<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997
REGISTRATION NO. 333-37183
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 4
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
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR 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. [_]
---------------
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 NOVEMBER 14, 1997
PROSPECTUS
2,500,000 SHARES
[LOGO OF PREVIEW TRAVEL, INC.]
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 Common Stock has been approved for quotation 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 strategic distribution
agreements that expire in 2002 or earlier, under certain circumstances.
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.
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.
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. In 1996 and
in the quarter ended September 30, 1997, the Company's television operations
accounted for approximately 79% and 54%, respectively, of the Company's total
revenues, and advertising revenues from MCI Telecommunications Corporation
("MCI") accounted for approximately 58% and 37%, respectively, of total
television revenues. MCI phased out its sponsorship of the Company's television
programming from the first quarter to the third quarter of 1997. As a result,
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.
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."
Nasdaq National Market sym-
bol....................... 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
calculation (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 PRO FORMA(4) AS ADJUSTED(5)
------ ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $13,640 $17,564 $42,289
Total assets............................... 20,922 24,846 49,571
Long-term obligations (6).................. 3,095 2,345 2,345
Total stockholders' equity................. 13,681 18,355 43,080
</TABLE>
- ------------------
(1) Includes an aggregate of 849,814 shares issuable upon exercise of warrants
outstanding as of September 30, 1997 at a weighted average exercise price
of $4.61 per share, substantially all of which are expected to be exercised
upon completion of this offering. Such warrants also may be exercised on a
net issuance basis, which would result in no cash proceeds to the Company.
Also includes an aggregate of 340,909 shares issuable upon conversion of
convertible subordinated notes outstanding as of September 30, 1997, which
conversion will not result in any cash proceeds to the Company. 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 as a measure of the Company's revenues 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) Includes effects of exercise of warrants and conversion of convertible
subordinated notes as described in footnote (1) above.
(5) 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. See "Use of Proceeds" and
"Capitalization."
(6) 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; History of Net Operating
Losses; Accumulated Deficit. The Company incurred net losses of $5.4 million,
$4.9 million, $5.6 million and $5.6 million in 1994, 1995, 1996 and the nine
months ended September 30, 1997, respectively. As of September 30, 1997, the
Company had an accumulated deficit of approximately $21.2 million. 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.
Anticipated Losses and Negative Cash Flow. 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.
5
<PAGE>
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 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
6
<PAGE>
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."
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 agreement with AOL is conditioned upon the Company achieving
specified levels of travel services bookings, which will require the Company
to significantly increase such bookings from current levels. 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, neither the AOL agreement nor the Excite
agreement provides the Company with
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renewal rights upon expiration of their respective five-year terms. The AOL
agreement provides AOL with the right to renew the AOL agreement for
successive one-year terms on a non-exclusive basis during which period AOL
would continue to receive a percentage of commissions and share in advertising
revenues, but the Company would not be obligated to make any additional
minimum payments. There can be no assurance that such agreements will be
renewed on commercially acceptable terms, or at all.
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
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. The Company's arrangements with AOL and Excite are expected to
continue 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 14 of Notes to
Consolidated Financial Statements.
Risk of Termination of Distribution Agreement with America Online. The
Company's future success depends in part upon its ability to maintain its
distribution agreement with AOL. The Company's distribution agreement with AOL
may be terminated by AOL in the event that the Company fails to make certain
minimum payments to AOL, fails to achieve specified levels of travel services
bookings or breaches its database services agreement with AOL pursuant to
which the Company is required to develop and manage a travel-related
destinations database for AOL. In particular, the Company's ability to achieve
such specified annual levels of travel services bookings will require the
Company to significantly increase such bookings from current levels, with the
first annual measurement date occurring in September 1998. There can be no
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assurance that the Company will be able to meet its significant financial
obligations to AOL, achieve the specified minimum levels of travel services
bookings, or deliver satisfactory content to the database. Failure to do any
of the foregoing could result in the termination by AOL of the Company's
distribution agreement with AOL, which would likely have a material adverse
effect on the Company's business, operating results and financial condition.
See "--Reliance on Distribution Agreements with America Online and Excite."
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.
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
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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.
Specifically, the Company does not have a written agreement with Pegasus, and
its agreement with ANS Communications is currently on a month-to-month basis.
The Company's agreement with GeoNet Communications becomes month-to-month as
of January 31, 1998. 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 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.
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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.
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."
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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 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
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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 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
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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% and 36.7% of the Company's total television revenues for
the first nine months and the quarter, respectively, 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 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
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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."
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,
15
<PAGE>
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 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
16
<PAGE>
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
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
17
<PAGE>
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 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 the amount of $7.30 per share. 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 ($28,561,000 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, which require the Company to make minimum payments to AOL and
Excite totaling $56 million over the next five years. 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. The Company also
expects to use approximately $3 million of the net proceeds for capital
expenditures, including the acquisition of redundant computer and
communications systems. 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 disallowed without prior approval from
the bank. 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 giving effect to the transactions described in footnote (1)
below 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. 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(1) AS ADJUSTED
-------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total debt.................................. $ 1,055 $ 305 $ 305
-------- -------- --------
Shareholders' equity:
Preferred Stock, $0.001 par value,
6,134,563 shares authorized; 6,033,687
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; 9,154,368
shares issued and outstanding (pro
forma); 11,654,368 shares issued and
outstanding (as adjusted)................ 2 10 2,510
Additional paid-in capital................ 34,962 39,634 61,859
Other..................................... (95) (95) (95)
Accumulated deficit....................... (21,194) (21,194) (21,194)
-------- -------- --------
Total shareholders' equity.............. 13,681 18,355 43,080
-------- -------- --------
Total capitalization................... $ 14,736 $ 18,660 $ 43,385
======== ======== ========
</TABLE>
- ---------------------
(1) Includes an aggregate of 849,814 shares issuable upon exercise of warrants
outstanding as of September 30, 1997 at a weighted average exercise price
of $4.61 per share, substantially all of which are expected to be
exercised upon completion of this offering. Such warrants also may be
exercised on a net issuance basis, which would result in no cash proceeds
to the Company. Also includes an aggregate of 340,909 shares issuable upon
conversion of convertible subordinated notes outstanding as of September
30, 1997, which conversion will not result in any cash proceeds to the
Company. 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 historical and pro forma net
tangible book value of approximately $13,681,000 or $7.09 per share of Common
Stock, and $18,355,000 or $2.01 per share of Common Stock, respectively. 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 to be issued upon 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 $43,080,000 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
Net tangible book value per common share as of September 30,
1997....................................................... 7.09
Effect of pro forma adjustments:
Conversion of Preferred Stock to Common Stock............. (5.37)
Conversion of notes to Common Stock....................... .02
Exercise of warrants...................................... .27
-----
Pro forma net tangible book value per share................. 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 include an aggregate of 849,814 shares issuable upon
exercise of warrants outstanding as of September 30, 1997 at a weighted
average exercise price of $4.61 per share, substantially all of which are
expected to be exercised upon completion of this offering. Such warrants
also may be exercised on a net issuance basis, which would result in no
cash proceeds to the Company. Also includes an aggregate of 340,909 shares
issuable upon conversion of convertible subordinated notes outstanding as
of September 30, 1997, which conversion will not result in any cash
proceeds to the Company. 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 3,095
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 as a measure
of the Company's revenues 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% and 36.7% of the Company's total television revenues for
the nine months and the quarter, respectively, 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; History of Net Operating Losses;
Accumulated Deficit," "--Anticipated Losses and Negative Cash Flow," "--
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."
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. The Company's
arrangements with AOL and Excite are expected to continue 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. See
24
<PAGE>
"Risk Factors--Reliance on Distribution Agreements with America Online and
Excite." 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 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; History of Net Operating Losses;
Accumulated Deficit" and "--Anticipated Losses and Negative Cash Flow."
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 television 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 phase-out 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, more than half of which resulted from an
increase in payroll and related expenses attributable to hiring additional
staff. 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 of approximately
$500,000 associated with less 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 addition of staff for the Company's online
operations, resulting in an increase of more than $700,000 in payroll and
related expenses. 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.
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<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 as a measure
of the Company's revenues 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 phase-out 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 associated primarily with development of the
online business and television programming, 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
associated with decreased television revenue, 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 associated with normal operating activities, 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 associated with increased revenue, partly offset by an increase in
accounts payable and accrued liabilities associated with expansion of the
Company's business and decreases in prepaid production and other assets and
travel inventory as the Company terminated acquisition of 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.
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<PAGE>
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 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 14 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.
34
<PAGE>
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
35
<PAGE>
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
36
<PAGE>
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; however, AOL may terminate the distribution agreement 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. In particular, the Company's ability to achieve such
specified annual levels of travel services bookings will require the Company
to significantly increase such bookings from current levels, with the first
annual measurement date occurring in September 1988. See "Certain
Transactions" for a description of the Company's relationship with AOL.
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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 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
Agreements 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 is currently in discussions with Excite with respect to
the Company's contribution to the development and promotion of the Excite
Travel Channel. While the specific nature and extent of its investment in
terms of financial, managerial, editorial and other resources has not yet been
determined, the Company believes that such investment may be significant, as
the Company anticipates that the Excite Travel Channel will represent an
important distribution channel for the Company's travel services. 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 Excite arrangement is expected to represent a
significant distribution channel for the Company's travel services, and any
termination of the Company's agreement with Excite would likely have a
material adverse affect on the Company's business, operating results and
financial condition. See "Risk Factors--Reliance on Distribution Agreements
with America Online and Excite."
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 Agreements 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
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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:
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
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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.
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, primarily by the
addition of a T3 data communications line, 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."
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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."
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. Revenues from the Company's television
operations accounted for 79% and 58% of total revenues for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively.
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.
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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."
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."
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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 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
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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 "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. Although the Company believes that its
current facilities are adequate and suitable for its current operations, the
Company anticipates that it will require additional space within the next 12
months. 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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<PAGE>
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
49
<PAGE>
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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<PAGE>
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.
51
<PAGE>
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.
Mr. Leonsis is President and Chief Executive Officer of AOL Studios, an
operating division of AOL. Messrs. Hearst and Mackenzie are limited partners
of KPCB VII Associates, the general partner of each of Kleiner Perkins
Caufiled & Byers VII, KPCB VII Founders Fund and KPCB Information Sciences
Zaibatsu Fund II, which collectively are a principal stockholder of the
Company (the "KPCB Funds").
In January 1995, AOL and the KPCB Funds purchased 595,238 shares and 714,285
shares, respectively, of Series D Preferred Stock at a purchase price of $4.20
per share, and in June 1996, AOL and the KPCB Funds purchased 27,333 shares
and 27,077 shares, respectively, of Series E Preferred Stock at a purchase
price of $9.00 per share. Each share of Series D and Series E Preferred Stock
is convertible into one share of Common Stock. In May 1996, the Company issued
and sold to AOL and the KPCB Funds convertible subordinated notes, the
principal balance and accrued interest under which were converted into the
shares of Series E Preferred Stock purchased by such entities in June 1996. In
connection with the issuance of such notes, the Company also issued to AOL and
the KPCB Funds warrants to purchase 4,692 shares and 4,648 shares,
respectively, of Common Stock at an exercise price of $2.40 per share.
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. 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
52
<PAGE>
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 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. Frank J. Caufield, a director of
AOL, is a general partner of KPCB VII Associates.
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. Each share of Series D and Series E
Preferred Stock is convertible into one share of Common Stock. 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.
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. In addition, the KPCB Funds and AOL
are principal stockholders of Excite.
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.
See "Certain Relationships and Related Transactions."
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
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<PAGE>
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 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.
54
<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 Internal Revenue Code of
1986, as amended (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
56
<PAGE>
exercisable at the rate of 1/36th of the total number of shares subject to the
options monthly following a six-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
57
<PAGE>
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.
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
58
<PAGE>
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 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.
59
<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. Each share of Series D and Series E Preferred Stock is
convertible into one share of Common Stock. 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 VII (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.
60
<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 expire in September 2002; however, AOL may terminate the distribution
agreement 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. 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.
61
<PAGE>
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. Each share of Series D and Series E
Preferred Stock is convertible into one share of Common Stock. 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. Each share of Series E Preferred
Stock is convertible into one share of Common Stock. 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.
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<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)........................... 1,239,882 14.5% 11.2%
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 (13)........................... 78,100 * *
Douglas J. Mackenzie (3)........................... 1,251,419 15.1 11.6
James E. Noyes (14)................................ 45,974 * *
David S. Pottruck.................................. 22,222 * *
All directors and executive officers as a group (15
persons) (15)..................................... 3,888,103 44.6 34.7
</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 each of the individuals named above
is: c/o Preview Travel, Inc., 747 Front Street, San Francisco, California
94111.
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<PAGE>
(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. Does not include 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.
(3) Includes 800,708 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) Does not include 1,239,882 shares held by AOL, of which shares Mr.
Leonsis disclaims beneficial ownership.
(14) Includes 38 shares issuable upon exercise of a warrant, which warrant is
expected to be exercised upon completion of the offering.
(15) 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 5,067 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.
64
<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. In addition, upon completion of the offering, the
Company expects that warrants to purchase an aggregate of 849,811 shares of
Common Stock at a weighted average exercise price of $4.61 per share will be
exercised and that convertible subordinated notes in the aggregate principal
amount of $750,000 will be converted into an aggregate of 340,909 shares of
Common Stock. See "--Warrants, Convertible Subordinated Notes and Other
Rights."
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
65
<PAGE>
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.
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.
Such warrants also may be exercised on a net issuance basis, which would
result in no cash proceeds to the Company. Such warrants, if not exercised
prior to or upon the completion of the offering, will expire upon 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, resulting in no cash proceeds to
the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is U. S.
Stock Transfer Corporation.
LISTING
The Common Stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "PTVL."
66
<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.
67
<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.
68
<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 &
69
<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
September 30, 1997 and the 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,
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.
70
<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 and copied at the
Commission's public reference room at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, as well as the Regional Offices of the Commission
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; 7 World Trade Center, Suite 1300, New York, New York
10048; and 5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of
such materials can be obtained by mail from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington D.C. 20549, upon payment
of the fees prescribed by the Commission. 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.
71
<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 15)
-------- -------- ------------- -------------
(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
7,963,645 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:
Proceeds from borrowings on
long-term debt............... 733 1,318 100 100 1,350
Payment of long-term debt..... (557) (2,700) (718) (618) (3,450)
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.
Long-lived Assets:
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (SFAS 121). SFAS 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. No such
impairments have been identified to date. The Company assesses the impairment
of long-lived assets when events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable.
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 not affect
the Company's operating results. Disclosure of gross bookings is not required
by generally accepted accounting principles ("GAAP"). Gross bookings are not
included in revenues or operating results, and should not be considered in
isolation or as a substitute for other information prepared in accordance with
generally accepted accounted principles. Management believes that gross
bookings provide more consistent comparison between historical periods than do
online revenues. In addition, management believes that gross bookings are
meaningful because such information and, in particular, year-to-year changes
in such information, are a useful measure of market acceptance.
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 Number 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 disallows the payment of dividends without
prior approval from the bank. 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 $ 850,500 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
------------ ------------ -------------
<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>
[GRAPHIC DEPICTING FAREFINDER SCREEN]
SHOPPING FEATURES
[GRAPHIC DEPICTING FIND-A-TRIP SCREEN]
Preview Travel has created several special services designed to help
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.......................... 60
Principal Stockholders.................................................. 63
Description of Capital Stock............................................ 65
Shares Eligible for Future Sale......................................... 67
Underwriting............................................................ 69
Legal Matters........................................................... 70
Experts................................................................. 70
Additional Information.................................................. 71
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, INC.]
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.
*** Supercedes exhibit previously filed.
+ 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
Financial Statements Schedules have not been included inasmuch as the
information required to be included therein is not material.
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 November 14, 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:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Kenneth J. Orton* President, Chief November 14, 1997
- ------------------------------------- Executive Officer
(KENNETH J. ORTON) and Director
(Principal
Executive Officer)
/s/ Kenneth Pelowski Executive Vice November 14, 1997
- ------------------------------------- President, Finance
(KENNETH PELOWSKI) and Administration
and Chief Financial
Officer (Principal
Financial Officer)
/s/ James J. Hornthal* Chairman and November 14, 1997
- ------------------------------------- Director
(JAMES J. HORNTHAL)
/s/ Thomas W. Cardy* Director November 14, 1997
- -------------------------------------
(THOMAS W. CARDY)
/s/ Thomas A. Cullen* Director November 14, 1997
- -------------------------------------
(THOMAS A. CULLEN)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ William R. Hearst, III* Director November 14, 1997
- -------------------------------------
(WILLIAM R. HEARST, III)
/s/ Theodore J. Leonsis* Director November 14, 1997
- -------------------------------------
(THEODORE J. LEONSIS)
/s/ Douglas J. Mackenzie* Director November 14, 1997
- -------------------------------------
(DOUGLAS J. MACKENZIE)
/s/ James E. Noyes* Director November 14, 1997
- -------------------------------------
(JAMES E. NOYES)
/s/ David S. Pottruck* Director November 14, 1997
- -------------------------------------
(DAVID S. POTTRUCK)
/s/ Kenneth R. Pelowski
*By: ________________________________
(ATTORNEY-IN-FACT)
</TABLE>
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
November 14, 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.
*** Supercedes exhibit previously filed.
+ 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 10.9
Confidential EXECUTION COPY
INTERACTIVE SERVICES AGREEMENT
------------------------------
This Interactive Services Agreement (the "Agreement"), dated as of
September 1, 1997 (the "Effective Date"), is between America Online, Inc.
("AOL"), a Delaware corporation, with offices at 22000 AOL Way, Dulles, Virginia
20166, and Preview Travel, Inc. ("Preview"), a California corporation, with
offices at 747 Front Street, San Francisco, California 94111. AOL and Preview
may be referred to individually as a "Party" and collectively as "Parties."
INTRODUCTION
------------
AOL and Preview each desires that Preview make the Online Area (and the Res
System therein) available through the AOL Network, subject to the terms and
conditions set forth in this Agreement. Defined terms used but not defined in
the body of the Agreement shall be as defined on Exhibit A attached hereto.
TERMS
-----
1. ONLINE AREA - PROGRAMMING; ADVERTISING. The Parties shall have the
--------------------------------------
following duties and rights with respect to the Content and programming of
the Online Area:
1.1 Online Area. Preview shall work diligently to maintain the Online
-----------
Area, consisting of the Content contained within the Online Area as of
the Effective Date. Consistent with the Parties' joint goal that the
Online Area be rich and robust and substantially consistent with any
other version of the area (or similar Content of Preview) made
available directly by Preview or through any third party or via any
Interactive Site including, without limitation, any features, offers,
contests, functionality or technology (such other versions
collectively, the "Additional Preview Channels"), Preview shall ensure
that the Online Area shall include all of the Content that is then
included in the Additional Preview Channels; provided, however, that
(a) such inclusion shall not be required where it is commercially or
technically impractical to either Party and (b) the specific changes
in scope, nature and/or offerings required by such inclusion shall be
subject to AOL's review and approval and the terms of this Agreement.
Prior to the Transition (if any) (as defined in Section 1.10) the
inclusion in the Online Area of (a) any material amounts of additional
Content not contained within the Online Area as of the Effective Date
or (b) any additional Content that is inconsistent in any manner with
the scope and purpose of the Online Area as of the Effective Date
(including, without limitation, in each case, any features,
functionality or technology) shall be subject to AOL's prior written
approval. Subsequent to the Transition, all Content, including without
limitation, all links, advertising, transaction types and
functionality, shall be subject to the prior written approval of AOL.
Preview shall develop any redesign of the Online Area in consultation
with AOL and in accordance with any standard design and content
publishing guidelines provided to Preview by AOL (including, without
limitation, any HTML publishing guidelines). Preview shall not
authorize or permit any third party to distribute any Content of
Preview through the AOL Network absent AOL's prior written approval.
Preview shall reasonably consider AOL's views on any redesign of the
Online Area
1.2 Links. Preview shall not be permitted to establish any links between
-----
the Online Area and any other area on or outside of the AOL Network,
including, without limitation, sites on the World Wide Web portion of
the Internet, without the prior written approval of AOL. In the event
that AOL approves any such links, such approval shall, in each case,
be subject to Preview's compliance with the then-current standard
terms and conditions for such links, as such terms and conditions may
be amended by AOL from time to time.
[*]= CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
1
<PAGE>
Confidential
1.3 Contests. Preview shall take all commercially reasonable steps
--------
necessary to ensure that any contest, sweepstakes or similar promotion
conducted or promoted through the Online Area (a "Contest") complies
with all applicable federal, state and local laws and regulations.
Preview shall provide AOL with at least thirty (30) days prior written
notice (or less as applicable given the legal requirements relating to
such Contest) of any Contest.
1.4 Navigational Icons. AOL shall be entitled to establish navigational
------------------
icons, links and pointers connecting the Online Area (or portions
thereof) with other content areas on or outside of the AOL Network.
In addition, upon AOL's reasonable request, Preview shall create
contextual links in the Online Area to appropriate Content outside of
the Online Area.
1.5 Lowest Price Commitment; Special Offers. Preview shall ensure that
---------------------------------------
the prices for Products offered to AOL Users through the Online Area
(a) do not exceed prices for substantially similar Products offered by
or on behalf of Preview through any other Interactive Site and (b) are
competitive in all material respects with prices for substantially
similar Products offered by other travel services in any other online
or offline medium. In addition, Preview shall, on a reasonably
periodic basis, promote (a) any special or promotional offers made
available by or on behalf of Preview on any other Interactive Site or
through any Additional Preview Channel and (b) in addition, a
reasonable number (at least [*] per Contract Year, with best efforts
to make each of the [*] offers an airline offer and to create
additional offers in each Contract Year) of special exclusive offers
for AOL Users through the Online Area (e.g., discounted fares, free
upgrades (collectively, the "Special Offers"). Preview shall provide
AOL with reasonable prior notice of Special Offers so that AOL can
market the availability of such Special Offers in the manner AOL deems
appropriate in its editorial discretion. In addition, on an annual
basis, Preview will offer a mutually agreeable number of Special
Offers as part of the AOL Member Benefits program, which offers shall
be available exclusively to AOL Members. Preview and AOL will
regularly work together to create other effective and mutually
agreeable promotions for AOL Users.
1.6 Res System. Preview will maintain the Core Systems and the Res System
----------
accessible through the Online Area and will be responsible for
arranging for the connection of the Res System to the Airline Systems
(through the Core Systems). Preview's management of the Res System
shall also be subject to the obligations set forth in Sections 2.8 and
2.9 and Exhibits C and D.
1.7 Disclaimers. Preview agrees that a product disclaimer in
------------
substantially the following form will be displayed in a legal notice
screen to be placed in a mutually agreed upon area in the Online Area:
"AOL AND ITS AFFILIATES WILL NOT BE A PARTY TO ANY TRANSACTION
BETWEEN ANY PURCHASER AND PREVIEW, AND, EXCEPT AS EXPRESSLY
PROVIDED IN AOL'S SHOPPING CHANNEL SATISFACTION GUARANTEE
(AVAILABLE AT KEYWORD "GUARANTEE"), ALL ASPECTS OF SUCH
TRANSACTIONS INCLUDING BUT NOT LIMITED TO PURCHASE TERMS, PAYMENT
TERMS, WARRANTIES, GUARANTEES, MAINTENANCE, AND DELIVERY ARE
SOLELY BETWEEN PURCHASER AND PREVIEW. AOL AND ITS AFFILIATES
PROVIDE NO GUARANTEES OR WARRANTIES, EXPRESS OR IMPLIED,
REGARDING THE QUALITY, MAKE, OR PERFORMANCE OF THE PRODUCTS OR
SERVICES AVAILABLE THROUGH THIS AREA. ALL SUCH GUARANTEES OR
WARRANTIES, IF ANY, ARE DIRECTLY BETWEEN PREVIEW AND THE
PURCHASER."
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
2
<PAGE>
Confidential
1.8 Licenses. Preview hereby grants AOL during the Term a non-exclusive
--------
worldwide license to market, license, distribute, display, perform,
transmit and promote the Online Area and the Licensed Content
contained therein through the AOL Network solely for the purposes
described herein. Preview also grants AOL during the Term a non-
exclusive worldwide license to use any Preview software (and all
modifications and enhancements thereto) necessary for use of the
Online Area by AOL and/or AOL Users (the "Preview Software"). During
the Term, AOL Users shall have the right to access and use the Online
Area and to use the Preview Software, each free of charge. Subject to
such licenses, Preview retains all right, title to and interest in the
Licensed Content and the Preview Software.
1.9 AOL Look and Feel. Preview acknowledges and agrees that AOL shall own
-----------------
all right, title and interest in and to the AOL Look and Feel, subject
to Preview's ownership rights in the Licensed Content.
1.10 Transition of Online Area. In the event that Parties mutually agree
-------------------------
in writing that the Online Area should be reformatted in HTML and
placed on a customized Interactive Site instead of within the
"Rainman" portion of the AOL Network (the "Transition"), (a) the
Transition shall occur according to a written transition plan agreed
upon by the Parties which includes specific responsibilities for each
Party and timetables for completion of such responsibilities, (b)
Preview shall pay all production and communications costs associated
with the Transition and (c) the Online Area after the Transition will
be an Interactive Site customized for use solely by users of the AOL
Service and AOL.com and will contain links only to AOL Content areas,
unless expressly agreed upon in writing in advance by the Parties.
Prior to the Transition, AOL must be reasonably satisfied that
Preview's customized Interactive Site fully complies with the
"Customized Interactive Site Requirements" set forth in Exhibit C.
1.11 Advertising Sales. Both Parties shall have the right to license or
-----------------
sell promotions, advertisements, links, pointers or similar services
or rights through the Online Area ("Advertisements"), subject to the
Advertising Minimum, AOL's then-applicable advertising policies and
AOL's prior approval. The specific advertising inventory within the
Online Area shall be as reasonably determined by the Parties. In
connection with the sale by Preview of an Advertisement, Preview
shall, in each instance, provide AOL with a completed standard
Advertising Registration Form relating to such Advertisement. Preview
shall take all reasonable steps necessary to ensure that any
Advertisement sold by Preview or its agents complies with all
applicable federal, state and local laws and regulations. When selling
advertising associated with any Preview Interactive Site, Preview
shall use commercially reasonable efforts to sell related advertising
within the Online Area. To the extent a Party sells an Advertisement
as part of an advertising package including multiple placement
locations (e.g., both the Online Area and a Preview Interactive Site),
such Party shall allocate the payment for such advertising package
between or among such locations in an equitable fashion, subject to
the Advertising Minimum. To the extent an Advertisement is delivered
through a dynamic mechanism primarily linked to the AOL Members
viewing the advertisement (rather than a defined space within the
Online Area) (e.g., delivery using "ad server" technology), the amount
of revenue from the advertisement allocable to Advertising Revenues
shall be determined based on the number of Impressions to the
Advertisement generated by AOL Users while viewing Content within the
Online Area relative to the total Impressions to the Advertisement
during the given period (or such other formula as AOL may reasonably
implement across the AOL Service given the then-existing advertising
models). Preview shall be responsible for calculating the Internet
Advertising Quotient related to Internet Advertising Revenues. To the
extent AOL is caching any Preview Interactive Site, AOL will provide
Preview with the Impressions information related to any cached sites
necessary for Preview to calculate the Internet Advertising Quotient.
For any period
3
<PAGE>
Confidential
during which Preview fails to calculate the Internet Advertising
Quotient, such quotient shall be deemed to be one hundred percent
(100%). In the event Preview or its Affiliates receives or desires to
receive, directly or indirectly, any barter advertising (or similar
compensation that does not meet the definition of Advertising Revenues
pursuant to Exhibit A) in connection with the Online Area ("Barter
Ads"), Preview shall be entitled to sell such Barter Ads solely from
Preview's unsold inventory on the Online Area; provided that (a)
Barter Ads shall not during any month constitute more than [*] of the
advertising inventory on the Online Area or more than [*] of the
advertising inventory on any screen and (b) sales of Advertisements
shall always preempt placement of Barter Ads. Preview will work with
AOL to incorporate AOL's ad-serving technology, subject to the
specific limitations of that technology. Preview has not yet received
documentation regarding this technology, and therefore cannot
guarantee specific functionality. In no event shall Preview use a
third party provider of ad-serving technology in the AOL Database
without AOL's prior written approval.
2. ONLINE AREA - MANAGEMENT AND MAINTENANCE.
----------------------------------------
2.1 Management of Online Area. Preview shall manage, review, delete,
-------------------------
edit, create, update and otherwise manage all content and services
available on or through the Online Area, including but not limited to
the Licensed Content and message boards (if any), in a timely and
professional manner and in accordance with the terms of this Agreement
and AOL's applicable Terms of Service. Preview shall keep the Online
Area current, accurate and well-organized. Preview warrants that no
portion of the Online Area which is proprietary to Preview (i) will
infringe on or violate any copyright, U.S. patent, trademark or trade
secret; or (ii) will contain any Content which violates any applicable
law or regulation. AOL shall have no obligations with respect to the
Content available on or through the Online Area, including, but not
limited to, any duty to review or monitor any such Content. Preview
acknowledges and agrees that in the event any Content made available
through the Online Area creates material adverse legal and/or public
relations consequences for AOL ("Adverse Content"), as reasonably
determined by AOL, AOL shall be entitled to (a) restrict access to the
Adverse Content in an agreed-upon manner or (b) in the event such
access cannot be restricted, direct Preview to remove the Adverse
Content. In the event that any Adverse Content remains in serious
violation of any copyright, U.S. patent, trademark or trade secret or
of any applicable law or regulation and has not been removed from the
Online Area more than 72 hours following discovery of the violation by
Preview or notice of the violation to Preview, AOL shall have the
right to terminate the Agreement on ten (10) days prior written notice
to Preview.
2.2 Access Equipment. Preview shall provide all computer, telephone and
----------------
other equipment or resources necessary for Preview and the Online Area
to access the AOL Network (including, without limitation, high-speed
dedicated data connections capable of handling AOL peak traffic
loads), except for the AOL proprietary client software necessary to
access the AOL Network and the publishing and commerce tools to be
provided by AOL pursuant to Section 2.6.
2.3 Duty to Inform. Preview shall use all reasonable efforts to promptly
--------------
inform AOL of any information related to the Online Area which could
reasonably lead to a claim, demand, or liability of or against AOL
and/or its Affiliates by any third party.
2.4 Overhead Accounts. Preview shall be granted a reasonable number of
-----------------
Overhead Accounts, as mutually determined by AOL and Preview, for the
exclusive purpose of enabling it and its agents to perform Preview's
duties under this Agreement. Preview shall be responsible for the
actions taken under or through its Overhead Accounts, which
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTD WITH RESPECT TO THE OMITTED PORTIONS.
4
<PAGE>
Confidential
actions are subject to AOL's applicable Terms of Service and for any
surcharges, including, without limitation, all premium charges,
transaction charges, and any applicable communication surcharges
incurred by any Overhead Account issued to Preview, but Preview shall
not be liable for charges incurred by any Overhead Account relating to
AOL's standard monthly usage fees and standard hourly charges, which
charges AOL shall bear. Upon the termination of this Agreement, all
Overhead Accounts, related screen names and any associated usage
credits or similar rights, shall automatically terminate. AOL shall
have no liability for loss of any data or content related to the
proper termination of any Overhead Account.
2.5 Production Work. In the event that Preview requests AOL's production
---------------
assistance in connection with (i) ongoing programming and maintenance
related to the Online Area, (ii) a redesign of or addition to the
Online Area (e.g., a change to an existing screen format or
construction of a new custom form), (iii) production to modify work
performed by a third party provider or (iv) any other type of
production work, Preview shall work with AOL to develop a detailed
production plan for the requested production assistance (the
"Production Plan"). Following receipt of the final Production Plan,
AOL shall notify Preview of (i) AOL's availability to perform the
requested production work, (ii) the proposed fee or fee structure for
the requested production and maintenance work and (iii) the estimated
development schedule for such work. To the extent the Parties reach
agreement regarding implementation of agreed-upon Production Plan,
such agreement shall be reflected in a separate work order signed by
the Parties. To the extent Preview elects to retain a third party
provider to perform any such production work, work produced by such
third party provider must generally conform to AOL's production
Standards & Practices (a copy of which will be supplied by AOL to
Preview upon request). The specific production resources which AOL
allocates to any production work to be performed on behalf of Preview
shall be as determined by AOL in its sole discretion.
2.6 Publishing and Commerce Tools. AOL grants Preview a non-exclusive,
-----------------------------
royalty-free license during the term of the Agreement to use AOL's
publishing tools and its commerce tools which are then made generally
available by AOL to its interactive content providers, solely in
connection with Preview's construction and/or maintenance and
operation of its Online Area. Preview recognizes that (i) AOL
provides all such publishing tools on an "as is" basis, without
warranties of any kind and (ii) AOL may withdraw or modify its
publishing tools at any time. Preview shall be required to complete
AOL's then-standard technical production training classes prior to
receiving access to the AOL publishing tools.
2.7 Training. AOL shall make available to Preview standard AOL training
--------
programs related to Preview's management and maintenance of the Online
Area (including, without limitation, the technical production classes
for AOL publishing tools described below). In addition, Preview will
pay its own travel and lodging costs associated with its participation
in any AOL training programs (including AOL's reasonable travel and
lodging costs when training is conducted at Preview's offices).
2.8 Performance Standards. Except as provided in this Agreement or
---------------------
otherwise mutually agreed, Preview shall comply with the performance
standards (the "Performance Standards") set forth in Exhibit C. To
the extent Performance Standards are not established for any portion
of the services provided by Preview hereunder, Preview will perform
those services at a level of accuracy, quality, completeness, and
responsiveness which meets or exceeds prevailing industry standards.
Upon any discovery by Preview, or receipt by Preview of notification
by AOL, of failure by Preview to meet a Performance Standard, (a)
Preview shall promptly investigate the failure and inform AOL in
writing of such failure and the "root causes" thereof (to the extent
they can be determined) no later than five (5) days after Preview
discovers the failure or receives such notification by AOL, (b)
5
<PAGE>
Confidential
AOL shall consult with Preview to develop an action plan for remedying
the failure within five (5) days thereafter and (c) within thirty (30)
days of development of such action plan, Preview shall fully institute
such plan and reach compliance with the applicable Performance
Standard. In the event Preview has not complied with the Performance
Standard at the end of such 30-day period, AOL may, at its sole
option, terminate either the Agreement or Sections 3.1, 3.3 and 3.4
upon written notice to Preview.
2.9 Preview Services. Preview shall provide the services set forth in
----------------
Exhibit D.
2.10 Certified Merchant Program. Preview shall participate in any
--------------------------
generally applicable "Certified Merchant" program operated by AOL or
its authorized agents or contractors. Such program may require
merchant participants on an ongoing basis to meet certain reasonable,
generally applicable standards relating to provision of electronic
commerce through the AOL Network and may also require the payment of
certain reasonable certification and/or monitoring fees to AOL or its
authorized agents or contractors operating the program.
3. PLACEMENT AND PROMOTION; [*]; CROSS-PROMOTION.
-----------------------------------------------------
3.1 Promotional Plan. AOL shall provide online promotion for the Online
----------------
Area across the AOL Network using promotional placements chosen from
time to time by AOL in its reasonable discretion from the list of
placements set forth in Exhibit B (the "Promotional Plan"). The
Parties shall also mutually agree on the extent to which Preview may
be entitled to Travel Channel pop-ups, subject to AOL's internal
testing regarding the efficacy and consumer acceptance of such pop-ups
for partners in the Travel Channel. On a periodic basis, no less than
quarterly, the parties shall review and modify these placements, as
applicable and mutually agreed, with the intent of maintaining a
current and effective plan. In addition to the specific placements
and distribution agreed upon in the promotional plan, AOL shall have
the right, but not the obligation, to promote and distribute the
Online Area throughout the AOL Network beyond the AOL Service and
AOL.com (e.g., Greenhouse, Instant Messenger, Digital City, etc.). If
AOL is unable to deliver any particular promotional placement
described in Exhibit B (e.g., if the area in which the placement was
to occur is redesigned), the Parties will cooperate in good faith to
develop a replacement program that will include providing Preview with
a substitute promotion of similar quality, nature and value. AOL's
performance of its promotional commitments in the Travel Channel
(including any Impressions commitments pursuant to Section 3.2) is
contingent upon Preview's delivery of the "Destinations Database"
pursuant to the terms and conditions of the Database Agreement between
the parties dated as of September 25, 1997 (the "Database Agreement").
Until such date, AOL shall make commercially reasonable efforts to
satisfy any commitments with respect to the Travel Channel. Any delay
in delivery after such date will reduce AOL's commitments on a pro-
rata basis. In addition, in the event of non-delivery of such
database, AOL may elect to terminate the Agreement pursuant to Section
10.3.
3.2 Impressions. The online promotional placements within certain areas
-----------
of the AOL Network, as required by Section 3.1 above, shall result in
at least the total amount of annual Impressions indicated on the
Promotional Plan; provided that AOL shall not be obligated to provide
in excess of any required amount of Impressions in any year. AOL will
use commercially reasonable efforts to deliver the Impressions in
roughly proportionate quarterly amounts based on the annual target
levels. Except as set forth below in this Section 3.2, any shortfall
in Impressions at the end of a Contract Year shall not be considered a
breach hereof by AOL; such amount shall instead be added to the target
level in the subsequent Contract Year. AOL's failure to provide an
agreed upon percentage (the "Shortfall Percentage") of the number of
total Impressions due to Preview
6
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
Confidential
during any Contract Year as set forth in Exhibit B shall be deemed a
material breach of the Agreement, unless such failure is substantially
attributable to Preview. The Shortfall Percentage shall be [*] for the
first and second Contract Years and [*] for the third, fourth and
fifth Contract Years. Preview's sole remedy for such breach shall be
to terminate the Agreement on thirty (30) days prior written notice to
AOL. In the event there is a shortfall in total Impressions as of the
anticipated Expiration Date (a"Final Shortfall"), AOL shall elect in
its sole discretion one of the following options to provide to Preview
as its sole remedy following the Expiration Date: (a) AOL shall pay
Preview an amount equal to the Final Shortfall divided by [*] (the
"Shortfall Dollar Value"), or (b) commencing on the Expiration Date,
AOL shall provide Preview with advertising placements at a mutually
agreed upon discount from AOL's then-current rate card in the Travel
Channel, the Shopping Channel and other mutually agreed upon areas
with a total value equal to the Shortfall Dollar Value; provided that
in the case of clause (b), the Parties shall negotiate an appropriate
promotional plan for such period prior to the Expiration Date, and
AOL's promotional commitment shall expire upon provision of the total
value due to Preview during the period, which shall not exceed nine
(9) months. In the event AOL has over-delivered Impressions as of the
end of the first four (4) Contract Years for either AOL.COM or the
"Other AOL Network Placements" category set forth in Exhibit B, AOL's
Impressions commitment for either area in the fifth Contract Year
shall be reduced by the amount of such over-delivery (AOL to determine
allocation of such reductions between such areas). In the event AOL
has over-delivered Impressions as of the end of the first four (4)
Contract Years for the Travel Channel, AOL's Impressions commitment
for the Travel Channel (and only the Travel Channel) in the fifth
Contract Year shall be reduced by the amount of such over-delivery. In
the event that at any point during the Term, the aggregate amount of
Commissions earned by Preview as of such date equals or exceeds [*],
AOL's entire Impressions commitment for the remainder of the Term will
be deemed satisfied as of the date on which such hurdle was met.
Subject to Preview's reasonable approval, AOL will have the right to
fulfill Impressions commitments in any promotional area by
substituting incremental Impressions from alternative areas of the AOL
Network. In the event the Database Agreement is terminated, the
numbers of Impressions to be delivered by AOL in the Travel Channel
pursuant to Exhibit B shall be reduced to [*]. In the event delivery
of the database is delayed by Preview in any phase pursuant to the
Database Agreement, the numbers of Impressions to be delivered by AOL
in the Travel Channel pursuant to Exhibit B shall be reduced on a pro-
rata basis. Pursuant to Section 11.11, the remedies available to AOL
set forth in this Section 3.2 are not AOL's exclusive remedies
hereunder.
3.3 [*]. Subject to the terms of this Section 3.3, AOL agrees that the Res
---
System shall be the [*] Reservations Engine that is (a) contextually
integrated across the "Travel Channel" on the AOL Service (i.e.,
threaded throughout the promotional areas listed on Schedule B) and
(b) expressly promoted by AOL in any areas on the AOL Service or on
AOL.com over which AOL exercises complete or substantially complete
programming control (the "AOL-Controlled Areas"). For purposes of this
Agreement, areas managed by [*] or any third party content providers,
among other areas, shall not be deemed AOL-Controlled Areas. The
foregoing [*] shall not apply to (a) Last Minute Travel, Business
Travel, Airline Ticket Consolidation or Cruises [*] or (b) Vacations
Packages. In addition, notwithstanding the foregoing [*], no provision
of this Agreement shall limit AOL's ability (in the AOL-Controlled
Areas or elsewhere on or off the AOL Network) to:
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(a) promote, market or distribute (i) the Content of any other
travel-related interactive content provider that may link to a
Reservations Engine (so long as AOL does not expressly promote
the availability of such Reservation Engine through such
provider and does not promote the Content of any entity meeting
the definition of a Preview Competitor) or (ii) [*] travel
offerings or any discount travel club/membership service (e.g.,
Traveler's Advantage);
(b) sell advertising (e.g., banners, buttons, links) to any travel-
related company (other than a Preview Competitor), including
without limitation, any airline, hotel or rental car company
that may link to and promote a Reservations Engine ;
(c) perform its duties pursuant to arrangements with other parties
entered into prior to the Effective Date.
Preview acknowledges that AOL does not and cannot guarantee that users
will not be able to access alternative Reservations Engines through
the AOL Service or AOL.com (e.g., using an Internet browser).
3.4 Specific Travel Categories.
3.4.1 Rights of First Offer. Preview shall have a right of first
offer to be the [*] provider on the AOL Service and AOL.com for
each of [*], as follows (any service in each such category, an
"Additional Service"). In the event AOL elects to provide an
Additional Service on the AOL Service and/or AOL.com, AOL shall
provide Preview with written notice of the terms on which AOL
generally desires to distribute the Additional Service (the
"Terms"); provided that in the case of [*], AOL hereby
acknowledges its intent to provide such service and to provide
such Terms (including a written specification reasonably
designed to be created within the AOL structure within 45 days)
to Preview promptly following AOL's decision to offer the
applicable service. If Preview desires to provide the
Additional Service, Preview shall provide AOL with written
notice of its desire to provide such service within five (5)
business days of its receipt of written notice from AOL as set
forth above and shall execute a written agreement with AOL
setting forth the Terms within thirty (30) business days of its
receipt of notice from AOL describing the Terms. In such case,
Preview will work diligently to provide to AOL a viable version
of the Additional Service which is suitable for distribution
generally on the AOL Network and which is reasonably
satisfactory to AOL, in accordance with the Terms agreed to by
Preview; provided that Preview shall provide such version
within a reasonable period of time following Preview's notice
of agreement on the Terms, not to exceed ninety (90) days (45
days in the case of [*]). The right of first offer shall expire
and AOL will be entitled to pursue negotiations with third
parties on terms (including, without limitation, terms relating
to carriage, revenue share and programming requirements)
substantially identical to the Terms (a) if Preview informs AOL
in writing that it does not desire to participate in such
Additional Service or does not otherwise respond to the Terms
within the five (5) business days allowed above; or (b) at any
point (i) following the 30 days in which Preview is allowed to
enter into an agreement with AOL regarding the Additional
Service or (ii) following the 90/45 day period in which Preview
must provide the Additional Service; provided that AOL shall
not in bad faith rely on the foregoing to deprive Preview of
the opportunity to provide any Additional Service. In the event
AOL is entitled pursuant to the foregoing to pursue
negotiations with third parties regarding [*], AOL shall not be
prohibited from
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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negotiating with BizTravel.com and Trip.com; in the event
such negotiations result in an arrangement whereby either
entity provides Business Travel to AOL, such entity shall not
be deemed a Preview Competitor hereunder. In the event AOL
offers Cruises to Preview and Preview does not agree to offer
Cruises, all pursuant to this Section, Preview shall be
entitled to mutually agreed upon placement in the Cruises area
that may be developed by AOL. Absent the written agreement
described above between Preview and AOL setting forth the Terms
or a duly authorized and executed written agreement between AOL
and a third party with respect to an Additional Service, under
no circumstances shall AOL be obligated to distribute such
Additional Service, whether provided by Preview or any other
party. In the event that, in accordance with the foregoing, AOL
uses another provider for Business Travel, Preview agrees to
cooperate (as long as it is technically feasible) with such
provider in the development of any Business Travel applications
that are dependent on information from the Res System. This
includes, but is not limited to, frequent flyer programs,
mileage-optimization utilities, email and instant-message
travel updates, and integrated merchandizing. The Parties
acknowledge that more than one Additional Service may be
established with respect to any category (e.g., Last Minute
Travel) and, therefore, each such Additional Service shall be
subject to the terms and conditions of this Section 3.4.1.
3.4.2 Vacation Packages. AOL shall provide Preview the following
-----------------
promotional placements with respect to Vacation Packages (to
the extent Preview offers such packages): (a) on the front
screen of the AOL "Vacations Area", the top third-party
promotional button (currently anticipated to appear on the
right side of such screen), (b) the second from the top third-
party programming button (currently anticipated to appear on
the left side of the screen) and (c) in instances in both the
Vacations Area and the vacations database that may be created
by AOL in which AOL Users are allowed to search for Vacation
Packages in a particular category or subcategory (e.g.,
adventure), the first 2 search results will list packages
offered by Preview in such category (if Preview offers packages
in such category) (and no results will list packages offered by
a Preview Competitor).
3.5 Cross-Promotion by Preview. In general, Preview shall use
--------------------------
commercially reasonable efforts to market the Online Area.
Notwithstanding the generality of the foregoing, Preview shall, at a
minimum, perform the following obligations:
3.5.1 Preview shall cooperate with and reasonably assist AOL in
supplying material for AOL's marketing and promotional
activities which relate to the Online Area. For instance,
Preview shall make its video archives available to AOL and
shall produce six (6) video segments per Contract Year for use
by AOL in its "slideshow" promotions.
3.5.2 Preview shall prominently and regularly promote the Online
Area, making specific mention (verbally, where possible) of
its availability through the America Online(R) service), in
television, radio or print advertisements that are produced
after the Effective Date. In addition, in any instances when
Preview makes promotional reference to any Preview Interactive
Site (each reference, a "Site Reference"), Preview shall
include a specific reference to the Online Area's availability
through the America Online(R) brand service and/or AOL.com, as
applicable, of at least equal prominence to the Site
Reference. Any listings of the applicable "URL(s)" (or similar
address) for such Interactive Site(s) (each an "URL
Reference") shall include a listing of the AOL "keyword" for
the Online Area of at least equal prominence to the URL
Reference and prior to the URL Reference. Preview shall
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Confidential
also include at least 2 editorial features regarding America
Online per Contract Year in its television-related properties.
In addition, the Parties shall in good faith discuss member or
subscriber acquisition programs; provided that neither Party
shall be required to enter into any such program with the other
Party. Preview shall be required to perform the foregoing
obligations in this Section 3.5.2 only in promotional areas
over which Preview exercises complete or substantially complete
programming control (e.g., a television ad purchased solely by
or on behalf of Preview or its Affiliates).
3.5.3 Preview shall include each of the following promotions for AOL
and the Online Area (as the case may be) within each Preview
Interactive Site during the term of the Agreement: (i) a
prominent "Try America Online(R)" feature in the primary area
where Preview mentions its business partners from which users
can obtain promotional information about AOL products and
services and, at AOL's option, download or order AOL's then-
current version of client software for the AOL Service and
AOL's other branded software (e.g., Instant Messenger) and (ii)
a prominent link on the front screen of each Preview
Interactive Site to AOL's primary site on the World Wide Web.
3.5.4 Preview shall not agree to perform obligations similar to the
commitments stated above in Sections 3.5.2 and 3.5.3 for any
AOL Competitor subsequent to execution hereof. In addition,
Preview shall promote AOL exclusively as Preview's Internet
online access provider of choice and shall not promote, market
or distribute the products or services of any AOL Competitor.
3.5.5 Notwithstanding the foregoing obligations in this Section 3.5,
no provision of this Agreement shall limit Preview's ability to
perform certain promotional obligations pursuant to any
existing written agreement with Excite, Inc. (provided that
Preview shall disclose the specific nature and extent of such
duties to AOL subject to the applicable confidentiality
restrictions in such agreement). Preview hereby represents that
it does not owe any obligations to Excite which compete with
the promotions made available to AOL or any service provided by
AOL (other than Netfind).
3.6 Promotional Materials/Press Releases. Each Party will submit to the
------------------------------------
other Party, for its prior written approval, which shall not be
unreasonably withheld or delayed, any marketing, advertising, press
releases and all other promotional materials related to the Online
Area and/or referencing the other Party and/or its trade names,
trademarks, and service marks (the "Materials"); provided, however,
that either Party's use of screen shots of the Online Area for
promotional purposes shall not require the approval of the other Party
so long as the AOL Network is clearly identified as the source of such
screen shots. Each Party shall solicit and reasonably consider the
views of the other Party in designing and implementing such Materials.
A Party whose approval is sought shall respond within five (5)
business days of its receipt of the Materials. If such Party fails to
respond within such five-day period, then its consent shall be deemed
given. Once approved, the Materials may be used during the term of
this Agreement by a Party and its Affiliates for the purpose of
promoting the Online Area and the Content contained therein and reused
for such purpose until such approval is withdrawn with reasonable
prior notice. No press release, public announcement, confirmation or
other public statement regarding this Agreement or the contents hereof
shall be made without the prior written consent of the other Party,
which consent shall not be unreasonably withheld. Notwithstanding the
foregoing, either Party may issue a press release or other disclosure
without the consent of the other Party, if such disclosure is required
pursuant to Section 6 (and in accordance therewith). In addition, the
Parties agree that they will issue a mutually agreed initial
10
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Confidential
press release announcing this Agreement and the Database Agreement on
a mutually agreed date no earlier than September 29, 1997, and no
later than October 15, 1997; provided that in the event no such
release has been issued as of October 15, 1997, neither Party shall be
deemed in breach of the Agreement, and either Party shall be entitled
to issue its own release pursuant to the terms of this Agreement.
3.7 Trademark License. In designing and implementing the Materials and
-----------------
subject to the other provisions contained herein, Preview shall be
entitled to use the following trade names, trademarks, and service
marks of AOL: the "America Online" brand service, "AOL"
service/software and AOL's triangle logo; and AOL and its Affiliates
shall be entitled to use the following trade names, trademarks, and
service marks of Preview solely in connection with this Agreement:
Preview Media, Preview Media, Inc., Travel Update, Weekend Travel
Update, Preview Vacation Bargains, Preview Vacations, Preview Travel,
Consumer Travel Guides and Consumer Travel Reports (collectively,
together with the AOL marks listed above, the "Marks"); provided that
each Party: (i) does not create a unitary composite mark involving a
Mark of the other Party without the prior written approval of such
other Party; (ii) displays symbols and notices clearly and
sufficiently indicating the trademark status and ownership of the
other Party's Marks in accordance with applicable trademark law and
practice; and (iii) uses the other Party's Marks in accordance with
written guidelines provided to such Party by the other Party.
3.7.1 Ownership of Trademarks. Each Party acknowledges the ownership
-----------------------
of the other Party in the Marks of the other Party and agrees
that all use of the other Party's Marks (including all goodwill
associated with the Marks) shall inure to the benefit, and be
on behalf, of the other Party. Each Party acknowledges that its
utilization of the other Party's Marks will not create in it,
nor will it represent it has, any right, title, or interest in
or to such Marks other than the licenses expressly granted
herein. Each Party agrees not to do anything contesting or
impairing the trademark rights of the other Party, including,
without limitation, seeking to register the other Party's Marks
as part of a composite Mark.
3.7.2 Quality Standards. Each Party agrees that the nature and
-----------------
quality of its products and services supplied in connection
with the other Party's Marks shall conform to quality standards
reasonably set by the other Party. Each Party agrees to supply
the other Party, upon request, with a reasonable number of
samples of any Materials publicly disseminated by such Party
which utilize the other Party's Marks. Each Party shall comply
with all applicable laws, regulations, and customs and obtain
any required government approvals pertaining to use of the
other Party's marks.
3.7.3 Infringement Proceedings. Each Party agrees to promptly notify
------------------------
the other Party of any unauthorized use of the other Party's
Marks of which it has actual knowledge. Each Party shall have
the sole right and discretion to bring proceedings alleging
infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide
the other Party with its reasonable cooperation and assistance
with respect to any such infringement proceedings.
3.8 Marketing Surveys. PM and AOL shall jointly conduct an annual
------------------
marketing survey that is designed, among other reasons, to determine
the level of customer satisfaction. The Parties shall mutually agree
upon the design of the surveys and shall meet to discuss the results
of the surveys and determine any actions required in response to such
results.
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4. PAYMENTS; REPORTS; WARRANTS.
---------------------------
4.1 FIXED PAYMENTS. Preview shall pay AOL a guaranteed amount of Thirty
--------------
Two Million Dollars (US$32,000,000) across the five Contract Years of
the initial term, as follows. Prior to the Financing Event, Preview
shall pay AOL [*] due and payable in arrears on the last day of each
month during the Term, with the first payment to be paid on September
30, 1997. On the first monthly due date following the Financing Event,
Preview shall pay AOL Six Million Four Hundred Thousand Dollars
(US$6,400,000) representing advance payment of Preview's monthly
payment commitments for the next twelve (12) months (the "Pre-Paid
Year"). Following the Pre-Paid Year, Preview shall pay AOL in advance
[*] on the first day of each quarter following the Pre-Paid Year.
4.2 REVENUE SHARING PAYMENTS.
------------------------
4.2.1 Quarterly Hurdle; High Hurdle. If at any time during the first
-----------------------------
and second Contract Years, the amount of Commissions and
Advertising Revenues (the "Total Revenues") generated as of
such date equals or exceeds [*] the cumulative amount of
payments to be made by Preview to AOL pursuant to Section 4.1
(the "Earnout Hurdle") as of such date (the "Earnout Date"),
then: (a) for the quarter in which the Earnout Date occurs,
Preview shall pay AOL [*] of the Commissions generated in such
quarter following the Earnout Date, and (b) if the Total
Revenues generated in any subsequent quarter during the first
and second Contract Years equal or exceed [*] (the "Quarterly
Hurdle"), Preview shall pay AOL [*] of the Commissions
generated in such quarter following the date on which the
Quarterly Hurdle is met. In the event that the Total Revenues
generated during any quarter of the third, fourth and fifth
Contract Years equal or exceed the Quarterly Hurdle, Preview
shall pay AOL [*] of the Commissions generated in such quarter
following the date on which the Quarterly Hurdle is met.
Preview shall make all of the foregoing payments in this
Section 4.2 within thirty (30) days of the end of the quarter
in which the Quarterly Hurdle is met. The foregoing provisions
in this Section 6.2 shall cease to apply in the event that the
Total Revenues generated during the Term equals or exceeds [*]
(the "High Hurdle"), in which case, Preview shall pay AOL [*]
of Commissions generated during the remainder of the Term
following the date on which the High Hurdle is exceeded. In
such event, Preview shall make such payments within thirty (30)
days of the end of each quarter, commencing with the quarter in
which the High Hurdle is exceeded.
4.2.2 Renegotiation of Amounts. In the event the weighted average
------------------------
Commissions percentage received by Preview from its airline
partners is at any point during the Term less than [*], Preview
shall promptly notify AOL in writing and, upon AOL's request,
shall negotiate in good faith regarding an equitable
alternative compensation structure to the structure set forth
above in this Section 4.2. Such alternative structure shall, at
a minimum, be designed to maintain the level of AOL's
compensation prior to the reduction in Commissions percentage
and shall satisfy the Parties' joint goal that AOL receive its
equitable share of revenues generated by Preview (including any
new or incremental revenues) in connection with the Online
Area; in that regard, during such negotiation, Preview shall
seriously consider sharing Overrides with AOL without regard to
the conditions limiting such sharing set forth in Section 4.4.
In the event the Parties
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND
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cannot in good faith reach agreement regarding such alternative
structure within fifteen (15) days of AOL's request to
negotiate, AOL shall have the right to terminate the Agreement
immediately on written notice to Preview.
4.3 ADVERTISING REVENUES. Preview shall be entitled to retain [*]
--------------------
of all Advertising Revenues generated during the first and second
Contract Years and [*] of all Advertising Revenues below certain
threshold amounts (the "Ad Thresholds") generated during the third,
fourth and fifth Contract Years. In the third, fourth and fifth
Contract Years, the respective Threshold Amounts shall be [*]. In the
event that total Advertising Revenues in any of these three (3) years
equal or exceed the applicable Ad Threshold, Preview shall pay AOL [*]
of all Advertising Revenues in excess of the Ad Threshold during the
remainder of such Contract Year, paid quarterly within thirty (30)
days of the end of each quarter, commencing with the quarter in which
the Ad Threshold was exceeded.
4.4 OVERRIDES; ADDITIONAL REVENUES. Except as expressly provided
------------------------------
hereunder, Preview shall not share Overrides with AOL; provided that
in the event the total amount of Overrides as of the end of any
quarter exceeds [*] of the total amount of Commissions generated in
such quarter, then the total amount of Overrides generated in such
quarter shall be included in (a) the calculation of whether the
Commissions hurdles in Sections 3.2 ([*] hurdle), 4.2.1 (Earnout
Hurdle and High Hurdle) and 10.3 ([*] hurdle) have been reached and
(b) the calculation of any Commissions payment relating to such
quarter which is to be made to AOL pursuant to the Agreement (e.g.,
pursuant to Section 4.2.1). In the event Preview or its Affiliates
receives or desires to receive, directly or indirectly, any
compensation in connection with the Online Area other than Advertising
Revenues, Commissions and Overrides or otherwise restructures the
nature of its transactions with AOL Users (e.g., establishment of club
memberships) (collectively, "Additional Revenues"), Preview shall
promptly inform AOL in writing, and the Parties shall negotiate in
good faith regarding whether Preview shall be allowed to collect such
Additional Revenues, and if so, the equitable portion of such
Additional Revenues that shall be shared with AOL. In the event the
Parties cannot in good faith reach agreement regarding such Additional
Revenues within fifteen (15) days of AOL's request to negotiate, AOL
shall have the right to terminate the Agreement immediately on written
notice to Preview. Any portion shared with AOL shall, at a minimum,
satisfy the Parties' joint goal that AOL receive its equitable share
of revenues generated by Preview (including any new or incremental
revenues) in connection with the Online Area.
4.5 WIRED PAYMENTS; LATE PAYMENTS. All payments required under this
--------------- -------------
Section 4 shall be paid in immediately available funds wired to AOL's
account. All amounts owed hereunder not paid when due and payable
will bear interest from the date such amounts are due and payable at
the rate of 8% per year, or the highest legally permissible rate if
below 8%.
4.6 AUDITING RIGHTS. Each Party shall maintain complete, clear and
---------------
accurate records of all expenses, revenues and fees in connection with
the performance of this Agreement. For the sole purpose of ensuring
compliance with this Agreement (including, without limitation,
Sections 4.1, 4.2, 4.3 and 4.4), each Party shall have the right, at
its expense, to direct an independent certified public accounting firm
to conduct a reasonable and necessary inspection of portions of the
books and records of the other Party which are relevant to amounts
payable to the auditing Party pursuant to this Agreement. Any such
audit may be conducted once per year after twenty (20) business days
prior written notice. Any audit shall be at the auditing Party's sole
cost and expense unless a discrepancy of the greater of five percent
(5%) or Ten Thousand Dollars (US$10,000) is found, in which case
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTD WITH RESPECT TO THE OMITTED PORTIONS.
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the other Party will pay all reasonable costs and expenses related to
the audit. No such audit of AOL shall occur during the period
beginning on June 1 and ending October 1.
4.7 REPORTS. Each Party shall each provide the other Party with certain
-------
reports evidencing the reporting Party's compliance with its
obligations under the Agreement and detailing certain information, all
as set forth below, which may be mutually amended from time to time by
the parties.
4.7.1 Sales Reports. Preview shall provide AOL in an automated
-------------
manner with a monthly report accompanying the payments to be
made pursuant to this Section 4 (as applicable) in a mutually
agreeable format consistent with the reports provided to AOL by
its other interactive content providers, detailing the
following activity in such period (and any other information
mutually agreed upon by the Parties or reasonably necessary for
measuring revenue activity by Preview through the Online Area):
Commissions, Advertising Revenues, Overrides, number of
profiles created, transactions by type (air, hotel, car) and by
source (Travel Channel, AOL.com, other channels), chargebacks
and credits for returned or cancelled goods or services (and,
where possible, an explanation of the type of reason therefor,
e.g., bad credit card information, poor customer service,
etc.), and credit card processing fees charged and/or collected
by the credit card issuer.
4.7.2 Promotional Reports. Each Party shall provide the other Party
-------------------
with a quarterly report documenting its compliance with any
promotional commitments it has undertaken pursuant to the
Agreement. In reporting any promotion, the Party should
describe the nature of promotion, its duration and any other
relevant information regarding the promotion, including any
required information set forth in the description of each
promotion.
4.7.3 Fraudulent Transactions. To the extent permitted by applicable
-----------------------
laws, Preview shall provide AOL with an prompt report of any
fraudulent order, including the date, screenname and amount
associated with such order, following Preview obtaining
knowledge that the order is, in fact, fraudulent.
4.7.4 AOL Reports. AOL shall provide Preview with monthly reports
-----------
specifying for the prior month aggregate hourly usage within
the Online Area (as applicable) and other mutually agree-upon
information relating to the Online Area.
4.8 TAXES. Preview shall collect and pay and indemnify and hold AOL
-----
harmless from, any sales, use, excise, import or export value added or
similar tax or duty not based on AOL's net income, including any
penalties and interest, as well as any costs associated with the
collection or withholding thereof, including reasonable attorneys'
fees, in the event litigation or any regulatory proceeding,
investigation or action is commenced.
5. REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants to the
------------------------------
other Party that: (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of
it hereunder; (ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not
and will not violate any agreement to which such Party is a party or by
which it is otherwise bound; (iii) when executed and delivered by such
Party, this Agreement will constitute the legal, valid and binding
obligation of such Party, enforceable against such Party in accordance with
its terms; and (iv) such Party acknowledges that the other Party makes no
representations, warranties or agreements related to the subject matter
hereof that are not expressly provided for in this Agreement.
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6. CONFIDENTIALITY. Each Party acknowledges that Confidential Information may
---------------
be disclosed to the other Party during the course of this Agreement. Each
Party agrees that it shall take reasonable steps, at least substantially
equivalent to the steps it takes to protect its own proprietary
information, during the term of this Agreement and thereafter, to prevent
the duplication or disclosure of Confidential Information of the other
Party, other than duplication by or disclosure to its employees or
Affiliates who must have access to such Confidential Information to perform
such Party's obligations hereunder, who shall each be subject to
restrictions substantially similar to this Section 6. Notwithstanding the
foregoing, either Party may issue a press release or other disclosure
containing Confidential Information without the consent of the other Party,
to the extent such disclosure is required by law, rule, regulation or
government or court order. In such event, the disclosing Party shall
provide at least five (5) business days prior written notice of such
proposed disclosure to the other Party. Further, in the event such
disclosure is required of either Party under the laws, rules or regulations
of the Securities and Exchange Commission or any other applicable governing
body, such Party shall (i) redact mutually agreed-upon portions of this
Agreement to the fullest extent permitted under applicable laws, rules and
regulations and (ii) submit a request to such governing body that such
portions and other provisions of this Agreement receive confidential
treatment under the laws, rules and regulations of the Securities and
Exchange Commission or otherwise be held in the strictest confidence to the
fullest extent permitted under the laws, rules or regulations of any other
applicable governing body.
7. SOLICITATION/PROMOTION; USER INFORMATION
----------------------------------------
7.1 SOLICITATION OF SUBSCRIBERS. During the term of this Agreement, and
---------------------------
for the one-year period following the expiration or termination of
this Agreement, neither Preview nor its Affiliates or agents will use
the AOL Network to promote, solicit, or participate in the
solicitation of AOL Users when that promotion or solicitation is for
the benefit of any AOL Competitor. In addition, Preview may not send
any AOL User e-mail communications through the AOL Network without a
"Prior Business Relationship." For purposes of this Agreement, a
"Prior Business Relationship" shall mean that the AOL User has either
(i) engaged in a transaction with Preview through the AOL Network or
(ii) voluntarily provided information to Preview through a contest,
registration, or other communication, which, in the case of clause
(ii), included notice therein to the AOL User that the information
provided by the AOL User could result in an e-mail being sent to that
AOL User by Preview or its Affiliates or agents. A Prior Business
Relationship does not exist by virtue of an AOL User's visit to the
Online Area (absent the additional elements described above).
7.2 COLLECTION OF USER INFORMATION. Preview is prohibited from collecting
------------------------------
AOL User screennames from public or private areas of the AOL Network,
except as specifically provided below. Preview shall ensure that any
survey, questionnaire or other means of collecting AOL User names,
screennames, addresses or other identifying information ("User
Information") including, without limitation, requests directed to
specific AOL User screennames and automated methods of collecting
screennames (an "Information Request") complies with (i) all
applicable laws and regulations, (ii) AOL's applicable Terms of
Service and (iii) any privacy policies which have been issued by AOL
in writing during the Term and made available to Preview (the "AOL
Privacy Policies") (currently found in Section 5 of the Terms of
Service). Each Information Request shall clearly and conspicuously
specify to the AOL Users at issue the purpose for which User
Information collected through the Information Request shall be used
(the "Specified Purpose").
7.3 USE OF USER INFORMATION. Preview shall restrict use of the User
-----------------------
Information collected through an Information Request to the Specified
Purpose. In no event shall Preview (i) provide User Information to
any third party (except to the extent specifically (a) permitted
15
<PAGE>
CONFIDENTIAL
under the AOL Privacy Policies or (b) authorized by the members in
question), (ii) rent, sell or barter User Information, (iii) identify,
promote or otherwise disclose AOL User names, screennames, addresses
or other identifying information in a manner that identifies AOL Users
as end-users of the AOL Service or AOL.com or (iv) otherwise use any
User Information in contravention of Section 7.1 above. Nor shall
Preview use any User Information for any purpose (including any
Specified Purpose) not directly related to online travel.
7.4 CUSTOMER DATA; AOL DATA. [*] Preview agrees that
-----------------------
AOL may use the Customer Data subject to the terms of this Agreement
and AOL's then-applicable privacy policies; provided that AOL shall
not use destination-specific reservation information on a customer-by-
customer basis unless agreed to by both Parties to implement
programming objectives or "smart agent" type services as reasonably
required by prevailing market conditions. AOL agrees that during the
Term, Preview may use the Customer Data subject to the terms of this
Agreement and AOL's then-applicable privacy policies; provided that
Preview (a) shall comply with the foregoing Sections 7.1 through 7.3,
(b) shall provide users the right to have their Customer Data deleted
from any database created by or on behalf of Preview, and (c) shall
not have the right to use the Customer Data to market or promote any
consumer direct airline travel information and reservations systems
reasonably construed to be in competition with the Res System. Any
data provided by AOL to Preview (e.g., usage reports) (the "AOL Data")
shall be and remain the property of AOL, and the AOL Data will be
promptly returned to AOL by Preview in the form in which such data is
maintained by Preview or, if AOL so elects, will be destroyed, upon
(i) AOL's request, (ii) expiration or termination of this Agreement
for any reason, or (iii) with respect to any particular AOL Data, on
such earlier date that the same is no longer required by Preview in
order to provide the services required hereunder. Preview will not use
the AOL Data for any purpose other than that of providing such
services, nor will the AOL Data, or any part thereof, be disclosed,
sold, assigned, leased, or otherwise disposed of to third parties by
Preview or commercially exploited by or on behalf of Preview, its
employees or agents. Preview will not possess or assert any lien or
other right against or to the AOL Data.
8. LIMITATION OF LIABILITY; DISCLAIMER; INDEMNIFICATION.
----------------------------------------------------
8.1 LIABILITY. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO
---------
THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR
EXEMPLARY DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES), ARISING FROM BREACH OF THE AGREEMENT,
THE SALE OF PRODUCTS, THE USE OR INABILITY TO USE THE AOL NETWORK, THE
AOL SERVICE, THE ONLINE AREA OR THE RES SYSTEM, OR ARISING FROM ANY
OTHER PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS
OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS ("COLLECTIVELY,
"DISCLAIMED DAMAGES"); PROVIDED THAT EACH PARTY SHALL REMAIN LIABLE TO
THE OTHER PARTY TO THE EXTENT ANY DISCLAIMED DAMAGES ARE CLAIMED BY A
THIRD PARTY AND ARE SUBJECT TO INDEMNIFICATION PURSUANT TO SECTION
8.3. EXCEPT AS PROVIDED IN SECTION 8.3, NEITHER PARTY SHALL BE LIABLE
TO THE OTHER PARTY FOR MORE THAN [*] PROVIDED THAT EACH PARTY
SHALL REMAIN LIABLE FOR THE AGGREGATE AMOUNT OF ANY PAYMENT
OBLIGATIONS OWED TO THE OTHER PARTY PURSUANT TO SECTION 4.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
16
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CONFIDENTIAL
8.2 NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
------------------------
AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY
DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
REGARDING THE AOL NETWORK, THE AOL SERVICE OR THE ONLINE AREA,
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF
DEALING OR COURSE OF PERFORMANCE. WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, AOL SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING THE
PROFITABILITY OF THE ONLINE AREA.
8.3 INDEMNITY. Either Party will defend, indemnify, save and hold
---------
harmless the other Party and the officers, directors, agents,
Affiliates, distributors, franchisees and employees of the other Party
(the "Covered Parties") from any and all third party claims, demands,
liabilities, costs or expenses, including reasonable attorneys' fees
("Liabilities"), resulting from the indemnifying Party's material
breach of any duty, representation, or warranty of this Agreement,
except to the extent Liabilities result from the negligence or
misconduct of, or material breach of any duty, representation, or
warranty of this Agreement by, the other Party. In addition, Preview
will defend, indemnify, save and hold harmless AOL and the Covered
Parties of AOL from any and all Liabilities resulting from any claim
that any Third Party Content in the Online Area infringes on or
violates any copyright, U.S. patent, trademark or trade secret, or
(ii) violates any applicable law or regulation. "Third Party Content"
is any Content that is licensed (or otherwise made available for use
or distribution) to Preview by a third party.
8.4 CLAIMS. Each Party agrees to (i) promptly notify the other Party in
------
writing of any indemnifiable claim and give the other Party the
opportunity to defend or negotiate a settlement of any such claim at
such other Party's expense, and (ii) cooperate fully with the other
Party, at that other Party's expense, in defending or settling such
claim. Each Party reserves the right, at its own expense, to assume
the exclusive defense and control of any matter otherwise subject to
indemnification by the other Party hereunder, and in such event, such
other Party shall have no further obligation to provide
indemnification for such matter hereunder.
8.5 ACKNOWLEDGEMENT. AOL and Preview each acknowledges that the
---------------
provisions of this Agreement were negotiated to reflect an informed,
voluntary allocation between them of all risks (both known and
unknown) associated with the transactions contemplated hereunder. The
limitations and disclaimers related to warranties and liability
contained in this Agreement are intended to limit the circumstances
and extent of liability. The provisions of this Section 8 shall be
enforceable independent of and severable from any other enforceable or
unenforceable provision of this Agreement.
9. AOL TERMS OF SERVICE; UNSPECIFIED CONTENT. AOL shall have the right to
-----------------------------------------
remove, or direct Preview to remove, any Content which, as reasonably
determined by AOL (i) violates AOL's then-standard Terms of Service (as set
forth on the AOL Service) or the terms of this Agreement or (ii) is
inconsistent in any manner with the scope and purpose of the Online Area as
of the Effective Date (including, without limitation, in each case, any
features, functionality or technology) or with AOL's programming
objectives.
10. TERM, RENEWAL AND TERMINATION.
-----------------------------
10.1 TERM. The term of this Agreement (the "Term") will commence on the
----
Effective Date and, unless earlier terminated or extended in
accordance with this Agreement, will continue in effect until August
31, 2002. The date on which this Agreement expires due to the passage
of time (of the initial term and any renewal term(s)) is referred to
herein as the "Expiration
17
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Date." The date on which this Agreement is terminated pursuant to
Section 10.3 is referred to herein as the "Termination Date."
10.2 RENEWAL. At least six (6) months prior to the expiration of the
-------
initial term or any renewal term(s), as the case may be, Preview will
give notice to AOL of the pending Expiration Date. Within three (3)
months of receipt of Preview's notice (or at least thirty (30) days
prior to the Expiration Date, if Preview fails to provide such
notice), AOL will notify Preview whether AOL desires to: (a) renew
this Agreement for successive one-year renewal terms in perpetuity
[*] (i.e., without regard to Sections 3.3 or 3.4) and receive, in lieu
of the payment amounts set forth in Section 4.2, [*] of Commissions
and [*] of Advertising Revenues or (b) elect not to renew this
Agreement, in which case this Agreement will expire on the applicable
Expiration Date. In the event AOL elects in its sole discretion to
renew the Agreement pursuant to clause (a) above, the Agreement shall
so renew, Sections 3.2 and 4.1 shall not apply, and AOL shall elect at
the beginning of such renewal term one of the following two options
with respect to such renewal term: (i) AOL shall not be required to
perform its obligations pursuant to Section 3.1 (promotional
placements) and Preview shall not be required to perform its
obligations pursuant to Sections 1.10 (customization), 2.8
(performance standards) and 3.5 (cross-promotion) or (ii) both Parties
shall perform their respective obligations listed in the foregoing
clause (i).
10.3 TERMINATION. Either Party may terminate this Agreement at any time
-----------
in the event of a material breach by the other Party which remains
uncured after thirty (30) days written notice thereof.
Notwithstanding the foregoing, in the event either Party fails to make
any payment required hereunder as of the due date, the other Party may
terminate the Agreement on the date thirty (30) days following such
due date. In addition, either Party may terminate this Agreement
immediately following written notice to the other Party if the other
Party ceases to do business, becomes or is declared insolvent or
bankrupt, is the subject of any proceeding related to its liquidation
or insolvency which is not dismissed within ninety (90) days or makes
an assignment for the benefit of creditors. In addition, in the event:
(a) Gross Bookings in any Contract Year are less than the Gross
Bookings Hurdle; (b) an AOL Direct Competitor acquires Preview, or all
or substantially all of the assets of Preview, through merger, asset
acquisition, stock acquisition or otherwise; (c) the Financing Event
does not occur prior to September 30, 1998; (d) as of the end of the
fourth Contract Year, the cumulative amount of Commissions equals or
exceeds [*] and Preview has received [*] cumulative Impresssions; or
(e) AOL is eligible to exercise any of its rights to terminate the
Database Agreement pursuant to the terms and conditions thereof, then
AOL shall have the right to terminate the Agreement upon thirty (30)
days written notice to Preview. In addition, in the event that AOL is
eligible to exercise any of its termination rights pursuant to this
Agreement, AOL may elect instead to renew the Agreement consistent
with the terms of Section 10.2 above as of the date such termination
would have taken effect.
10.4 EFFECT OF TERMINATION. Except in the event of termination by Preview
---------------------
based on a material breach of the Agreement by AOL during any Contract
Year, Preview shall pay AOL within thirty (30) days of the date of
termination all amounts otherwise due pursuant to Section 4 during the
quarter of such Contract Year in which termination occurs; provided
that if such termination occurs prior to the Financing Event, Preview
shall continue to owe payments to AOL for any unpaid Impressions
delivered to Preview in the month in which termination occurs but
shall not owe AOL for any fixed payment amounts relating to subsequent
months. In the event of termination by Preview based on a material
breach of the Agreement by AOL during any Contract Year, Preview shall
not be required to pay AOL the amounts otherwise due to AOL pursuant
to Section 4.1 for such
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
18
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CONFIDENTIAL
Contract Year. Notwithstanding the foregoing, each Party shall be
entitled upon termination due to breach of the Agreement by the other
Party to seek all additional remedies for such breach which the Party
may possess at law or in equity.
11. GENERAL PROVISIONS.
------------------
11.1 EXCUSE. Neither Party shall be liable for, or be considered in
------
breach of or default under this Agreement on account of, any delay or
failure to perform as required by this Agreement as a result of any
causes or conditions which are beyond such Party's reasonable control
and which such Party is unable to overcome by the exercise of
reasonable diligence; provided: (i) the delayed Party gives the other
Party written notice of such cause or condition promptly and (ii) uses
its reasonable best efforts to promptly correct such failure or delay.
For purposes of this provision, a delay or non-performance shall not
be deemed beyond the reasonable control of the Party affected if such
delay or non-performance would not have occurred had the affected
Party been performing in accordance with the provisions of the
Agreement.
11.2 INDEPENDENT CONTRACTORS. The Parties to this Agreement are
-----------------------
independent contractors. Neither Party is an agent, representative,
or partner of the other Party. Neither Party shall have any right,
power or authority to enter into any agreement for or on behalf of, or
incur any obligation or liability of, or to otherwise bind, the other
Party. This Agreement shall not be interpreted or construed to create
an association, agency, joint venture or partnership between the
Parties or to impose any liability attributable to such a relationship
upon either Party.
11.3 NOTICE. Any notice, approval, request, authorization, direction or
------
other communication under this Agreement shall be given in writing and
shall be deemed to have been delivered and given for all purposes (i)
on the delivery date if delivered by electronic mail on the AOL
Network; (ii) on the delivery date if delivered personally to the
Party to whom the same is directed; (iii) one business day after
deposit with a commercial overnight carrier, with written verification
of receipt, or (iv) five business days after the mailing date, whether
or not actually received, if sent by U.S. mail, return receipt
requested, postage and charges prepaid, or any other means of rapid
mail delivery for which a receipt is available, to the address of the
Party to whom the same is directed as such addresses are set forth
below.
AMERICA ONLINE PREVIEW TRAVEL
Attn: David M. Colburn Attn: Ken Orton
America Online, Inc. Preview Travel, Inc.
22000 AOL Way 747 Front Street
Dulles, VA 20166 San Francisco, CA 94111
[email protected] [email protected]
With copies to:
Senior Vice President, Business Affairs
and
Vice President and General Counsel
America Online, Inc.
22000 AOL Way
Dulles, VA 20166
19
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CONFIDENTIAL
11.4 NO WAIVER. The failure of either Party to insist upon or enforce
---------
strict performance by the other Party of any provision of this
Agreement or to exercise any right under this Agreement shall not be
construed as a waiver or relinquishment to any extent of such Party's
right to assert or rely upon any such provision or right in that or
any other instance; rather, the same shall be and remain in full
force and effect.
11.5 RETURN OF INFORMATION. Upon the expiration or termination of this
---------------------
Agreement, each Party shall, upon the other Party's written request,
either return or destroy (at the option of the Party receiving the
request) all Confidential Information, documents, manuals and other
materials specified by the other Party.
11.6 SURVIVAL. Sections 3.2, 4, 6, 7, 8, 10.4, 11.5, 11.6, 11.11, 11.14,
--------
11.15 and any provisions that reasonably contemplate survival thereof
and all payment obligations incurred during the Term shall survive
the completion, expiration, termination or cancellation of this
Agreement.
11.7 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement,
----------------
and supersedes any and all prior agreements of the Parties with
respect to the transactions set forth herein. Neither Party shall be
bound by, and each Party specifically objects to, any term, condition
or other provision which is different from or in addition to the
provisions of this Agreement (whether or not it would materially
alter this Agreement) and which is proffered by the other Party in
any correspondence or other document, unless the Party to be bound
thereby specifically agrees to such provision in writing.
Notwithstanding the foregoing, Preview shall also be bound by the
Terms of Service except as such Terms of Service are specifically
amended by this Agreement.
11.8 EXPIRATION OF PRIOR AGREEMENT. Upon the Effective Date, the
-----------------------------
Development and Management Services Agreement, dated as of November
3, 1995 between the Parties (and any amendments thereto) and the
Online Services Agreement dated as of July 20, 1994 between the
Parties (and any amendments thereto) shall each be deemed to be
terminated and of no further force and effect.
11.9 AMENDMENT. No change, amendment or modification of any provision of
---------
this Agreement shall be valid unless set forth in a written
instrument signed on behalf of each Party hereto, and in the case of
AOL, by a senior vice president.
11.10 FURTHER ASSURANCES. Each Party shall take such action (including,
------------------
but not limited to, the execution, acknowledgment and delivery of
documents) as may reasonably be requested by any other Party for the
implementation or continuing performance of this Agreement.
11.11 RESERVATION OF REMEDIES. Except where otherwise expressly
-----------------------
specified, the rights and remedies granted to a Party under this
Agreement are cumulative and in addition to, and not in lieu of, any
other rights or remedies which the Party may possess at law or in
equity; provided that, in connection with any dispute hereunder,
neither Party shall be entitled to offset any amounts that such Party
claims to be due and payable from the other Party against amounts
otherwise payable by the claiming Party to the other Party.
11.12 HEADINGS. The headings in this Agreement are for reference only,
--------
and shall not affect the interpretation of this Agreement.
11.13 ASSIGNMENT. Except for assignment, transfer or delegation by
----------
Preview to an Affiliate or successor by way of merger, consolidation
or sale of all or substantially all of Preview's outstanding voting
securities or assets, Preview shall not assign (voluntarily, by
operation of law or otherwise) this Agreement or any right, interest
or benefit under this Agreement
20
<PAGE>
CONFIDENTIAL
without the prior written consent of AOL. AOL shall not assign
(voluntarily, by operation of law or otherwise) this Agreement or any
right, interest or benefit under this Agreement to any Preview
Competitor, or any other party whose primary business is in the
nature of a Preview Competitor, without the prior written consent of
Preview. Subject to the foregoing, this Agreement shall be fully
binding upon, inure to the benefit of and be enforceable by the
Parties hereto and their respective successors and assigns.
11.14 CONSTRUCTION. In the event that any provision of this Agreement
------------
conflicts with the law under which this Agreement is to be construed
or if any such provision is held invalid by a court with
jurisdiction over the Parties to this Agreement, such provision
shall be deemed to be restated to reflect as nearly as possible the
original intentions of the Parties in accordance with applicable
law, and the remainder of this Agreement shall remain in full force
and effect.
11.15 APPLICABLE LAW. This Agreement shall be interpreted, construed and
--------------
enforced in all respects in accordance with the laws of the
Commonwealth of Virginia except for its conflicts of laws
principles.
11.16 COUNTERPARTS. This Agreement may be executed in facsimile
------------
counterparts, each of which shall be deemed an original and all of
which together shall constitute one and the same document.
21
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the Effective Date.
AMERICA ONLINE, INC. PREVIEW TRAVEL, INC.
By: /s/ David M. Colburn By: /s/ Ken Orton
-------------------------------- --------------------------------
Print Name: David M. Colburn Print Name: Ken Orton
------------------------- ------------------------
Title: Sr. V.P., AOL Networks Title: President & CEO
------------------------------ ----------------------------
22
<PAGE>
EXHIBIT A
Confidential
DEFINITIONS. The following definitions shall apply to this Agreement:
- -----------
1.1 ADVERTISING MINIMUM. (i) [*] per thousand entries
-------------------
per month by AOL Users into the Online Area or (ii) such different
rate or rates as AOL may establish based upon market conditions
and publish during the Term.
1.2 ADVERTISING REVENUES. The combination of AOL Advertising Revenues
--------------------
and Internet Advertising Revenues:
(A) AOL ADVERTISING REVENUES. Aggregate amounts collected plus
------------------------
the fair market value of any other compensation received
(excluding barter advertising except as provided in Section
1.11) by Preview, AOL or either Party's agents, as the case
may be, arising from the license or sale of Advertisements,
less applicable Advertising Sales Commissions; provided
that, in order to ensure that AOL receives fair value in
connection with Advertisements, Preview shall be deemed to
have received no less than the Advertising Minimum in
instances when Preview makes an Advertisement available to a
third party at a cost below the Advertising Minimum.
(B) INTERNET ADVERTISING REVENUES. For each Advertisement on any
Preview Interactive Site linked to the Online Area, the
product of: (a) the amount collected plus the fair market
value of any other compensation received (excluding barter
advertising except as provided in Section 1.11) by Preview
or its agents arising from the license or sale of such
Advertisement attributable to a given period of time and (b)
the quotient of (i) Impressions on the page containing such
Advertisement by AOL Users for such period of time divided
by (ii) total Impressions on the page containing such
Advertisement by all users for such period of time (the
"Internet Advertising Quotient") (or such other percentage
or formula as is mutually agreed upon in writing by the
Parties). For example, if (a) Preview is paid five thousand
dollars ($5,000) by a third party to include an
Advertisement within a linked Preview Interactive Site
during a given month and (b) during such month AOL Users
generate twenty percent (20%) of the Impressions to such
Advertisement, then (c) the Internet Advertising Revenue
relating to such advertisement would be one thousand dollars
($1,000) and such amount would be subject to the revenue
sharing described in Section 4.3.
1.3 ADVERTISING SALES COMMISSION. In the case of an Advertisement, (i)
---------------------------
actual amounts paid as commission to third party agencies in
connection with sale of the AOL Advertisement or (ii) [*], in the
event the Party has sold the Advertisement directly and will not
be deducting any third party agency commissions.
1.4 AFFILIATE. (i) in the case of AOL, any agent, distributor, or
---------
franchisee of AOL, or an entity controlled by, in common control
with, or in which AOL holds, directly or indirectly, at least a
19.9% equity interest and (ii) in the case of any other party, an
entity controlling, controlled by, or in common control with,
directly or indirectly, such party.
1.5 ANCHOR TENANCY. A prominent placement on a screen or form which is
--------------
no less favorable in size and position on the screen than any
other third party on such screen.
1.6 AIRLINE SYSTEMS. The computerized reservations systems providing
---------------
flight and fare information (and the ability to make reservations)
on all airlines whose information is general available through
industry airline systems (i.e., ABACUS, AMADEUS, APOLLO,
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
23
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GALILEO, GEMINI, GETS, SYSTEM ONE, SABRE and WORLDSPAN), that will
interface with the Core Systems. Airline Systems also provide hotel
and car rental information (and, as applicable, the ability to make
reservations).
1.7 AIRLINE TICKET CONSOLIDATION. Any service that aggregates unsold
----------------------------
airline seats and sells them directly to consumers.
1.8 AOL COMPETITOR. Any entity which could reasonably be construed to be
--------------
or become in competition with AOL (including, without limitation,
[*].
1.9 AOL DIRECT COMPETITOR. Any online or Internet interactive services
---------------------
providers, including, without limitation, any online service
providers, Internet service providers, @Home or other broadband
providers, any search, directory or other large-scale aggregators of
Internet content, any off-line content providers (e.g., PointCast) or
any provider of open standard (e.g., HTML) distribution platforms
(e.g., the Microsoft Active Desktop).
1.10 AOL LOOK AND FEEL. The elements of graphics, design, organization,
-----------------
presentation, layout, user interface, navigation and stylistic
convention (including the digital implementations thereof) which are
generally associated with online areas within the AOL Service.
1.11 AOL MEMBER. Any authorized user of the AOL Service, including any
----------
sub-accounts using the AOL Service under an authorized master
account.
1.12 AOL NETWORK. The AOL Service and any other information,
-----------
communication, transaction or other related service owned, operated,
distributed or authorized to be distributed by or through AOL or its
Affiliates throughout the world through which AOL elects to offer the
Online Area (including, without limitation, any CD-ROM merchandising
products which may be distributed by AOL).
1.13 AOL SERVICE. The U.S. version of the America Online (R) brand service
-----------
(specifically excluding Digital City, AOL.COM, NetFind, WorldPlay,
other sites or services not wholly owned by AOL that may be
distributed by or through the U.S. version of the America Online
brand service, and other sites or services distributed by AOL wholly
or partially outside the U.S. version of the America Online brand
service).
1.14 AOL USER. Any AOL Member or any authorized user of AOL.com.
--------
1.15 AOL.COM. AOL's Internet-based Interactive Site referred to as
-------
AOL.COM.
1.15a BUSINESS TRAVEL. Any business travel service that comprises a
---------------
combination of targeted content offerings and a business-oriented
reservations engine and service and which has access to the GDS
systems and fares, schedules, and other reservations services.
1.16 COMMISSIONS. The aggregate amount of standard commissions (based on
-----------
commission schedules published in the GDS and available for review by
all approved ARC agencies). paid to or received by Preview or its
agents which are generated from (a) AOL Users using the Online Area
through either the AOL Service or AOL.com and (b) AOL Users using any
Preview Interactive Site who have either (i) created a profile on the
Online Area after September 1, 1997 or (ii) created a profile prior
to such date using only an AOL e-mail address (or addresses, as the
case may be); provided that to the extent Preview is able during the
Term to identify whether an AOL User is using the AOL Network when
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
24
<PAGE>
Confidential
accessing any Preview Interactive Site (e.g., using the standard AOL
Service browser to visit such site), revenues from such users shall
also be included hereunder. Commissions shall, in certain instances
set forth in Section 4.4, include Overrides.
1.17 CONFIDENTIAL INFORMATION. Any information relating to or disclosed
------------------------
in the course of the Agreement, which is or should be reasonably
understood to be confidential or proprietary to the disclosing Party,
including, but not limited to, the material terms of this Agreement,
information about AOL Users and Preview customers, technical
processes and formulas, source codes, product designs, sales, cost
and other unpublished financial information, product and business
plans, projections, and marketing data. "Confidential Information"
shall not include information (a) already lawfully known to or
independently developed by the receiving Party, (b) disclosed in
published materials, (c) generally known to the public, or (d)
lawfully obtained from any third party.
1.18 CONTENT. Information, materials, features, Products, advertisements,
promotions, links, pointers and software, including any
modifications, upgrades, updates, enhancements and related
documentation.
1.19 CONTRACT YEAR. Any twelve (12) month period commencing on the
-------------
Effective Date or any anniversary thereof.
1.20 CORE SYSTEMS. The systems between the RMG and the Airline Systems,
------------
that serve as the back-end systems for the Res System, and that shall
be managed and maintained by Preview pursuant to this Agreement.
1.20a CRUISE. Any offer solely relating to travel by ocean liner which is
------
offered directly by a travel agent and reserved through a CRS.
1.21 FINANCING EVENT. (i) the closing of the initial public offering of
---------------
Preview's common stock registered under the Securities Act of 1933,
as amended, pursuant to an underwritten firm commitment public
offering from a prominent underwriter, in which the aggregate gross
proceeds to Preview, net of underwriting discounts and commissions,
exceed $25,000,000 for listing on a major exchange (the "IPO") or
(ii) the closing of a private equity investment in Preview which,
when compared with the IPO, creates for Preview the same or greater
amount of net proceeds, provides Preview with access to cash and has
the same or greater overall value (e.g., market perception), as
determined by AOL in its reasonable discretion.
1.22 GROSS BOOKINGS. The aggregate amounts paid to or received by Preview
--------------
or its agents for all travel bookings (e.g., air, car, hotel,
vacation packages, etc.) generated from (a) AOL Users using the
Online Area through either the AOL Service or AOL.com and (b) AOL
Users using any Preview Interactive Site who have either (i) created
a profile on the Online Area after September 1, 1997 or (ii) created
a profile prior to such date using only an AOL e-mail address (or
addresses, as the case may be); provided that to the extent Preview
is able during the Term to identify whether an AOL User is using the
AOL Network when accessing any Preview Interactive Site (e.g., using
the standard AOL Service browser to visit such site), revenues from
such users shall also be included hereunder.
1.23 GROSS BOOKINGS HURDLE. An amount equal to (i) [*]
---------------------
in the first Contract Year and (ii) in all Contract Years subsequent
to the first Contract Year, [*] of the Gross Bookings Hurdle for the
prior Contract Year.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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1.24 IMPRESSIONS. A user's viewing of any screen containing an
-----------
advertisement, promotion or other similar placement required under
this Agreement, as determined by AOL from time to time.
1.25 INTERACTIVE SITE. Any interactive site or area, including, by way of
----------------
example and without limitation, (i) a Preview-operated site or area
on the World Wide Web portion of the Internet or (ii) a channel, site
or area delivered through a "push" product such as the Pointcast
Network or interactive environment such as Microsoft's proposed
"Active Desktop."
1.26 LAST MINUTE TRAVEL. Any service that sells distressed travel
------------------
supplier inventory at deep discounts to regular tariffs.
1.27 LICENSED CONTENT. All Content offered through the Online Area
------------------
pursuant to this Agreement, including any modifications, upgrades,
updates, enhancements, and related documentation.
1.28 ONLINE AREA. The specific area within the AOL Network where Preview
------------
can market and complete transactions regarding Preview's Products.
The Online Area shall be developed, managed and marketed by Preview
pursuant to this Agreement, including but not limited to the Licensed
Content, message boards, chat and other AOL User supplied content
areas.
1.29 OVERHEAD ACCOUNTS. Accounts of AOL Users for which AOL does not
-----------------
require payment of standard AOL subscription and usage charges.
1.30 OVERRIDES. The aggregate amounts received from airlines by Preview
---------
or its agents for performance over and above standard sales targets
set by such airlines, including without limitation, any amounts based
on percentage of target volume, flat fee arrangements, or other non-
cash incentives.
1.31 PREVIEW COMPETITOR. [*] solely to the extent each of the
------------------
foregoing entities makes available through its Interactive Site a
Reservations Engine and Travel Information/Reservations; provided
that in the event any of the foregoing entities utilizes Preview's
Reservations Engine or does not have a Reservations Engine integrated
into the version of its Interactive Site (or portion thereof) which
AOL desires to distribute through the AOL Network, such entity shall
not be deemed a Preview Competitor hereunder.
1.32 PRODUCTS. Any product, good or service which Preview offers, sells
--------
or licenses to AOL Users through the Online Area.
1.33 RES SYSTEM. The Preview Media brand computerized reservations
----------
system, which includes a screen interface and programming behind the
screen that is connected to the Core Systems that is connected to the
Airline Systems.
1.34 RESERVATIONS ENGINE. A computerized reservations system that
-------------------
provides consumers with flight and fare information and the ability
to make reservations and purchase tickets on all airlines whose
information is general available through industry airline systems
(i.e., ABACUS, AMADEUS, APOLLO, GALILEO, GEMINI, GETS, SYSTEM ONE,
SABRE and WORLDSPAN) and also provides hotel and car rental
reservation information (and the ability to make those reservations).
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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1.35 RMG. The remote managed gateway connecting the AOL Network to the
---
Core Systems and the Airline Systems. Preview will be responsible for
maintenance of the the part of the RMG connecting the Core Systems up
to the RMG Focal Point. In the event the Parties agree to transition
from the RMG to a Web gateway, as described in Section 1.10, each
reference to the RMG in this Exhibit A shall be read as a reference
to such Web gateway.
1.36 RMG FOCAL POINT. The focal point within the RMG in which Preview's
---------------
and AOL's equipment and software directly interface (i.e., connect).
1.37 TRAVEL INFORMATION/RESERVATIONS. Travel information, pricing and
-------------------------------
reservations for, among other things, airlines, hotels, and car
rentals, all as generally available through the major Airline
Systems.
1.38 VACATION PACKAGES. Any leisure travel offer involving two or more of
-----------------
the following travel features: air, hotel (or other lodging), car (or
other land transportation), Cruises, adventure, which is offered
directly by a travel agent and reserved through a CRS.
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EXHIBIT B
Promotional Plan
----------------
1. [*]
[*]
. [*] on the [*] of the Travel Channel on the AOL Service, which shall
include the following:
. [*] promotional [*]
. [*] presence on [*] of the [*] for [*] per week
. [*] within [*] screen and [*] screens
. [*] within the [*] at the [*] levels
. [*] within [*] areas
. [*] on the [*] linked from the [*]
. [*] on [*]
. Mutually agreed [*] on the [*] (if applicable pursuant to Section [*])
[*]
. A portion of [*] travel-related [*]
. [*] within the [*] of [*]
. [*] within the [*] areas within [*]
. [*] within [*]
. [*] on [*]
[*]
. [*] in the [*] department of the [*]
. Additional [*]
. [*] in [*]
. [*] in the [*]
. Other general [*] on the [*]
. [*]
2. [*]
Year 1 Year 2 Year 3 Year 4 Year 5
[*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*]
Total [*] [*] [*] [*] [*]
[*]
[*]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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EXHIBIT C
Performance Standards
---------------------
General. The Online Area (including the Res System) will be in the top [*]
- -------
in performance and quality averages or standards for the online travel
reservations industry, including, without limitation, the following specific
standards: (i) pricing of Products made available through AOL, (ii) scope and
selection of Products, (iii) quality of Products, (iv) customer service and
fulfillment associated with the marketing and sale of Products; and (v) ease of
use of the Online Area shall, with respect to each measure, be competitive with
that offered by any Preview Competitor.In addition, the Online Area (including
the Res System) will be in the top [*] in the online travel reservations
industry with respect to gross travel sales to consumers and small businesses.
Each of the performance standards contained in this paragraph shall apply only
to the extent it can be validated by a third party that is prominent and
generally accepted within the online travel reservations industry.
Capacity. Preview will maintain sufficient servers, software and other
- --------
technical infrastructure necessary for Preview to receive and support traffic
from the AOL Service on a timely basis, without producing material delays. In
the event Preview fails to satisfy this requirement AOL will have the right (in
addition to any other remedies available to AOL hereunder) to regulate the
promotions it provides to Preview hereunder to the extent necessary to minimize
user delays until such time as Preview corrects its infrastructure deficiencies.
To the extent AOL fails to make necessary adjustments to the AOL technical
infrastructure for capacity increases, Preview will not be penalized pursuant to
the foregoing.
Speed; Accessibility. Preview shall ensure that the performance and
- --------------------
availability of the Online Area (a) is monitored on a continuous, 24/7 basis
and (b) remains competitive in all material respects with the performance and
availability of other similar sites based on similar form technology. In the
event that any or all portions of the Online Area are contained within HTML-
based World Wide Web forms (or any other forms created using a technology other
than AOL's proprietary form technology) ("Web Forms"), Preview shall take all
commercially reasonable steps to ensure that the Web Forms are designed and
populated in a manner that minimizes delays when AOL Users attempt to access
such Web Forms.
Functionality. Preview shall ensure that the features and functionality of the
- -------------
Online Area remains competitive in all material respects with the features and
functionality of other similar sites based on similar form technology. Preview
shall ensure that the features and functionality within any Web Forms are
optimized for the AOL client software then in use by AOL Users. AOL shall be
entitled to require reasonable changes to the content, features and/or
functionality within any screen or form created using AOL's proprietary form
technology (a "Rainman Area") to the extent such Rainman Area will, in AOL's
good faith judgment, adversely affect operation of any portion of the AOL
Network.
User Interface. Preview shall maintain a graphical user interface within the
- --------------
Online Area that is competitive in all material respects with interfaces of
other similar sites based on similar form technology. AOL reserves the right to
conduct focus group testing to assess Preview's competitiveness in this regard.
Service Level Response. Preview agrees to use commercially reasonable efforts
- ----------------------
to provide the following service levels in response to problems with or
improvements to the software/functionality associated with the Online Area.
1. For material functions of the software that are or have become entirely or
substantially inoperable, Preview will provide a bug fix or workaround
within two business days after the first report of such error.
2. For functions of the software that are impaired or that otherwise fail to
operate in accordance with agreed upon specifications, Preview will provide
a bug fix or workaround within three business days after the first report
of such error.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
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3. Degraded operations: for errors disabling only certain non-essential
functions, Preview will provide a bug fix or workaround within sixty days
after the first report of such error.
4. Minimal impact: for all other errors, Preview will address these requests
on a case-by-case basis as soon as reasonably feasible.
Additional Standards. Preview shall diligently monitor the Online Area,
- --------------------
especially the Res System for fraud and abuse and shall provide adequate
staffing for maintenance of both the Rainman Areas and any Web Forms contained
in the Online Area. In the event that fraudulent activity associated with use of
the Online Area exceeds two times AOL's average occurrence of fraud for a
similar time frame across its credit card transaction activities through the AOL
Service (as measurable by AOL) (the "Average Fraud Level"), then the Parties
shall make such modifications to any and all applicable operations, systems,
information flows related to fraud prevention and billing as are necessary to
reduce such fraudulent activity to no greater than two times the Average Fraud
Level. Preview shall also work with AOL in developing policies (not otherwise
addressed herein) that are designed to combat any repeated customer service
complaints and to prevent deceptive selling practices.
Customized Interactive Site Requirements. In the event the Transition occurs
- ----------------------------------------
pursuant to Section 1.10, Preview shall comply with all of the following:
Technical Performance:
- ---------------------
1. Preview will design the customized Interactive Site to support the Windows
version of the Microsoft Internet Explorer 3.0 browser, and make
commercially reasonable efforts to support all other AOL browsers listed
at: http://webmaster.info.aol.com/BrowTable.html.
2. Preview will configure the server from which it serves the site to examine
the HTTP User-Agent field in order to identify the AOL User-Agents listed
at: http://webmaster.info.aol.com/Brow2Text.html (the "AOL User-Agents").
3. Preview will design its site to support HTTP 1.0 or later protocol as
defined in RFC 1945 (available at http://ds.internic.net/rfc/rfc1945.text)
and to adhere to AOL's parameters for refreshing cached information listed
at http://webmaster.info.aol.com/CacheText.html.
4. Preview will provide continuous navigational ability for AOL Members to
return to an agreed-upon point on the AOL Service (for which AOL shall
supply the proper address) from the Online Area.
Testing and Integration: Preview shall test the site in accordance with
- ------------------------
standard diagnostic practices, to ensure to the extent reasonably possible that
the site conforms to a mutually agreed upon technical specification, including
but not limited to ensuring that the site works without significant program
errors under a variety of test conditions that reasonably reflect the actual
environments in which the site has been designed to be used. In addition,
Preview will work with AOL to enable integration of the site with the AOL
Service and to provide any reasonable assistance necessary to AOL engineers to
ensure the level of integration called for in the product specification.
Acceptance Testing and Quality Assurance Testing: The prototype and launch
- -------------------------------------------------
versions of the site shall be subjected to acceptance by AOL based on
satisfaction of such tests as AOL will reasonably construct in order to
determine whether such versions operate in accordance with the AOL's standard
quality assurance assistance program, which is designed to provide assistance
and resources to AOL partners during the development and testing of integrated
web sites.
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EXHIBIT D
Preview Services
----------------
1. INTRODUCTION
This Exhibit D describes certain services, functions and responsibilities
of Preview (the "Services"). Preview shall be fully responsible for all
services (including, without limitation, for equipment and software) from
the connection to the Airline Systems to the Core Systems to the RMG Focal
Point (such area shall be known as the "Preview Responsibility Area").
Included in such responsibilities, Preview shall operate and maintain the
Core Systems and part of the RMG up to the RMG Focal Point, and arrange for
the connection of the Core Systems to the Airline Systems, and then manage
and operate the equipment, software and any other resources within the
Preview Responsibility Area. Preview shall also be fully responsible for
providing support and back-end services in connection with travel
reservations support and ticket processing, including, without limitation,
call center operation and management services and fulfillment services and
other general support functions.
Preview anticipates that the provision of Services will improve over the
Term based on Preview's knowledge of and access to state-of-the-art
resources and technology, implementation of improved methods and procedures
for providing the Services, and efficiencies arising from Preview's
provision of the Services.
2. MANAGEMENT AND OPERATION SERVICES
2.1 Management and Operation of the Equipment. Preview will assume
------------------------------------------
full management and operational responsibility for the equipment
within the Preview Responsibility Area. Such responsibilities
include, at a minimum, acquiring, installing, upgrading, managing,
maintaining, repairing and replacing all equipment in order to provide
the Services.
. Preview shall assume full management and operational
responsibility for host processor(s) functions and services
within the Preview Responsibility Area. Preview's
responsibilities during the term of the Agreement will include,
at a minimum: console monitoring and operations; tape and storage
management; and all technical system support operations. Preview
will maintain proper and adequate facilities, equipment and
supplies, and a properly trained and adequately staffed
operations center, including necessary management and support
staff. The hours of operation of the operations center will be 24
hours per day, 7 days per week.
. Preview will assume full management and operational
responsibility for network functions and services within the
Preview Responsibility Area. Preview's responsibilities will
include, at a minimum, acquiring, installing, upgrading,
managing, maintaining, repairing and replacing all equipment,
software, lines and cabling, as required to perform the network
services as the network may change during the Term. Preview shall
implement measures necessary to ensure confidentiality and
protect against unauthorized access and fraudulent use.
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2.2 Software Management and Maintenance. Preview will assume full
-----------------------------------
management and operational responsibility for the software within the
Preview Responsibility Area, i.e., the "Back-End Systems". Such
responsibilities include, at a minimum, acquiring, installing,
upgrading, managing, maintaining, repairing and replacing all software
in order to provide the Services. Software management and maintenance
will include, at a minimum, the following:
. Corrective maintenance, including correction of systems defects
in accordance with applicable specifications;
. Preventative maintenance, including prevention of systems
problems by, where appropriate, improving systems documentation,
source code restructuring to the extent the code is accessible,
database/index reorganization, system re-engineering, tool
construction and re-writing un-maintainable modules.
. Upgrading the Back-End Systems: (i) so that the Back-End Systems
are always kept current and competitive (including cost-
competitive) with the major airline reservations systems in the
industry, (ii) pursuant to Preview's normal maintenance
practices, (ii) in a manner that ensures continued eligibility
for support and maintenance by any third-party for such Software,
and (iii) so as to maintain connectivity with the Airline
Systems.
. Tuning of systems to improve operational performance and minimize
resource usage to the extent practicable;
. Development and maintenance of current documentation for the
Back-End Systems, including changes to reflect any modifications
to the Back-End Systems; and
. Implementation of any regulatory requirements.
2.3 Other Management and Operational Responsibilities. Preview shall
-------------------------------------------------
be responsible for other management and operation services related to
the Preview Responsibility Area, including, without limitation, the
following:
. Disaster Recovery. Preview will assume management and operational
-----------------
responsibility, as applicable, for the provision of disaster
recovery services in a manner at least consistent with industry
standards. Such services include the management and interface
with third party disaster recovery service providers, and the
development, management and, as applicable, operation of a
disaster recovery plan.
. Security Management. Preview will manage and monitor access to
-------------------
computer system resources, including system level accounts,
groups, users and passwords and will maintain the security
software. AOL shall have the right to perform a and end-to-end
security audit of the Preview Responsibility Area at AOL's sole
option and expense.
3. SUPPORT AND BACK-END SERVICES
3.1 Call Center Services. Preview shall be responsible for the management
---------------------
of a call center to answer inquiries from users of the Res System
related to information and reservations on all airlines that are
generally available on major airline reservations systems (the "Call
Center"). Preview shall manage and operate the Call Center, providing
the resources necessary to respond promptly to inquiries and customer
support related to information and reservations on all airlines that
are generally available on major airline reservations
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systems. Without limiting the generality of the foregoing, Preview's
services shall include, without limitation:
. Supporting both toll free (800) voice service and online, real-
time assistance to users through instant messages and/or (as
commercially reasonable and necessary) chat/conference room(s).
. Providing hours of operation that will mirror periods of highest
user activity over all time zones, which, unless mutually agreed,
at a minimum will be between 6:00 am to 10:00 p.m. Pacific Time.
. Staffing the Call Center as necessary to meet or exceed customer
demand for customer support.
. Acknowledging customer complaints within 24 hours of receipt of
complaint and promptly resolving the same, but no later than
within five (5) business days after receipt. Preview shall log
all such complaints and will note the date/time of the complaint,
escalation (if any) and resolution. Preview shall maintain files
on all complaints and resolutions.
. Responding to AOL requests for information on Call Center
operations. Preview understands that from time to time AOL shall
make surprise test calls to the Call Center in order to determine
provision of Call Center services. In the event that AOL
discovers a problem with the services, AOL shall notify Preview,
and the Parties shall meet to discuss the problem. Preview shall
take the steps necessary to correct any problems.
3.2 Fulfillment Services. Preview shall be responsible for the
---------------------
management of fulfillment services in which Preview shall receive
ticket reservation orders made by customers through the Res System and
then print out the tickets and distribute (i.e., mail) them to
customers ("Fulfillment"). Preview shall manage and operate the
Fulfillment services, providing the resources necessary to receive
ticket reservation orders made by customers through the Res System and
then printing out the tickets and distributing them to customers.
Without limiting the generality of the foregoing, Preview's services
shall include:
. Using commercially reasonable best efforts to ensure that all
travel documentation is delivered to customers on a timely basis.
Preview shall document all missed deliveries and will keep such
documentation on file for AOL review.
. Acknowledging customer complaints within 24 hours of receipt of
complaint and promptly resolving the same, but no later than
within five (5) business days after receipt. Preview shall log
all such complaints and will note the date/time of the complaint,
escalation (if any) and resolution. Preview shall maintain files
on all complaints and resolutions.
34
