 6 1,930 $ 2 $34,962 $(95) $(21,194) $13,681
======== ====== ===== === ======= ==== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss...................... $(5,418) $(4,933) $(5,592) $(3,108) $(5,579)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation................. 602 671 828 623 697
Amortization of film
library..................... 2,539 1,724 1,527 1,136 959
Loss on disposal of fixed
assets...................... -- -- 188 -- --
Unearned compensation........ -- -- -- -- 34
Charges related to issuance
of warrants................. -- -- 172 172 130
Loss on cancelled
programming................. 2,166 -- -- -- --
Changes in assets and
liabilities:
Accounts receivable......... 1,208 486 (330) (560) (278)
Travel inventory............ (159) 191 602 288 --
Prepaid production and other
assets..................... 199 215 664 390 (268)
Accounts payable and accrued
liabilities................ 1,196 (1,090) 886 (289) 351
Deferred income taxes....... (422) -- -- -- --
Deferred revenue............ 203 457 (222) (407) (262)
------- ------- ------- ------- -------
Net cash provided by (used
in) operating activities.. 2,114 (2,279) (1,277) (1,926) (1,363)
------- ------- ------- ------- -------
Cash flows from investing
activities:
Acquisition of equipment...... (71) (841) (239) (177) (261)
Additions to film library..... (2,389) (1,072) (738) (514) (530)
------- ------- ------- ------- -------
Net cash used in investing
activities................ (2,460) (1,913) (977) (691) (791)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Net repayment of long-term
debt......................... 176 (1,382) (618) (518) (2,100)
Proceeds from equipment note.. -- 543 -- -- --
Payments on equipment note.... -- -- (135) (102) (103)
Payments on obligations under
capital leases............... (523) (596) (623) (471) (521)
Proceeds from repayment of
shareholder notes............ -- 77 8 -- 207
Proceeds from issuance of
convertible bridge loans .... -- -- 1,000 1,000 --
Proceeds from issuance of
common stock................. 66 37 11 11 112
Proceeds from issuance of
preferred stock.............. -- 6,160 7,562 7,562 14,487
Proceeds from stock warrant
exercises.................... -- 279 1 -- 449
------- ------- ------- ------- -------
Net cash provided by (used
in) financing activities.. (281) 5,118 7,206 7,482 12,631
------- ------- ------- ------- -------
Net increase (decrease) in
cash..................... (627) 926 4,952 5,608 7,624
Cash and cash equivalents,
beginning of year............. 765 138 1,064 1,065 6,016
------- ------- ------- ------- -------
Cash and cash equivalents, end
of the year................... $ 138 $ 1,064 $ 6,016 $ 6,674 $13,640
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preview Travel, Inc. ("Preview Travel" or the "Company") is a leading
provider of branded online travel services for leisure and small business
travelers. The Company operates its own Web sites (www.previewtravel.com,
www.reservations.com and www.vacations.com), the travel service on America
Online, Inc. ("AOL") (AOL keyword: previewtravel) and a co-branded travel Web
site with Excite, Inc. ("Excite") (City.Net). Through its News Travel Network,
Inc. ("NTN"), Preview Travel produces entertainment programming for broadcast
and cable television and the in-flight markets.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Preview Travel Online, Inc. and News Travel
Network, Inc.. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements.
Revenue Recognition:
Online Revenues:
Commission revenues for air travel, hotel rooms, car rentals and travel
packages, net of allowances for cancellations, are recognized upon
confirmation of the reservation. Overrides are recognized on a cash basis
which reflects the performance in the prior monthly or quarterly period.
Television Revenues:
Program license revenues are recognized when all of the following conditions
are met: 1) the license period begins, 2) the license fee and the production
costs are known, and 3) the program has been accepted by the licensee and is
available for telecast.
Advertising Revenues:
Advertising revenues are recognized when all the terms of the advertising
agreement are met and advertising is shown on various media as designated by
the agreement.
Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per
Share:
Net loss per share is computed using the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares, comprising the incremental common shares issuable upon the exercise of
stock options and warrants and upon conversion of convertible preferred stock,
except as provided below, have not been included as such shares are anti-
dilutive.
The Company has computed common and common equivalent shares in determining
the number of shares used in calculating net loss per share for all periods
presented pursuant to the Securities and Exchange
F-7
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Commission Staff Accounting Bulletin (SAB) No. 83. SAB 83 requires the Company
to include all common shares and all common share equivalents issued during
the twelve month period preceding the filing date of an initial public
offering in its calculation of the number of shares used to determine net loss
per share as if the shares had been outstanding for all periods presented.
Pro forma net loss per share for the year ended December 31, 1996 and the
nine months ended September 30, 1997 assumes the common shares issuable upon
conversion of the outstanding convertible preferred stock and certain warrants
had been outstanding during such period.
Cash and Cash Equivalents:
Cash equivalents consist of short-term investments with original maturities
of 90 days or less and are recorded at cost, which approximates fair value.
Travel Inventory:
Travel inventory consists of barter credits earned as compensation for the
Company's television program production services rendered and advertising time
provided. Travel inventory includes airline tickets, hotel accommodations,
rental cars, and other travel-related products. Barter credits are recorded
based on various percentages of wholesale rates and do not exceed estimated
realizable value. During the year ended December 31, 1996, the Company greatly
reduced its acquisition of travel inventory and wrote off the remaining
balance of unused travel inventory.
Film Library and Prepaid Production Costs:
Direct costs of producing travel programs and travel film are capitalized.
These costs are amortized on the basis of management's estimate of the
program's or film's useful life in generating future revenue. Such estimates
are revised periodically, and adjustments, if any, are recorded. Based on the
Company's past experience and estimates for future projects, such costs are
currently being amortized over a period of three to five years. Expenditures
relating to custom travel programs which have a limited useful life are
charged to expense in the same period as revenues are recognized. It is
reasonably possible that these estimates of anticipated gross revenues,
remaining economic life, or both, could be reduced.
Property and Equipment:
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets,
typically five years. Any gains or losses on the disposal of property and
equipment are recorded in the year of disposition.
Income Taxes:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109) which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.
F-8
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Revenues
Deferred revenues primarily represents prepayments by vendors for television
or film advertising.
Supplemental Information (unaudited):
Gross bookings represent the total purchase price of all travel services
booked through the Company's online sites. This information does affect the
Company's operating results. Gross bookings are not required by generally
accepted accounting principles ("GAAP"), are not included in revenues, and
should not be considered in isolation or as a substitute for other information
prepared in accordance with generally accepted accounted principles.
Business Risk and Credit Concentration:
The Company operates in the online travel services industry, which is new,
rapidly evolving and intensely competitive. The Company competes primarily
with traditional travel agency reservation methods and online travel
reservation services. In the online travel services market, the Company
competes with other entities that maintain similar commercial Web sites. There
can be no assurance that the Company will achieve sufficient online traffic,
travel bookings or commissions to realize economies of scale that justify its
significant commitments to third parties.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
(including money market accounts) and accounts receivable. The Company places
its temporary cash investments with one major financial institution.
The majority of the Company's customers for travel programs and related
productions are located across the United States and are primarily in travel-
related industries and television broadcast businesses. The Company performs
ongoing credit evaluations of customers and generally does not require
collateral. Allowances are maintained for potential credit losses, and such
losses have been within management's expectations. In 1996, revenues from one
customer approximated $5.7 million and accounted for approximately 46% of
total revenues and 33% of accounts receivable at December 31, 1996. The
majority of contracts with this customer have subsequently been terminated.
For the nine months ended September 30, 1996 and 1997, revenues from the
same customer approximated $4.4 million and $2.2 million, respectively, and
accounted for approximately 46% and 21% of total revenues, respectively, and
50% and 13% of accounts receivable, respectively.
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair value due to the
short-term maturities of these instruments.
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the carrying value of the
borrowings under the capital lease obligations, bank line of credit and notes
payable approximate their fair value.
Unaudited Interim Financial Information:
The accompanying interim consolidated statements of operations and cash
flows for the nine months ended September 30, 1996 together with the related
notes are unaudited but include all adjustments, consisting of only normal
recurring adjustments, which the Company considers necessary to present
fairly, in all material respects, the consolidated financial position, the
results of operations and cash flows for the nine month periods ended
September 30, 1996. Results for the nine months ended September 30, 1997 are
not necessarily indicative of results for the entire year.
F-9
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Recently Issued Accounting Pronouncements:
In 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard Numbers 128, "Earnings Per Share" (effective for the
Company's year ending December 31, 1997) Number 129, "Disclosure of
Information About Capital Structure," Number 130, "Reporting Comprehensive
Income," and Number 131, "Disclosure About Segments of an enterprise and
Required Information," which are effective for the year ending December 31,
1998). The Company has not determined the impact of the implementation of
these pronouncements.
2. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Furniture and fixtures............... $ 553 $ 311 $ 721
Production equipment................. 2,849 1,782 1,795
Leasehold improvements............... 142 275 365
Computer equipment................... 922 1,827 2,637
------- ------- ------
4,466 4,195 5,518
Less accumulated depreciation........ (2,627) (2,095) (2,792)
------- ------- ------
Property and equipment, net.......... $ 1,839 $ 2,100 $2,726
======= ======= ======
</TABLE>
Equipment under capital leases included in property and equipment amounted
to $1,506,000 (net of $1,422,000 accumulated amortization), $1,264,000 (net of
$1,104,000 accumulated amortization) and $2,928,000 (net of $1,122,000
accumulated amortization) at December 31, 1995 and 1996 and September 30,
1997, respectively.
3. INCOME TAXES:
During the year ended December 31, 1994, deferred income tax benefits for
federal and state taxes were $357,000 and $63,000, respectively. For December
31, 1995, and 1996 and September 30, 1997, the provision for income taxes
comprised minimum state tax expense.
Deferred tax assets (liabilities) as of December 31, 1995 and 1996 and
September 30, 1997 comprised the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Film library................................. $ (182) $ (264) $ (179)
Property and equipment....................... (103) 86 333
Other........................................ 45 55 97
Warrants..................................... 112 179 229
Deferred rent................................ 103 140 158
Net operating loss carryforwards............. 3,473 5,382 6,981
------- ------- -------
3,448 5,578 7,619
Less valuation allowance..................... (3,448) (5,578) (7,619)
------- ------- -------
-- -- --
======= ======= =======
</TABLE>
F-10
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Due to the uncertainty surrounding the realization of the deferred tax asset
in future tax returns, the Company has placed a valuation allowance against
its net deferred tax assets. The valuation allowance has increased by
$1,777,000 and $2,130,000 during 1995 and 1996, respectively, and $2,042,000
during the nine months ended September 30, 1997.
At December 31, 1996, the Company had available net operating loss
carryforwards for federal and state income tax purposes of approximately
$14,516,000 and $7,271,000, respectively. These carryforwards expire from 2001
to 2011.
Due to changes in the Company's ownership in 1995 and 1996, future
utilization of these net operating loss carryforwards will be subject to
certain limitations on annual utilization as defined by the Tax Reform Act of
1986.
4. NOTES PAYABLE AND LINE OF CREDIT:
Notes payable and line of credit consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Line of credit (1).................. $ 618 $ -- $ --
Subordinated convertible shareholder
notes payable (2).................. 750 750 750
Subordinated notes payable (3)...... 2,000 2,000 --
Bank equipment note (4)............. 543 407 305
------- ------- ------
$ 3,911 $ 3,157 $1,055
Less current portion................ (3,504) (2,886) (886)
------- ------- ------
$ 407 $ 272 $ 169
======= ======= ======
</TABLE>
- ---------------------
(1) The Company has a bank line of credit collateralized by accounts
receivable, equipment and inventories. The line requires monthly payments
of interest only at prime plus 1.5% (9.5% and 9.75% at December 31, 1995
and 1996, respectively, and 8.50% at September 30, 1997), and any unpaid
principal and interest will be due on May 5, 1998. The line has a maximum
amount available of $2,000,000 and limits borrowing to 80% of qualified
receivables (as defined). The bank credit agreement requires the Company's
compliance with certain financial covenants related to tangible net worth
and quarterly profitability and restricts the payment of dividends. As of
December 31, 1995 and 1996 and September 30, 1997, the Company was in
compliance with these financial covenants.
(2) The notes to shareholders bear interest at the rate of 8% per annum
payable semi-annually on June 30 and December 31, starting June 30, 1995.
The entire unpaid principal and interest is due and payable on the earlier
of demand by the note holders or January 31, 2000. The notes can be
converted to common stock at a rate of one share per $2.20 of principal
amount of such notes at the note holders' option. In addition, the notes
will be automatically converted into shares of common stock upon the
closing of a public offering of the Company's common stock with aggregate
proceeds to the Company in excess of $7,500,000 and at a price of not less
than $10.00 per share. The notes are subordinated to the bank line of
credit and bank equipment note described in (4) below. The Company has
reserved 340,909 shares of common stock for issuance upon conversion of
the notes.
F-11
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) Subordinated notes payable to various shareholders, trusts and
partnerships at December 31, 1995 and 1996 required semiannual interest
payments at a rate of 8% per annum beginning July 14, 1993. The entire
principal and remaining interest due on the notes was paid on March 1,
1997. The notes were collateralized by all Company assets excluding
equipment. The notes were subordinated to the bank line of credit and bank
equipment note, capital lease obligations and the debt described in (2)
above, in an amount not to exceed $5,000,000.
(4) The bank equipment note is payable in equal monthly payments of $11,300
plus interest at 2% over the bank's prime rate (8.5% and 8.25% at December
31, 1995 and 1996, respectively, and 8.5% at September 30, 1997) through
December 1999. The note was paid in full in October 1997.
5. COMMITMENTS:
The Company leases its office space under a noncancelable operating lease
expiring in 2001. Certain operating expenses and property taxes related to the
leased office space are paid by the Company. The Company also leases certain
production and office equipment and computers under capital leases expiring
through 2001.
Future minimum annual lease payments for both capital and operating leases
are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
<S> <C> <C>
12 months ending September 30:
1998..................................................... $ 473 $ 943
1999..................................................... 539 794
2000..................................................... 588 509
2001..................................................... 460 152
------ ------
Total minimum lease payments............................... $2,060 2,398
======
Less amounts representing interest......................... 359
------
Present value of minimum lease payments.................... $2,039
======
</TABLE>
Total rent expense for office space was $272,000, $434,000 and $479,000 for
the years ended December 31, 1994, 1995 and 1996, respectively, and $359,000
and $329,000 for the nine months ended September 30, 1996 and 1997,
respectively.
Future Commitments and Contingencies:
In September 1997 the Company entered into agreements with AOL, a related
party, and Excite, Inc. (Excite) under which these companies are obligated to
deliver minimum numbers of annual page views to the Company through the online
areas featuring the Company's travel services. In connection with those
services, the Company is obligated to make aggregate payments to AOL and
Excite totaling $8.5 million in 1997 (assuming completion of the Company's
initial public offering in 1997), $4.1 million in 1998, $10.9 million in 1999,
$12.4 million in each of 2000 and 2001 and $7.7 million in 2002.
The Company is also obligated to pay a percentage of commissions earned by
the Company in excess of certain thresholds and, to retain the right to be the
primary provider of travel services on AOL, must achieve specified levels of
annual travel service bookings.
F-12
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PREFERRED STOCK:
As of December 31, 1996 and September 30, 1997, the Company had five series
of convertible preferred stock authorized and outstanding. The holders of all
preferred stock have the same voting rights as common shareholders. Voting
rights are equal to the number of shares of common stock into which such
shares of preferred stock could be converted on the record date for the vote.
The Series A, B, C, D, and E preferred stockholders are entitled to receive,
when and as declared by the Board of Directors, noncumulative dividends at the
rate of $0.12, $0.12, $0.168, $0.252, and $0.54 per share per annum,
respectively. No dividends were declared in 1995 or 1996 or the first nine
months of 1997. The preferred stock is convertible, at the option of the
holder, at any time into common stock on a one for one basis, subject to
adjustment resulting from certain future capital transactions. In addition,
each preferred share automatically converts into common stock upon the earlier
of (a) consummation of any public offering of common stock by the Company,
provided the net proceeds to the Company of such offering exceed $7,500,000
and the price to the public is at least $10.00 per share, or (b) the date
specified by written consent from at least 80% of the holders of each series
of preferred stock. The Company has reserved 4,322,661 shares of common stock
for the conversion of preferred stock. In the event of any voluntary or
involuntary liquidation of the Company, the Series A, B, C, D, and E holders
receive a liquidation preference of $2.00, $2.00, $2.80, $4.20 and $9.00 per
share, respectively.
7. STOCK WARRANTS:
The Company has issued warrants to purchase common and preferred stock to an
online service provider, holders of certain debt, and an equipment lease
provider. At September 30, 1997, the following warrants were outstanding:
<TABLE>
<CAPTION>
AGGREGATE
EXERCISE
SHARES PRICE EXPIRATION DATES
------- ---------- ----------------
<S> <C> <C> <C>
Common stock............ 160,000 $ 352,000 The earlier of January 1999 or upon closing
of an initial public offering
Common stock............ 128,011 $ 425,000 The earlier of March 1998 or upon closing
of an initial public offering
Common stock............ 14,684 $ 35,240 The earlier of May 2001 or upon closing of
an initial public offering
Series D Preferred 377,619 $1,586,000 The earlier of November 2001 or upon the
stock.................. closing of an initial public offering
Series D Preferred 20,000 $ 84,000 The later of December 2005 or five years
stock.................. from the closing of an initial public
offering
Series E Preferred 75,000 $ 675,000 The earlier of July 2001 or the closing of
stock.................. an initial public offering
Series E Preferred 11,666 $ 104,994 The earlier of July 2007 or five years
stock.................. following an initial public offering
Series E Preferred 94,500 $ 50,500 The earlier of September 2002 or the
stock.................. closing of an initial public offering
</TABLE>
The Company estimated the fair value of these warrants and charged such
amounts to expense at the time of issuance. The amounts charged to expense
were not significant.
The Company has reserved 881,480 shares of common stock for the exercise of
common stock warrants and exercise and conversion of preferred stock warrants.
F-13
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. OTHER SHAREHOLDERS' EQUITY:
Other shareholders' equity comprise the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
NOTE 9
<S> <C> <C> <C>
Unearned compensation.............. $-- $ -- $(536)
Shareholder note receivable........ (8) (234) (130)
Stock warrants..................... 284 457 571
---- ----- -----
$276 $ 223 $ (95)
==== ===== =====
</TABLE>
9. STOCK OPTION PLAN:
Under the Company's stock option plan, as amended, the Board of Directors
may grant options for common stock to employees, directors, and consultants
either as incentive stock options or nonstatutory options. Options granted as
incentive stock options are at an exercise price not lower than the fair
market value of the stock at the date the options are granted. Nonstatutory
options are issued at between 85% and 100% of fair market value. Options
granted generally become exercisable over fours years (three years for options
granted prior to 1995). At December 31, 1995 and 1996, and September 30, 1997,
1,056,750, 1,306,750 and 1,271,069 shares of common stock, respectively, were
reserved for the exercise of stock options.
The following table summarizes activity under the Company's stock option
plan for the periods ended December 31, 1994, 1995 and 1996 and September 30,
1997:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF AGGREGATE AVERAGE
SHARES OPTION PRICE PRICE EXERCISE
(IN THOUSANDS) PER SHARE (IN THOUSANDS) PRICE
-------------- --------------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
December 31, 1993...... 247 $.050 - $2.20 $ 206 $0.84
Granted............... 57 2.20 126 2.20
Exercised............. (97) 0.50 - 2.00 (66) 0.68
Terminated............ (11) 0.50 - 2.20 (24) 0.99
----- ----- ----- ------ -----
Options outstanding at
December 31, 1994...... 196 0.50 - 2.20 242 1.22
Granted............... 586 2.20 1,290 2.20
Exercised............. (70) 0.50 - 2.20 (37) 0.54
Terminated............ (35) 0.50 - 2.20 (73) 2.04
----- ----- ----- ------ -----
Options outstanding at
December 31, 1995...... 677 0.50 - 2.20 1,422 2.10
Granted............... 277 2.20 - 2.60 701 2.52
Exercised............. (137) 0.50 - 2.20 (246) 1.78
Terminated............ (82) 0.50 - 2.60 (211) 2.56
----- ----- ----- ------ -----
Options outstanding at
December 31, 1996...... 735 1.20 - 2.60 1,666 2.28
Granted............... 501 2.60 - 8.50 2,567 5.12
Exercised............. (51) 1.20 - 2.60 (112) 2.22
Terminated............ (27) 1.20 - 2.60 (64) 2.43
----- ----- --- ----- ------ -----
Options outstanding at
September 30, 1997..... 1,158 $1.20 - $8.50 $4,057 $3.54
===== ===== ===== ====== =====
</TABLE>
F-14
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1997, options to purchase 448,885 shares of common stock
were exercisable.
At December 31, 1996 and September 30, 1997, 212,698 and 113,156,
respectively, shares remain available for issuance.
The following table summarizes information with respect to stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT 12/31/96 CONTRACTUAL LIFE EXERCISE AT 12/31/96 EXERCISE
EXERCISE PRICES (IN THOUSANDS) (YEARS) PRICE (IN THOUSANDS) PRICE
--------------- -------------- ---------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$1.20--
$2.20 367 3.15 $2.18 190 $2.04
$2.40--
$2.60 368 3.76 $2.48 89 $2.42
</TABLE>
The following information concerning the Company's stock option plan is
provided in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for the plan in accordance with APB No. 25
and related Interpretations.
The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following weighted average assumptions
used for grants in 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Risk-free Interest Rates......................... 6.75% 6.15%
Expected Life.................................... 5 years 5 years
Dividends........................................ 0 0
</TABLE>
The weighted average fair value per option granted in 1995 and 1996 was
$0.64.
The following pro forma income information has been prepared as if the
Company had followed the provisions of SFAS 123 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Net loss--pro forma................................ $5,026 $5,732
</TABLE>
These pro forma amounts may not be representative of the effects on reported
net income (loss) for future years as options vest over several years and
additional awards are generally made each year.
The Company has accounted for the fair value for the warrants issued in
connection with the various financing and purchase transactions (Note 7) using
the following assumptions for 1995 and 1996:
<TABLE>
<S> <C>
Risk-free Interest Rate.............................................. 5.50%
Expected Life........................................................ 5 years
</TABLE>
The weighted average fair value of those purchase rights granted in 1996 was
$0.29 through $1.08 per share.
In connection with the filing of the Company's proposed initial public
offering, see Note 15, certain options granted in 1997 have been considered to
be compensatory. Compensation associated with such options as of September 30,
1997 amounted to $570,000. Of that amount, $34,000 has been charged to
operations in the nine months ended September 30, 1997 and $536,000 has been
recorded as unearned compensation and will be charged to operations over the
period to 2001.
F-15
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SHAREHOLDER NOTES RECEIVABLE:
Shareholder notes receivable represent the amounts due from directors and a
former employee in exchange for issuance of common stock together with accrued
interest. The notes bear interest at rates from 6%-8% and are due five years
from the date of issuance but may be repaid earlier.
11. EMPLOYEE BENEFIT PLAN:
The Company sponsors a defined contribution 401(k) plan which covers
substantially all employees. Employer contributions are made at the discretion
of the Company. The Company made no contributions to the plan during the years
ended December 31, 1994, 1995 or 1996 or the nine months ended September 30,
1997.
12. LOSS ON CANCELLED PROGRAMMING:
Effective September 30, 1994, the Company cancelled all further development
of environmental related programming. Unamortized production costs totaling
$2,166,000 were written off in 1994.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During each of the years ended December 31, 1994, 1995 and 1996, and each of
the nine month periods ended September 30, 1996 and 1997, the Company made
cash payments for interest of approximately $485,000, $372,000, $260,000,
$132,000 (unaudited) and $138,000, respectively, and payments for state
franchise taxes of $1,600 for the year ended December 31, 1994 and $2,400 for
each of the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997.
The following noncash investing and financing transactions occurred during
the periods presented (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- ------------------
1994 1995 1996 1996 1997
---- ----- ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Property and equipment obtained through
capital leases........................... $394 $ 266 $1,039 $742 $1,062
==== ===== ====== ==== ======
Common stock issued for licensing and
development costs........................ -- $ 655 $ -- -- --
==== ===== ====== ==== ======
Common stock issued for notes and interest
receivable............................... -- -- $ 234 $185 $ 103
==== ===== ====== ==== ======
Series E Preferred Stock issued upon
conversion of bridge loans............... -- -- $1,000 -- --
==== ===== ====== ==== ======
Unearned compensation in connection with
the issuance of stock options............ -- -- -- -- $ 570
==== ===== ====== ==== ======
</TABLE>
14. RELATED PARTY TRANSACTION:
During the year ended December 31, 1996, the Company recorded $1,537,040,
$233,139 and $372,971 of airline ticketing, booking, and connect time
revenues, respectively, pursuant to an agreement with America Online, Inc.
(AOL), a shareholder of the Company. The Company also recorded marketing
expense of $107,563 for services in connection with the agreement. For the
nine months ended September 30, 1997 the Company recorded 2,363,458, 229,864
and 262,987 of airline ticketing, booking and connect time revenues,
respectively. The Company also recorded marketing expense of $1,038,905 for
services in connection with the agreement.
F-16
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SUBSEQUENT EVENTS:
In October 1997, subject to stockholder approval, the Board of Directors
approved the reincorporation of the Company in Delaware having the effect of a
2:1 reverse stock split. All share and per share information in the
accompanying consolidated financial statements and notes thereto have been
restated for such stock split. In addition, subject to stockholder approval,
the Board of Directors approved the 1997 stock option plan reserving 1,500,000
Common Shares for future issuance.
In addition, the Board of Directors authorized management of the Company to
file a Registration Statement with the Securities and Exchange Commission
covering the proposed sale of shares of its common stock to the public. Upon
completion of this proposed sale, all outstanding shares of the Company's
convertible preferred stock will automatically convert into common stock.
Unaudited pro forma shareholders' equity, as adjusted for the assumed
conversion of the convertible preferred stock, is disclosed in the
accompanying unaudited pro forma balance sheet.
F-17
<PAGE>
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consumers make better travel decisions. With Farefinder, users have quick and
easy access to the lowest airfares from their home cities to destinations
around the world. With Find-a-Trip, users can locate a vacation package
designed to meet their specific needs and interests and retrieve extensive
hotel and destination information, including photos and streaming video.
EASY-TO-USE AND CONVENIENT SERVICES
[GRAPHICS DEPICTING AIRLINE RESERVATION AND BOOKING SCREENS]
Preview Travel's friendly interface makes it easy for customers to make
their travel plans online. The Company's services are designed to help
consumers shop for travel based on price, convenience and other criteria. In
addition, Preview Travel enables consumers to store personal profiles and
travel preferences, making their travel planning faster and more convenient.
[GRAPHIC DEPICTING E-MAIL SCREEN]
PERSONALIZED COMMUNICATIONS
Each purchase on Preview Travel is followed by a series of personalized e-
mail notifications. Online transactions are confirmed via e-mail and are
followed by Bon Voyage and Welcome Home e-mails, which provide a summary of
the travel itinerary as well as an opportunity to thank customers and solicit
valuable feedback. Preview Travel also delivers targeted newsletters and
notifications to its members on a regular basis.
KNOWLEDGEABLE CUSTOMER SERVICE
Preview Travel is committed to delivering world-class customer service,
including complete online help, free delivery of travel documents, 24-hour,
toll-free customer service and e-mail support. Preview Travel's mission is to
fully assist customers before, during and after their travel. The Company
handles all aspects of customer service and fulfillment in-house, with a staff
of cyber-literate travel professionals.
[PICTURE OF CUSTOMER SERVICE CENTER]
www.previewtravel.com AOL keyword: previewtravel
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
Risk Factors............................................................ 5
Use of Proceeds......................................................... 19
Dividend Policy......................................................... 19
Capitalization.......................................................... 20
Dilution................................................................ 21
Selected Consolidated Financial Data.................................... 22
Management's Discuss and Analysis of Financial Condition and Results of
Operations............................................................. 23
Business................................................................ 35
Management.............................................................. 49
Certain Relationships and Related Transactions.......................... 59
Principal Stockholders.................................................. 62
Description of Capital Stock............................................ 64
Shares Eligible for Future Sale......................................... 66
Underwriting............................................................ 68
Legal Matters........................................................... 69
Experts................................................................. 69
Additional Information.................................................. 70
Index to Consolidated Financial Statements.............................. F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,500,000 SHARES
[LOGO OF PREVIEW TRAVEL]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY
SECURITIES, INC.
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee, NASD filing fee and Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
SEC Registration Fee.................................................. $ 11,897
NASD Filing Fee....................................................... 3,663
Nasdaq National Market Listing Fee.................................... 50,000
Printing Fees and Expenses............................................ 175,000
Legal Fees and Expenses............................................... 300,000
Accounting Fees and Expenses.......................................... 200,000
Blue Sky Fees and Expenses............................................ 5,000
Transfer Agent and Registrar Fees..................................... 15,000
Miscellaneous......................................................... 89,440
--------
Total............................................................... $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for certain
expenses incurred) arising under the Securities Act of 1933, as amended (the
"Act"). The Registrant's Amended and Restated Certificate of Incorporation
(Exhibit 3.1 hereto) provides for indemnification of its directors and
officers to the maximum extent permitted by the Delaware General Corporation
Law and the Registrant's Bylaws (Exhibit 3.2 hereto) provides for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. In addition,
the Registrant has entered into Indemnification Agreements (Exhibit 10.1
hereto) with its directors and officers containing provisions which are in
some respects broader than the specific indemnification provisions contained
in the Delaware General Corporation Law. The indemnification agreements may
require the Company, among other things, to indemnify its directors against
certain liabilities that may arise by reason of their status or service as
directors (other than liabilities arising from willful misconduct of culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors'
insurance if available on reasonable terms. Reference is also made to the
Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Company against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since September 30, 1994, the Registrant has issued and sold (without
payment of any selling commission to any person) the following unregistered
securities (as adjusted to reflect the Registrant's reincorporation under the
laws of Delaware and the automatic conversion of its outstanding Preferred
Stock into Common Stock upon completion of this offering):
(1) In connection with the reincorporation of the Registrant under the
laws of Delaware to be effected prior to completion of this offering,
the Registrant will exchange shares of its capital stock for the
outstanding shares of capital stock of Preview Travel, Inc., a
California corporation.
II-1
<PAGE>
(2) As of September 30, 1997, 410,680 shares of Common Stock had been
issued upon exercise of options and 1,157,914 shares of Common Stock
were issuable upon exercise of outstanding options under the
Registrant's 1988 Stock Option Plan.
(3) In January 1995, the Registrant issued and sold to eight investors
shares of Series D Preferred Stock convertible into an aggregate of
1,492,976 shares of Common Stock for an aggregate purchase price of
$6,270,500.
(4) In February 1995, the Registrant issued to two investors convertible
subordinated notes in the aggregate principal amount of $750,000,
which notes are convertible into 340,909 shares of Common Stock.
(5) In May 1996, the Registrant issued to 20 investors convertible
subordinated notes in the aggregate principal amount of $999,959,
which notes were converted into shares of Series E Preferred Stock in
June 1996.
(6) In June 1996, the Registrant issued and sold shares of Series E
Preferred Stock convertible into an aggregate of 955,869 shares of
Common Stock to 21 investors for an aggregate purchase price of
$8,602,821. In September 1997, the Registrant issued and sold to 31
investors additional shares of Series E Preferred Stock convertible
into an aggregate of 1,562,806 shares of Common Stock for an aggregate
purchase price of $14,065,258.
(7) In January 1997, the Registrant issued Series C Preferred Stock upon
exercise of warrants held by 13 holders for an aggregate exercise
price of $414,999. Such shares of Series C Preferred Stock are
convertible into an aggregate of 148,214 shares of Common Stock.
(8) The Registrant has issued to America Online, Inc. the following
warrants in connection with certain commercial agreements between the
Registrant and America Online, Inc.: (A) in January 1995, a warrant to
purchase 160,000 shares of Common Stock for an aggregate purchase
price of $352,000; (B) in November 1995, a warrant to purchase shares
of Series D Preferred Stock convertible into 377,619 shares of Common
Stock for an aggregate purchase price of $1,586,000; and (C) in June
1996, a warrant to purchase shares of Series E Preferred Stock
convertible into 75,000 shares of Common Stock for an aggregate
purchase price of $675,000.
(9) The Registrant has issued to an equipment lease provider the following
warrants: (A) in December 1995, a warrant to purchase shares of Series
D Preferred Stock convertible into 20,000 shares of Common Stock for
an aggregate purchase price of $84,000; and (B) in July 1997, a
warrant to purchase shares of Series E Preferred Stock convertible
into 11,666 shares of Common Stock for an aggregate purchase price of
$104,994.
(10) In September 1997 the Registrant issued to a strategic partner a
warrant to purchase shares of Series E Preferred Stock convertible
into 94,500 shares of Common Stock at an aggregate exercise price of
$850,500.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuance described in Item 15(a)(1) was or will be exempt from
registration under Section 2(3) of the Securities Act on the basis that such
transaction did not involve a "sale" of securities. The issuances described in
Items 15(a)(3) through 15(a)(10) were deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) thereof as transactions
by an issuer not involving any public offering. The issuances described in
Items 15(a)(2) were deemed to be exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated thereunder in that they were offered
and sold either pursuant to written compensatory benefit plans or pursuant to
a written contract relating to compensation, as provided by Rule 701. In
addition, such issuances were deemed to be exempt from registration under
Section 4(2) of the Securities Act as transactions by an issuer not involving
any public offering. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends where affixed to the securities issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Form of Agreement and Plan of Merger between the Registrant and
Preview Travel, Inc., a Delaware corporation.
3.1* Certificate of Incorporation of the Registrant.
3.2* Form of Bylaws of the Registrant, to be effective upon completion of
the offering.
3.3* Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of the offering.
4.1* Form of the Registrant's Common Stock Certificate.
5.1** Opinion of Venture Law Group, a Professional Corporation.
10.1* Form of Indemnification Agreement.
10.2* 1988 Stock Option Plan, as amended.
10.3* 1997 Stock Option Plan.
10.4* 1997 Employee Stock Purchase Plan.
10.5* 1997 Directors' Stock Option Plan.
10.6* Third Amended and Restated Registration Rights Agreement, dated June
28, 1996, by and among the Registrant and certain holders of the
Registrant's capital stock.
10.7* Amendment No. 1 to the Third Amended and Restated Registration Rights
Agreement, dated September 26, 1997, by and among the Registrant and
certain holders of the Registrant's capital stock.
10.8+* Travel Channel Agreement, dated September 30, 1997, by and between the
Registrant and Excite, Inc.
10.9+* Interactive Services Agreement, dated September 1, 1997, by and
between the Registrant and America Online, Inc.
10.10+* Subscriber Services Agreement, dated October 1997, by and between the
Registrant and Apollo Travel Partnership.
10.11* Warrant Agreement to Purchase Shares of Series D Preferred Stock,
dated December 15, 1995, by and between the Registrant and Comdisco,
Inc.
10.12* Warrant Agreement to Purchase Shares of Series E Preferred Stock,
dated July 22, 1997, by and between the Registrant and Comdisco, Inc.
10.13* Office Lease, dated September 15, 1990, by and between the Registrant
and Blum's Building Associates.
10.14* Severance Agreement, dated March 1997, by and between the Registrant
and Kenneth Orton.
11.1 Statement Regarding Computation of Per Share Earnings.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants (see page II-7).
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* Previously filed.
** To be supplied by amendment.
+ Certain information in these exhibits has been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
confidential treatment request under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406.
(b) Financial Statement Schedules
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Amendment to Registration Statement on Form S-
1 to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of San Francisco, State of California, on October 29, 1997.
PREVIEW TRAVEL, INC.
By: /s/ Kenneth R. Pelowski
-----------------------------------
KENNETH R. PELOWSKI, EXECUTIVE
VICE PRESIDENT, FINANCE AND
ADMINISTRATION, AND CHIEF
FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT ON FORM S-1 HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Kenneth J. Orton* President, Chief October 29, 1997
- ------------------------------------- Executive Officer
(KENNETH J. ORTON) and Director
(Principal
Executive Officer)
Executive Vice October 29, 1997
/s/ Kenneth Pelowski President, Finance
- ------------------------------------- and Administration
(KENNETH PELOWSKI) and Chief Financial
Officer (Principal
Financial Officer)
/s/ James J. Hornthal* Chairman and October 29, 1997
- ------------------------------------- Director
(JAMES J. HORNTHAL)
/s/ Thomas W. Cardy* Director October 29, 1997
- -------------------------------------
(THOMAS W. CARDY)
/s/ Thomas A. Cullen* Director October 29, 1997
- -------------------------------------
(THOMAS A. CULLEN)
II-5
<PAGE>
SIGNATURE CAPACITY DATE
/s/ William R. Hearst, III* Director October 29, 1997
- -------------------------------------
(WILLIAM R. HEARST, III)
/s/ Theodore J. Leonsis* Director October 29, 1997
- -------------------------------------
(THEODORE J. LEONSIS)
/s/ Douglas J. Mackenzie* Director October 29, 1997
- -------------------------------------
(DOUGLAS J. MACKENZIE)
/s/ James E. Noyes* Director October 29, 1997
- -------------------------------------
(JAMES E. NOYES)
/s/ David S. Pottruck* Director October 29, 1997
- -------------------------------------
(DAVID S. POTTRUCK)
/s/ Kenneth R. Pelowski
*By: ________________________________
(ATTORNEY-IN-FACT)
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF COOPERS & LYBRAND L.L.P., INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-37183) of our report dated October 27, 1997, except for Note 15 for
which the date is , 1997, on our audits of the financial statements of
Preview Travel, Inc. We also consent to the reference to our firm under the
caption "Experts" and "Selected Financial Data."
Coopers & Lybrand L.L.P.
San Francisco, CA
October 28, 1997
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Form of Agreement and Plan of Merger between the Registrant and
Preview Travel, Inc., a Delaware corporation.
3.1* Certificate of Incorporation of the Registrant.
3.2* Form of Bylaws of the Registrant, to be effective upon completion of
the offering.
3.3* Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of the offering.
4.1* Form of the Registrant's Common Stock Certificate.
5.1** Opinion of Venture Law Group, a Professional Corporation.
10.1* Form of Indemnification Agreement.
10.2* 1988 Stock Option Plan, as amended.
10.3* 1997 Stock Option Plan.
10.4* 1997 Employee Stock Purchase Plan.
10.5* 1997 Directors' Stock Option Plan.
10.6* Third Amended and Restated Registration Rights Agreement, dated June
28, 1996, by and among the Registrant and certain holders of the
Registrant's capital stock.
10.7* Amendment No. 1 to the Third Amended and Restated Registration Rights
Agreement, dated September 26, 1997, by and among the Registrant and
certain holders of the Registrant's capital stock.
10.8+* Travel Channel Agreement, dated September 30, 1997, by and between the
Registrant and Excite, Inc.
10.9+* Interactive Services Agreement, dated September 1, 1997, by and
between the Registrant and America Online, Inc.
10.10+* Subscriber Services Agreement, dated October 1997, by and between the
Registrant and Apollo Travel Partnership.
10.11* Warrant Agreement to Purchase Shares of Series D Preferred Stock,
dated December 15, 1995, by and between the Registrant and Comdisco,
Inc.
10.12* Warrant Agreement to Purchase Shares of Series E Preferred Stock,
dated July 22, 1997, by and between the Registrant and Comdisco, Inc.
10.13* Office Lease, dated September 15, 1990, by and between the Registrant
and Blum's Building Associates.
10.14* Severance Agreement, dated March 1997, by and between the Registrant
and Kenneth Orton.
11.1 Statement Regarding Computation of Per Share Earnings.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants (see page II-7).
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* Previously filed.
** To be supplied by amendment.
+ Certain information in these exhibits has been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
confidential treatment request under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406.
<PAGE>
EXHIBIT 11.1
PREVIEW TRAVEL, INC.
STATEMENT RE: COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding.......... 1,140,366 1,227,979 1,630,803 1,611,317 1,723,555
Common equivalent shares
pursuant to Staff Accounting
Bulletin Nos. 55, 64 and 83. 294,319 294,319 294,319 294,319 294,319
Dilutive effect of common and
preferred stock options and
warrants.................... 1,562,807 1,562,807 1,562,807 1,562,807 1,562,807
--------- --------- --------- --------- ---------
Shares used in computing net
income (loss) per share..... 2,997,492 3,085,105 3,487,930 3,468,443 3,580,681
========= ========= ========= ========= =========
Shares used in computing pro
forma net loss per share:
Shares from above.......... 2,997,492 3,085,105 3,487,930 3,468,443 3,580,681
Assumed conversion of
preferred stock at the
date of issuance.......... 1,873,822 3,185,854 3,849,970 3,692,404 4,470,881
Assumed exercise warrants
and conversion of debt(1). 290,909 791,818 1,254,187 1,225,937 1,190,723
--------- --------- --------- --------- ---------
Shares used in computing
pro forma net income
(loss) per share.......... 5,162,223 7,062,778 8,592,086 8,386,784 9,242,285
========= ========= ========= ========= =========
</TABLE>
- ---------------------
(1) Required or expected to be exercised or converted as the effective of the
initial public offering.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from balance
sheets at December 31, 1996 and September 30, 1997 and statements of operations
for the fiscal year and nine months then ended, respectively, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 6,016 13,640
<SECURITIES> 0 0
<RECEIVABLES> 1,284 1,562
<ALLOWANCES> (25) (25)
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,487 15,605
<PP&E> 4,195 5,518
<DEPRECIATION> (2,095) (2,792)
<TOTAL-ASSETS> 12,554 20,922
<CURRENT-LIABILITIES> 7,095 5,547
<BONDS> 0 0
0 0
5 6
<COMMON> 2 2
<OTHER-SE> 4,404 13,673
<TOTAL-LIABILITY-AND-EQUITY> 12,554 20,922
<SALES> 12,374 10,127
<TOTAL-REVENUES> 12,374 10,127
<CGS> 9,308 7,011
<TOTAL-COSTS> 8,567 15,707
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (89) 3
<INCOME-PRETAX> (5,590) (5,577)
<INCOME-TAX> (2) (2)
<INCOME-CONTINUING> (5,592) (5,579)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,592) (5,579)
<EPS-PRIMARY> (1.61) (1.56)
<EPS-DILUTED> 0 0
</TABLE>
