<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1998
REGISTRATION NO. 333-49631
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PREVIEW TRAVEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
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
GLEN R. VAN LIGTEN JOSE F. MACIAS
VENTURE LAW GROUP
A PROFESSIONAL CORPORATION WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
2800 SAND HILL ROAD 650 PAGE MILL ROAD
MENLO PARK, CA 94025 PALO ALTO, CA 94304
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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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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.
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<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 APRIL 16, 1998
PROSPECTUS
3,100,000 SHARES
[LOGO OF PREVIEW TRAVEL, INC.]
PREVIEW TRAVEL, INC.
COMMON STOCK
Of the 3,100,000 shares of Common Stock offered hereby, 1,500,000 are being
sold by the Company and 1,600,000 are being sold by the Selling Stockholders.
The Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders."
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol PTVL. On April 15, 1998, the last reported sale price of the Common
Stock was $34.25 per share. See "Price Range of Common Stock."
-----------
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>
==============================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
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<S> <C> <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 $500,000.
(3) The Company granted to the Underwriters a 30-day option to purchase up to
465,000 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 , 1998, at the offices of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY
SECURITIES LLC
PAINEWEBBER INCORPORATED
, 1998
<PAGE>
[PREVIEW TRAVEL LOGO] [AOL LOGO]
[EXCITE LOGO]
[LYCOS 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 co-branded travel web sites with Excite and Lycos
and the primary travel service on America Online. These strategic distribution
agreements expire in 2002, 2000 and 2002, respectively, 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 SCREEN 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 OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. 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
This Prospectus contains forward-looking statements made within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Words such as "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates," and similar expressions identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those expressed or forecasted. Factors that may cause or
contribute to such differences include, but are not limited to, those under
"Risk Factors" and those appearing elsewhere in this Prospectus. The following
summary is qualified in its entirety by the more detailed information,
including "Risk Factors" and the Consolidated Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus.
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 co-branded travel
Web sites with Excite, Inc. ("Excite") (City.Net) and with Lycos, Inc.
("Lycos"). 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, including content licensed from Fodor's Travel
Publications, Inc. ("Fodor's"). 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 has
entered into various strategic relationships. In 1997 the Company entered into
long-term agreements with AOL, the leading online service provider with over
eleven 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 Excite's Travel Channel (City.Net). In February 1998,
the Company launched its Destinations Guides feature created with content
licensed from Fodor's. In March 1998, the Company entered into a two-year
agreement with Lycos, another leading search engine provider, under which the
Company will be the exclusive multiservice provider of travel reservations on
Lycos' Travel Web Guide and Travel Network. Through such strategic agreements,
the Company's travel services are prominently featured on the AOL, Excite and
Lycos travel channels and contextually integrated throughout the AOL, Excite
and Lycos services.
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.
Since launching its online booking service in May 1996, the Company has
experienced significant growth in its gross bookings. As of March 31, 1998, 3.4
million users had registered on the Company's online site, and over $136
million in gross bookings of travel services had been purchased by
approximately 220,000 customers in over 409,000 transactions.
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 an extensive library of over 6,000 hours of
proprietary, broadcast quality footage featuring over 2,000 destinations around
the world.
Preview Travel, Inc. (formerly Preview Media, Inc.) was incorporated in
California in March 1985 and was reincorporated in Delaware in November 1997.
The Company's principal corporate offices are located at 747 Front Street, San
Francisco, California 94111. Its telephone number is (415) 439-1200. As used in
this Prospectus, the "Company" refers to Preview Travel, Inc. and its
subsidiaries.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............... 1,500,000 shares
Common Stock offered by the Selling Stockholders.. 1,600,000 shares
Common Stock to be outstanding after the offering. 12,862,927 shares (1)
Use of proceeds................................... Working capital, payment
of obligations and general
corporate purposes. See
"Use of Proceeds."
Nasdaq National Market symbol..................... PTVL
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED
--------------------------- -------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1996 1997 1997 1997 1997 1997 1998
-------- ------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Online revenues........ $ 579 $ 2,573 $ 6,010 $ 1,496 $ 1,174 $ 1,556 $ 1,784 $ 2,332
Television revenues.... 9,564 9,801 7,634 2,023 2,033 1,845 1,733 1,683
-------- ------- -------- ------- ------- ------- ------- -------
Total revenues....... 10,143 12,374 13,644 3,519 3,207 3,401 3,517 4,015
Gross profit........... 672 3,066 4,245 1,223 851 1,042 1,129 1,572
Loss from operations... (4,667) (5,501) (10,432) (1,526) (1,540) (2,514) (4,852) (4,959)
Net loss............... $ (4,933) $(5,592) $(10,168) $(1,505) $(1,542) $(2,532) $(4,589) $(4,688)
Basic and diluted net
loss per share (2).... $ (4.02) $ (3.43) $ (3.54) $ (0.88) $ (0.90) $ (1.44) $ (0.73) $ (0.41)
Weighted average
shares used in net
loss per share
calculation (2)....... 1,228 1,631 2,869 1,702 1,712 1,753 6,306 11,353
SUPPLEMENTAL FINANCIAL
DATA (UNAUDITED):
Gross bookings (3)..... $ 2,043 $20,263 $ 80,389 $14,117 $17,816 $22,074 $26,383 $35,890
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED (4)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................. $12,477 $60,372
Marketable securities................................. 11,407 11,407
Total assets.......................................... 38,404 86,659
Long-term obligations (5)............................. 2,968 2,968
Total stockholders' equity............................ 30,701 78,956
</TABLE>
- -------------------
(1) Based on shares outstanding as of March 31, 1998. Excludes as of March 31,
1998 (a) 1,647,713 shares issuable upon exercise of outstanding options at
a weighted average exercise price of $6.02 per share, (b) 31,666 shares
issuable upon exercise of outstanding warrants at a weighted average
exercise price of $5.97 per share and (c) an aggregate of 1,833,600 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 11 of Notes to
Consolidated Financial Statements.
(2) The loss per share information was computed applying the requirements of
recently effective Statement of Financial Accounting Standards No. 128 and
SEC Staff Accounting Bulletin No. 98.
(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) As adjusted to reflect the sale of 1,500,000 shares of Common Stock offered
by the Company at an assumed public offering price of $34.25 per share
after deduction of the estimated underwriting discount and offering
expenses payable by the Company. See "Use of Proceeds" and
"Capitalization."
(5) Long-term obligations include capital lease obligations.
-------
Except as otherwise noted herein, all information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option. See "Underwriting."
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements made within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Words such as "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates," and similar expressions identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those expressed or forecasted. Factors that may cause
or contribute to such differences include, but are not limited to, those set
forth below and those appearing 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 $4.9 million,
$5.6 million, $10.2 million and $4.7 million in 1995, 1996 and 1997 and the
three months ended March 31, 1998, respectively. As of March 31, 1998, the
Company had an accumulated deficit of approximately $30.5 million. The
Company's television programming operations, which represented 56% and 42% of
its revenues for 1997 and the three months ended March 31, 1998, respectively,
have incurred net operating losses in each of the last three 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, including
obligations under its distribution
5
<PAGE>
agreements, and customer service operations, and to develop its technology and
transaction-processing systems. To the extent such expenses precede or are not
subsequently followed by increased revenues, the Company's operating results
will fluctuate and net anticipated losses in a given quarter may be greater
than expected.
The Company expects that it will experience seasonality in its business,
reflecting seasonal fluctuations in the travel industry, Internet and
commercial online service usage and advertising expenditures. The Company
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 are 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 1997 and the first half of 1998, (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, Lycos 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, Excite or Lycos, 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
6
<PAGE>
recessions. The travel industry is also highly susceptible to unforeseen
events, such as political instability, regional hostilities, fuel price
escalation, travel-related accidents, unusual weather patterns or other
adverse occurrences. Any event that results in decreased travel generally
would likely have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 designed to accomplish these objectives, including its
relationships with AOL, Excite, Lycos and Fodor's, and advertising the
Company's services in online and traditional media, there can be no assurance
that these strategies will be effective in increasing the dollar volume of
transactions booked through its online sites, increasing traffic to its online
sites, increasing the percentage of visitors who purchase travel services,
increasing the number of repeat purchasers or increasing 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 and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Reliance on Distribution Agreements with America Online, Excite and
Lycos. The Company has entered into agreements with AOL, Excite and Lycos
establishing the Company as the primary and preferred provider of travel
services on AOL, the exclusive provider of travel reservations services on
Excite's Travel Channel (City.Net) until September 2002 and the exclusive
multiservice provider of travel reservations on Lycos' Travel Web Guide and
Travel Network until March 2001. Under these agreements, AOL, Excite and Lycos
are obligated to promote the Company and to deliver minimum numbers of annual
page views or impressions to the online areas featuring the Company's travel
services. In addition, the Company is eligible to receive payments from Excite
and Lycos representing a share of advertising revenues received by Excite and
Lycos 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. During the terms of these agreements, the Company is obligated
to make minimum payments totaling $60.3 million to AOL, Excite and Lycos as
well as pay to AOL, Excite and Lycos 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, Excite and
Lycos, 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
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that justify the Company's significant fixed financial obligations to AOL,
Excite and Lycos or that the Company will satisfy the minimum levels of travel
services bookings required to maintain the AOL agreement, and failure to do so
would likely have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the agreements with
AOL, Excite and Lycos do not provide the Company with renewal rights upon
expiration of their respective 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 is a party to 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, Excite and
Lycos relationships is based on the continued positive market presence,
reputation and anticipated growth of AOL, Excite and Lycos, as well as the
commitment by each of AOL, Excite and Lycos to deliver specified numbers of
annual page views or impressions. Any decline in the significant market
presence, business or reputation of AOL, Excite or Lycos, or the failure of
AOL, Excite or Lycos 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 both
Lycos 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 the AOL Network accounted for 77%, 67%,
62% and 52% of the Company's online revenues for the three months ended June
30, 1997, September 30, 1997, and December 31, 1997 and March 31, 1998,
respectively. Travel services sold through Excite accounted for 8%, 13%, 15%
and 16% of the Company's online revenues for the three months ended June 30,
1997, September 30, 1997 and December 31, 1997 and March 31, 1998,
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 the Lycos arrangement is expected to represent a
significant distribution channel in the future. Any termination of any or all
of the Company's agreements with AOL, Excite and Lycos would likely have a
material adverse effect on the Company's business, operating results and
financial condition.
Except for its arrangements with AOL, Excite and Lycos, 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, Excite or Lycos, 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
"Business--Strategic Relationships" and Note 7 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
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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 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, Excite and Lycos."
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. For example, during the first quarter of 1998, a major hotel chain
eliminated commissions paid to the Company and other online travel service
providers for online bookings. There can be no assurance that other hotel
chains or other travel suppliers will not reduce current industry commission
rates or eliminate such commissions entirely, which could, individually or in
the aggregate, 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
September 1997, the major U.S. airlines reduced the commission rate payable to
traditional travel agencies from 10% to 8%.
In 1997, the major U.S. airlines reduced the commission rate payable for
online reservations from approximately 8% to approximately 5%, which had a
material adverse effect on the Company's results of operations for the three
months ended June 30, 1997, September 30, 1997, December 31, 1997 and
March 31, 1998. In addition, in the first half of 1998 one major airline
reduced its fixed rate commission structure for online roundtrip ticket sales
to ten dollars and a second major airline further reduced its cap (the maximum
amount of commissions paid per ticket) on per-roundtrip ticket commissions
payable for online ticket sales to ten dollars. The Company expects that its
weighted average commission on online transaction revenue will decline as a
result of these reductions. There can be no assurance that airlines or other
of the Company's travel suppliers will not further reduce the amount of
compensation payable to the Company and other online service providers.
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
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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
WorldCom, Inc.'s ANS Communications subsidiary (which was acquired by
WorldCom, Inc. from AOL in February 1998), which provides AOL customers with
access to the Company's online services; GeoNet Communications, which provides
the Company with a T3 data communication line for Internet access; Pegasus,
which provides the Company with access to a global hotel reservation system
and which operates an online travel service competitive with the Company;
Galileo, which provides the Company with access to the Apollo GDS system; and
AT&T, which provides the Company with data connectivity 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 agreements with ANS Communications and GeoNet Communications are currently
on a month-to-month basis. 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 "--Year
2000 Compliance," "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), Cendant Corporation, TravelWeb (operated by Pegasus), Internet
Travel Network, Biztravel.com, and TheTrip.com, 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.
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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, such as United Airlines,
offer travel services directly through their own Web sites, including travel
services from other travel suppliers, eliminating the need to pay commissions
to third parties such as the Company. The Company is unable to anticipate
which other companies are likely to offer competitive services in the future.
There can be no assurance that the Company's online operations will compete
successfully with any current or future competitors.
In the television and in-flight programming markets, the Company's News
Travel Network division competes for airtime for its programs with news and
entertainment programming produced by local stations, broadcast and cable
networks, infomercial producers and third party syndicators. NTN competes for
national advertising sales with networks, national advertising firms and
syndicators.
Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the
Company and may enter into strategic or commercial relationships with larger,
more established and well-financed companies. Certain of the Company's
competitors may be able to secure services and products from travel suppliers
on more favorable terms, devote greater resources to marketing and promotional
campaigns and devote substantially more resources to Web site and systems
development than the Company. In addition, new technologies and the expansion
of existing technologies may increase competitive pressures on the Company. In
particular, Microsoft Corporation has publicly announced its intent to invest
heavily in the area of travel technology and services. Increased competition
may result in reduced operating margins, as well as loss of market share and
brand recognition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and competitive
pressures faced by the Company could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Competition."
Dependence on Continued Growth of Online Commerce. The Company's future
revenues and any future profits are substantially dependent upon the
widespread acceptance and use of the Internet and commercial online services
as an effective medium of commerce by consumers. For the Company to be
successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information. Convincing consumers to purchase travel
services online may be particularly difficult, as such consumers have
traditionally relied on travel agents for advice and recommendations as to
destinations and accommodations as well as bookings, and are accustomed to a
high degree of human interaction in purchasing travel services. Rapid growth
in the use of and interest in the Web, the Internet and commercial online
services is a recent phenomenon, and there can be no assurance that acceptance
and use will continue to develop or that a sufficiently broad base of
consumers will adopt, and continue to use, the Internet and commercial online
services as a medium of commerce, particularly for purchases of travel
services.
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 1996 and 1997 and the
three months ended March 31, 1998, approximately 58%, 39% and 35%,
respectively, of the Company's total revenues were
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derived from the sale of advertising in connection with its television
programming and, to a lesser extent, its online sites. The Company expects
that revenues derived from the sale of advertising on its online sites will
increase in future periods in terms of absolute dollars. 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. In particular, the Company currently
anticipates that Best Buy Co., Inc. ("Best Buy") will account for an
increasing percentage of the Company's television advertising revenues in
future periods. As is common in the television industry, the Company does not
have a long-term contract or arrangement with Best Buy that guarantees
advertising revenues from Best Buy. As a result, if advertising revenues from
Best Buy do not materialize to the extent anticipated by the Company or if
such advertising revenues materialize and Best Buy then phases out its
sponsorship of the Company's television programming, overall revenues from the
Company's television operations would be materially and adversely affected,
which could adversely affect the Company's business operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Marketing and Sales."
Management of Potential Growth. The Company has rapidly and significantly
expanded its operations, and anticipates that further significant expansion
will be required to address potential growth in its customer base and market
opportunities. The Company has also recently added a number of key managerial
and technical employees, and the Company expects to add additional key
personnel in the future. This expansion has placed, and is expected to
continue to place, a significant strain on the Company's management,
operational and financial resources. To manage the expected growth of its
operations and personnel, the Company will be required to improve existing and
implement new transaction-processing, operational, customer service and
financial systems, procedures and controls, implement a formal disaster
recovery program and expand, train and manage the Company's growing employee
base. The Company also will be required to expand its finance, administrative
and operations staff. Further, the Company's management will be required to
maintain and expand its relationships with various travel service suppliers,
other Web sites and other Web service providers, Internet and commercial
online service providers and other third parties necessary to the Company's
business. There can be no assurance that the Company's current and planned
personnel, systems, procedures and controls will be adequate to support the
Company's future operations, that management will be able to hire, train,
retain, motivate and manage required personnel or that the Company's
management will be able to successfully identify, manage and exploit existing
and potential market opportunities. If the Company is unable to manage growth
effectively, its business, operating results and financial condition could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business--Employees" and
"Management."
Dependence on Attraction and Retention of Key Employees. The Company's
performance is substantially dependent on the continued services and on the
performance of its senior management and certain other key personnel. The loss
of the services of any of its executive officers or other key employees could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company does not have long-term employment
agreements with any of its key personnel. The Company's future success also
depends on its ability to identify, attract, hire, train, retain and motivate
other highly skilled 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
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that the Company will be able to retain and attract such developers. The
failure to retain and attract necessary technical, managerial, editorial,
merchandising, marketing and customer service personnel could have a material
adverse effect on the Company's business, operating results and financial
condition.
Although none of the Company's employees is represented by a labor union, it
is common for employees in the television industry to belong to a union, and
there can be no assurance that the Company's employees will not join or form a
labor union or that the Company, for certain purposes, will not be required to
become a union signatory. See "Business--Employees" and "Management."
Risk of Capacity Constraints; Reliance on Internally Developed Systems;
System Development Risks. The Company's revenues depend on the number of
customers who use its online travel sites to book their travel reservations.
Accordingly, the satisfactory performance, reliability and availability of the
Company's online sites, transaction-processing systems and network
infrastructure are critical to the Company's operating results, as well as its
ability to attract and retain customers and maintain adequate customer service
levels. Any system interruptions that result in the unavailability of the
Company's online sites or reduced performance of the reservation system would
reduce the volume of reservations and the attractiveness of the Company's
service offerings, which could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company uses an internally developed system for its online sites and
substantially all aspects of transaction processing, including customer
profiling, making reservations, credit card verification and confirmations.
The Company has experienced periodic system interruptions, which it believes
will continue to occur from time to time. Any substantial increase in the
volume of traffic on the Company's online sites or the number of reservations
made by customers will require the Company to expand and upgrade further its
technology, transaction-processing systems and network infrastructure. The
Company has experienced and expects to continue to experience temporary
capacity constraints due to sharply increased traffic during "fare wars" or
other promotions, which may cause unanticipated system disruptions, slower
response times, degradation in levels of customer service, impaired quality
and speed of reservations and confirmations and delays in reporting accurate
financial information.
There can be no assurance that the Company's transaction-processing systems
and network infrastructure will be able to accommodate such increases in
traffic in the future, or that the Company will, in general, be able to
accurately project the rate or timing of such increases or upgrade its systems
and infrastructure to accommodate future traffic levels on its online sites.
In addition, there can be no assurance that the Company will be able in a
timely manner to effectively upgrade and expand its transaction-processing
systems or to successfully integrate any newly developed or purchased modules
with its existing systems. Any inability to do so could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--Technology."
Risk of System Failure; Single Site. The Company's success, in particular
its ability to successfully receive and fulfill orders online and provide
high-quality customer service, largely depends on the efficient and
uninterrupted operation of its computer and communications hardware systems.
Substantially all of the Company's computer and communications systems are
located at a single facility in San Francisco, California. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. The Company currently does not have redundant systems or a
formal disaster recovery plan and does not carry sufficient business
interruption insurance to compensate it for losses that may occur. Despite the
implementation of network security measures by the Company, its servers are
vulnerable to computer viruses, physical or electronic break-ins and 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."
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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 experienced negative cash flow from
television operations in 1997 and expects to experience negative cash flow
from television operations for the foreseeable future. The Company must
generate substantial revenues from sales of its television programs, and, in
particular, advertising sales for such programs, in order to offset the
significant fixed costs associated with its television operations. The Company
historically has derived advertising revenues from a limited customer base. In
particular, a single customer, MCI Telecommunications Corporation ("MCI"),
accounted for 49% and 58% of the Company's television advertising revenues in
1995 and 1996, respectively. Commencing in the first quarter of 1997, MCI
began to phase out its sponsorship of the Company's television programming,
which phase-out was completed in the quarter ended September 30, 1997. MCI
continues to advertise in the Company's in-flight programming. Revenues
attributable to MCI comprised 30% and 7% of the Company's total television
revenues for 1997 and the three months ended March 31, 1998, respectively.
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 from historical 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. The Company currently anticipates that Best Buy
Co., Inc. ("Best Buy") will account for an increasing percentage of the
Company's television advertising revenues in future periods. As is common in
the television industry, the Company does not have a long-term contract or
arrangement with Best Buy that guarantees advertising revenues from Best Buy.
As a result, if advertising revenues from Best Buy do not materialize to the
extent anticipated by the Company or if such advertising revenues materialize
and Best Buy then phases out its sponsorship of the Company's television
programming, overall revenues from the Company's television operations would
be materially and adversely affected, which could adversely affect the
Company's business, operating results and financial condition. The Company
expects revenues from its television operations to decline in 1998 relative to
1997. 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
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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 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
this offering, together with its existing capital resources, will be
sufficient to meet the Company's capital requirements through the year 2000.
Thereafter, the Company may be required to raise additional funds, in part to
fund its financial obligations to AOL, Excite and Lycos. 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
15
<PAGE>
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, 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 continue to strategically license certain
content for its online sites from third parties, such as it did with Fodor's,
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
16
<PAGE>
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 services
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Governmental 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
17
<PAGE>
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.
Year 2000 Compliance. The Company believes that its internal computer
systems are Year 2000 compliant and does not anticipate that it will incur
significant expenditures to ensure that such systems will function properly
with respect to dates in the Year 2000 and beyond. The Company is in the early
stages of conducting an audit of its significant suppliers and other third
parties to ensure that those parties have appropriate plans to remedy Year
2000 issues where their systems interface with the Company's systems or
otherwise impact its operations. There can be no assurance that a failure of
systems of third parties on which the Company's systems and operations rely to
be Year 2000 compliant will not have a material adverse affect on the
Company's business, financial condition or operating results.
Volatility of Stock Price. The offering price for Common Stock to be sold by
the Company will be determined by negotiations among the Company and the
Underwriters and may bear no relationship to the price at which the Common
Stock will trade after completion of this offering. See "Underwriting" for
factors to be considered in determining such offering price. The market price
of the Common Stock has fluctuated significantly to date. See "Price Range of
Common Stock." In addition, 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 revenue or net income, or
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. Furthermore, substantially all
of the Company's outstanding Common Stock will be eligible for sale in the
public market upon the expiration of certain lock-up agreements, subject in
some cases to the volume and other restrictions of Rule 144 and Rule 701 under
the Securities Act of 1933 (the "Securities Act"). These lock-up agreements
were entered into between the Underwriters and certain stockholders in
connection with the Company's initial public offering in November 1997, which
agreements expire on May 19, 1998, and between the Underwriters and Company's
officers and directors and the Selling Stockholders in this offering, which
agreements expire 90 days after the effective date of the registration
statement filed in connection with this offering. There can be no assurance
that sales of Common Stock by such stockholders upon expiration of the lock-up
agreements will not adversely affect the market price of the Common Stock. See
"--Shares Eligible for Future Sale, " "Price Range of Common Stock" and
"Shares Eligible for Future Sale."
Antitakeover Effect of Certain Charter Provisions. The Board of Directors
has the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock may 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,
18
<PAGE>
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. Upon completion of the offering, the
Company will have outstanding 12,862,927 shares of Common Stock, assuming no
exercise of outstanding warrants, and no exercise of options after March 31,
1998. Of these shares, all of 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. In addition, the 2,500,000 shares sold in the
Company's initial public offering in November 1997, as well as approximately
119,500 additional shares are currently eligible to be resold immediately in
the public market.
The remaining 7,143,427 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. Beginning May 19, 1998, 180 days after the completion date
of the Company's initial public offering, upon expiration of pre-existing
lock-up agreements and lock-up agreements between the representatives of the
underwriters in the initial public offering and officers, directors and
certain stockholders of the Company, approximately 999,236 Restricted Shares
will be eligible for immediate resale without restriction under Rule 144(k)
and approximately 3,113,387 Restricted Shares will be eligible for resale
pursuant to Rule 144 under the Securities Act, subject to compliance with the
volume limitations and other restrictions under Rule 144 and, under certain
circumstances, Rule 701 under the Securities Act. In addition, following
expiration of such lock-up agreements, 483,506 Restricted Shares will become
eligible for sale at various times over a period of less than one year,
subject in some cases to volume and manner of sale limitations.
As a result of lock-up agreements (the "Lock-Up Agreements") that were
entered into between the Company's officers, directors and the Selling
Stockholders and the Underwriters in connection with this offering,
approximately 2,547,298 Restricted Shares will not be available for sale in
the public market until the expiration of the 90 day period following the
effective date of this offering. Upon expiration of the Lock-Up Agreements,
approximately 240,313 Restricted Shares will be eligible for immediate sale
without restriction under Rule 144(k) and approximately 1,464,569 Restricted
Shares will be eligible for sale pursuant to Rule 144 under the Securities
Act, subject to compliance with the volume limitations and other restrictions
under such rule. The remaining 842,416 shares will become eligible for sale at
various times over a period of less than 1 year, subject in some cases to
volume and manner of sale limitations. Any early release of the Lock-Up
Agreements 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, certain holders of Common Stock have the right to
include their 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.
The Company has filed a registration statement on Form S-8 under the
Securities Act that registered 3,508,273 shares of Common Stock issuable under
the Company's 1997 Employee Stock Purchase Plan, 1997 Directors' Stock Option
Plan and 1988 and 1997 Stock Option Plans. See "Description of Capital Stock"
and "Shares Eligible for Future Sale."
Dilution. The assumed public offering price is substantially higher than the
book value per share of the outstanding Common Stock. Investors purchasing
shares of Common Stock in the offering at an assumed offering price of $34.25
will therefore incur immediate, substantial dilution in the amount of $28.11
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."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company (after deducting underwriting discounts and
estimated offering expenses) from the sale of the 1,500,000 shares of Common
Stock offered by the Company hereby at the assumed public offering price of
$34.25 per share are estimated to be $48.3 million ($63.4 million if the
Underwriters' over-allotment option is exercised in full).
The principal purpose of this offering is to obtain additional capital. The
Company intends to use a portion of the net proceeds to pay a portion of its
obligations to AOL, Excite and Lycos pursuant to the Company's agreements with
AOL, Excite and Lycos, which require the Company to make minimum payments to
AOL, Excite and Lycos totaling approximately $52.3 million during the
remaining terms of such agreements as of April 15, 1998. 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."
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company commenced trading publicly on the Nasdaq
National Market on November 19, 1997 and is traded under the symbol PTVL. The
following table sets forth the high and low sales prices of the Company's
Common Stock as reported by the Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1997
Fourth Quarter (from November 19, 1997)..................... $11.94 $ 6.88
FISCAL 1998
First Quarter .............................................. $33.13 $ 7.50
Second Quarter (through April 15, 1998)..................... $38.13 $31.25
</TABLE>
On April 15, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $34.25 per share. As of April 14, 1998, there were
approximately 241 holders of record of the Company's Common Stock.
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 6 of Notes to Consolidated Financial Statements.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis, and (ii) as adjusted to give effect to the
sale by the Company of 1,500,000 shares of Common Stock offered hereby at an
assumed offering price of $34.25 per share and the application of the
estimated proceeds therefrom as set forth in "Use of Proceeds." 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 MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, 5,000,000 shares authorized, none
issued or outstanding, actual and as adjusted....... $ -- $ --
Common Stock, 50,000,000 shares authorized,
11,362,927 shares issued and outstanding, actual,
12,862,927 shares issued and outstanding, as
adjusted............................................ 11 13
Additional paid-in capital........................... 61,700 109,955
Other................................................ (539) (539)
Accumulated deficit.................................. (30,471) (30,471)
-------- --------
Total stockholders' equity......................... 30,701 78,956
-------- --------
Total capitalization............................. $ 30,701 $ 78,956
======== ========
</TABLE>
- ---------------------
(1) Excludes as of March 31, 1998 (a) 1,647,713 shares issuable upon exercise
of outstanding options at a weighted average exercise price of $6.02 per
share, (b) 31,666 shares issuable upon exercise of outstanding warrants at
a weighted average exercise price of $5.97 per share, and (c) an aggregate
of 1,833,600 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 11 of Notes to Consolidated Financial Statements.
21
<PAGE>
DILUTION
As of March 31, 1998, the Company had a historical net tangible book value
of approximately $30.7 million or $2.70 per share of Common Stock. Net
tangible book value represents total tangible assets less total liabilities
divided by the number of shares of Common Stock outstanding at that date.
After giving effect to the receipt by the Company of the net proceeds from the
sale of the 1,500,000 shares of Common Stock offered by the Company hereby at
the assumed public offering price of $34.25 per share, the net tangible book
value at March 31, 1998 would have been approximately $79.0 million or $6.14
per share. This represents an immediate increase in net tangible book value of
$3.44 per share to existing stockholders and an immediate dilution of $28.11
per share to new investors purchasing shares of Common Stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed public price per share..................................... $34.25
Net tangible book value per share after the offering............. 6.14
------
Dilution per share to new investors.............................. $28.11
======
</TABLE>
The following table summarizes, as of March 31, 1998, 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
PURCHASED TOTAL CONSIDERATION
-------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1).................... 11,363 88.3% $ 61,711 54.6% $ 5.43
New investors (1)....... 1,500 11.7 51,375 45.4 $34.25
------ ----- ----------- --------
Total............... 12,863 100.0% $ 113,086 100.0
====== ===== =========== ========
</TABLE>
- ---------------------
(1) Excludes as of March 31, 1998 (a) 1,647,713 shares issuable upon exercise
of outstanding options at a weighted average exercise price of $6.02 per
share, (b) 31,666 shares issuable upon exercise of outstanding warrants at
a weighted average exercise price of $5.97 per share, and (c) an aggregate
of 1,833,600 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 11 of Notes to Consolidated Financial Statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the four years ended
December 31, 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 year ended December 31, 1993 have been
derived from the audited consolidated financial statements of the Company. 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.
The following selected consolidated statement of operations data for the
three months ended March 31, 1997 and 1998 and the balance sheet data as of
March 31, 1997 and 1998 have been derived from unaudited financial statements
not included herein and include, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's results of operations for those periods and
financial position as of such dates. Results for the three months ended
March 31, 1998 are not necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Online.................. $ -- $ -- $ 579 $ 2,573 $ 6,010 $ 1,496 $ 2,332
Television.............. 12,309 9,598 9,564 9,801 7,634 2,023 1,683
------- ------- ------- ------- -------- ------- -------
Total revenues........ 12,309 9,598 10,143 12,374 13,644 3,519 4,015
Cost of revenues:
Online.................. -- -- 1,078 2,308 3,648 910 1,201
Television.............. 9,972 9,103 8,393 7,000 5,751 1,386 1,242
------- ------- ------- ------- -------- ------- -------
Total cost of
revenues............. 9,972 9,103 9,471 9,308 9,399 2,296 2,443
------- ------- ------- ------- -------- ------- -------
Gross profit............. 2,337 495 672 3,066 4,245 1,223 1,572
Operating expenses:
Marketing and sales..... -- 2,759 2,687 4,373 8,668 1,335 4,393
Research and
development............ -- -- 626 1,314 1,825 405 738
General and
administrative......... -- 1,162 2,026 2,880 4,184 1,009 1,400
Loss on canceled
programming (1)........ -- 2,166 -- -- -- -- --
------- ------- ------- ------- -------- ------- -------
Total operating
expenses (2)......... 2,617 6,087 5,339 8,567 14,677 2,749 6,531
------- ------- ------- ------- -------- ------- -------
Loss from operations...... (280) (5,592) (4,667) (5,501) (10,432) (1,526) (4,959)
Interest income (expense)
(2)...................... -- (246) (264) (89) 266 21 278
------- ------- ------- ------- -------- ------- -------
Loss before income taxes.. (280) (5,838) (4,931) (5,590) (10,166) (1,505) (4,681)
Income tax benefit
(expense)................ (23) 420 (2) (2) (2) -- (7)
------- ------- ------- ------- -------- ------- -------
Net loss.................. $ (303) $(5,418) $(4,933) $(5,592) $(10,168) $(1,505) $(4,688)
======= ======= ======= ======= ======== ======= =======
Basic and diluted net
loss per share......... $ (0.28) $ (4.75) $ (4.02) $ (3.43) $ (3.54) $ (0.88) $ (0.41)
======= ======= ======= ======= ======== ======= =======
Shares used in computation
of net loss per share
calculation.............. 1,076 1,140 1,228 1,631 2,869 1,702 11,353
SUPPLEMENTAL FINANCIAL
DATA (UNAUDITED):
Gross bookings (3)....... $ -- $ -- $ 2,043 $20,263 $ 80,389 $14,117 $35,890
======= ======= ======= ======= ======== ======= =======
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
CONSOLIDATED BALANCE SHEET
DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents. $ 765 $ 138 $ 1,064 $ 6,016 $ 27,912 $ 2,715 $12,477
Marketable securities..... -- -- -- -- 750 -- 11,407
Total assets.............. 13,011 8,593 9,066 12,554 42,785 9,563 38,404
Long-term obligations (4). 6,197 6,164 4,993 4,656 2,496 2,875 2,968
Total stockholders'
equity................... 4,336 (1,027) 1,249 4,411 35,365 3,299 30,701
</TABLE>
- -------------------
(1) Effective September 30, 1994, the Company canceled 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 1993.
(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 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) 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.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements made within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Words such as "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates," and similar expressions identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those expressed or forecasted. Factors that might cause
such a difference include, but are not limited to, those discussed in the
section entitled "Risk Factors" and those appearing 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. In February 1998, the Company launched its
Destinations Guides feature created with content licensed from Fodor's. In
March 1998, the Company entered into an agreement with Lycos, under which the
Company will be the exclusive multiservice provider of travel reservation
services for Lycos' Travel Web Guide and Travel Network.
Overview of Television Operations. From inception through 1994, the Company
derived all of its revenues from its television operations. In 1995, 1996,
1997 and the three months ended March 31, 1998, the Company's television
operations accounted for approximately 94%, 79%, 56% and 42% of the Company's
total revenues, respectively. Television revenues are derived primarily from
fees associated with sales of advertising time and the licensing of travel-
related news and entertainment programming. 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,
primarily for 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
24
<PAGE>
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 sponsorship of the Company's
television programming, which phase-out was completed in the quarter ended
September 30, 1997. MCI continues to advertise in the Company's in flight
programming. Revenues attributable to MCI comprised 30% and 7% of the
Company's total television revenues for the year ended December 31, 1997 and
the three months ended March 31, 1998, respectively. 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 from historical periods. The Company currently
anticipates that Best Buy Co., Inc. ("Best Buy") will account for an
increasing percentage of the Company's television advertising revenues in
future periods. As is common in the television industry, the Company does not
have a long-term contract or arrangement with Best Buy that guarantees
advertising revenues from Best Buy. As a result, if advertising revenues from
Best Buy do not materialize to the extent anticipated by the Company or if
such advertising revenues materialize and Best Buy then phases out its
sponsorship of the Company's television programming, overall revenues from the
Company's television operations would be materially and adversely affected,
which could adversely affect the Company's business operating results and
financial condition. See "Risk Factors--Risks Associated with Advertising
Revenues" and "--Risks Associated with Television Operations."
Although the Company's television operations have had positive operating
cash flow in the past, the Company experienced negative operating cash flow
from television operations in 1997 and expects to experience negative
operating cash flow from television operations for the foreseeable future. As
a result of the amortization of the Company's film library as well as
depreciation and other factors, the Company's television operations incurred a
net operating loss in 1997, 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, segment fees
received from GDS suppliers and the sale of advertisements on the Company's
online sites. In addition, certain travel suppliers pay performance-based
compensation known as "override commissions." Commission revenues for air
travel, hotel rooms, car rentals and vacation packages, net of allowances for
cancellations, are recognized upon the confirmation of the reservation.
Overrides are recognized on an accrual basis once the amount has been
confirmed with the travel supplier, which generally reflects the performance
for a prior quarterly period.
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. 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 $35.9 million in
the first quarter of 1998, which resulted in online revenues of approximately
$424,000 and $2.3 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,
25
<PAGE>
typical standard base commission rates paid by travel suppliers have been
approximately 10% for hotel reservations, 5% to 10% for 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 approximately 8% to approximately 5%
(excluding overrides). In addition, in a continuation of this trend, in the
first half of 1998, one major airline reduced its fixed rate commission
structure for online roundtrip ticket sales to ten dollars and a second major
airline further reduced its cap (the maximum amount of commissions paid per
ticket) on per-roundtrip ticket commissions payable for online ticket sales to
ten dollars. The Company expects that its weighted average commission on
online transaction revenue will decline as a result of these reductions. In
addition, during the first quarter of 1998, a major hotel chain eliminated
commissions paid to the Company and other online travel service providers for
online bookings. There can be no assurance that other hotel chains or other
travel suppliers will not reduce current industry commission rates or
eliminate such commissions entirely, which could, individually or in the
aggregate, have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors--Reliance on Travel
Suppliers; Potential Adverse Changes in Commission Payments."
Travel services sold through the AOL Network accounted for 77%, 67%, 62% and
52% of the Company's online revenues for the three months ended June 30, 1997,
September 30, 1997, December 31, 1997 and March 31, 1998, respectively. Travel
services sold through Excite accounted for 8%, 13%, 15% and 16% of the
Company's online revenues for the three months ended June 30, 1997, September
30, 1997, December 31, 1997 and March 31, 1998, 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 the
Lycos agreement is expected to represent a significant distribution channel in
the future. Any termination of any or all of the Company's agreements with
AOL, Excite or Lycos would likely have a material adverse effect on the
Company's business, operating results and financial condition. 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, Excite and Lycos require minimum aggregate payments of
approximately $60.3 million during the terms of such agreements 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, Excite and Lycos.
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 and Excite 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 America Online,
Excite and Lycos" and "--Risk of Termination of Distribution Agreement with
America Online."
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, Lycos 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, Excite or Lycos, 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 March 31, 1998, had an accumulated deficit of $30.5 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
26
<PAGE>
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 stockholders'
equity. In particular, the Company's operating expenses are expected to
increase substantially in 1998 as compared to 1997, primarily due to
commencement of the Company's payment obligations to AOL, Excite, Lycos,
Fodor's 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 stockholders' equity. See "Risk
Factors--Limited Operating History of Online Business; History of Net
Operating Losses; Accumulated Deficit" and "--Anticipated Losses and Negative
Cash Flow."
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>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- --------------
1995 1996 1997 1997 1998
------- ------- ------- ----- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Online....................... 5.7 % 20.8 % 44.0 % 42.5% 58.1%
Television................... 94.3 79.2 56.0 57.5 41.9
------- ------- ------- ----- ------
Total revenues............. 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Online....................... 10.6 18.7 26.7 25.9 29.9
Television................... 82.8 56.6 42.2 39.4 30.9
------- ------- ------- ----- ------
Total cost of revenues..... 93.4 75.3 68.9 65.3 60.8
------- ------- ------- ----- ------
Gross profit................... 6.6 24.7 31.1 34.7 39.2
Operating expenses:
Marketing and sales.......... 26.4 35.3 63.5 37.9 109.4
Research and development..... 6.2 10.6 13.4 11.5 18.4
General and administrative... 20.0 23.3 30.7 28.7 34.9
------- ------- ------- ----- ------
Total operating expenses... 52.6 69.2 107.6 78.1 162.7
------- ------- ------- ----- ------
Loss from operations........... (46.0) (44.5) (76.5) (43.4) (123.5)
Interest income (expense), net. (2.6) (0.7) 2.0 0.6 6.9
------- ------- ------- ----- ------
Loss before income taxes....... (48.6) (45.2) (74.5) (42.8) (116.6)
Income tax..................... -- -- -- -- 0.2
------- ------- ------- ----- ------
Net loss....................... (48.6)% (45.2)% (74.5)% (42.8)% (116.8)%
======= ======= ======= ===== ======
AS A PERCENTAGE OF RELATED
REVENUES:
Cost of online revenues........ 186.2 % 89.7 % 60.7 % 60.8% 51.5%
Cost of television revenues.... 87.8 % 71.4 % 75.3 % 68.5% 73.8%
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Revenues
Online Revenues. Online revenues increased from approximately $1.5 million
in the first three months of 1997 to $2.3 million in the first three months of
1998 due primarily to an increase in the Company's customer base and an
increase in paid advertising on the Company's Web site, partially offset by
lower
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<PAGE>
commissions paid to online travel services by certain airlines. As a result of
the recent reductions in commissions paid on online sales of round trip
tickets by two major airlines, the Company anticipates that the average
commissions paid to the Company for airline tickets will decline in future
periods. Online advertising revenues increased from $92,000 in the first three
months of 1997 to $284,000 in the first three months of 1998. Gross bookings
increased from $14.1 million in the first three months of 1997 to $35.9
million in the first three months of 1998 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. Visits to the Company's
online areas increased from 3.8 million in the first quarter of 1997 to 18.9
million in the first quarter of 1998. During the three months ended March 31,
1998, the percentage of online revenues derived from airline commissions,
nonairline commissions and the sale of advertising on the Company's online
sites was 67%, 21% and 12%, respectively, as compared to 80%, 4% and 6%,
respectively, during the three months ended March 31, 1997. In addition,
during the three months ended March 31, 1997, 10% of online revenues were
derived from fees paid by AOL to the Company for AOL connect time. The
Company's database of customer profiles grew from approximately 1.2 million
profiles as of March 31, 1997 to over 3.4 million profiles as of March 31,
1998. In 1996, the Company marketed its travel services primarily through AOL.
During 1997, the Company expanded its online presence beyond AOL by marketing
its own Web site and by entering into a strategic relationship with Excite.
The Company's gross bookings from Excite and the Web comprised approximately
44% of the Company's total gross bookings for the first three months of 1998.
Television Revenues. Television revenues decreased 16.8% from $2.0 million
for the first three months of 1997 to $1.7 million for the first three months
of 1998, due primarily to the phase-out of MCI as an advertising sponsor for
the Company's television programming in 1997. As a result, the Company expects
television revenues to continue to decline in the second quarter of 1998 as
compared to the same period for the previous year and to decline in future
periods. Advertising revenues constitute a majority of the Company's
television revenues and comprised 63% and 66% of television revenues in the
first three months of 1997 and 1998, respectively.
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 center, GDS charges, printing and delivery costs for
tickets and costs associated with errors in ticket fulfillment. Cost of online
revenues increased from $910,000 in the first three months of 1997 to $1.2
million in the first three months of 1998 due to the increased volume of
transactions in the first three months of 1998. As a percentage of online
revenues, cost of online revenues declined from 60.8% in the first three
months of 1997 to 51.5% in the first three months of 1998, primarily due to
economies of scale resulting from increased transaction volume. The Company's
average cost per transaction declined from approximately $23.50 in the first
three months of 1997 to approximately $10.70 in the first three months of 1998
due to both economies of scale resulting from increased transaction volumes
and the addition in the second quarter of 1997 of car and hotel reservation
booking capabilities, each of which has a lower per transaction fulfillment
cost compared to that for airline transactions.
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. Cost of television revenues decreased from
$1.4 million in the first three months of 1997 to $1.2 million in the first
three months of 1998 as a result of reduced production activity and cost
reductions implemented at the end of 1997. As a percentage of television
revenues, cost of television revenues increased from 68.5% in the first three
months of 1997 to 73.8% in the first three months of 1998 due to the
allocation of fixed costs over a smaller revenue base. Film library
amortization was $321,000 and $274,000 in the first three months of 1997 and
1998, respectively.
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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 229.1% from $1.3 million in the first
three months of 1997 to $4.4 million in the first three months of 1998. As a
percentage of total revenues, marketing and sales expenses increased from
37.9% in the first three months of 1997 to 109.4% in the first three months of
1998. The increase in marketing and sales expenses was attributable primarily
to expenses associated with the Company's online operations, including the
hiring of additional personnel for development of online content, expenditures
related to the Company's strategic agreements with AOL and Excite and
increased advertising exenditures. The Company continues to pursue an
aggressive branding and marketing campaign, including significant advertising
expenditures. In addition, the Company is obligated to make minimum payments
totaling $56 million to AOL and Excite over the term of its agreements with
AOL and Excite, and $4.3 million to Lycos over the two-year term of its
agreement with Lycos, 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.
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 such as its Destinations Guides with Fodor's, costs of content
development in connection with the Company's strategic relationships with
Excite, AOL and Lycos, and costs associated with network operations, systems
and telecommunications infrastructure. Research and development expenses
increased 82.2% from $405,000 in the first three months of 1997 to $738,000 in
the first three months of 1998. As a percentage of total revenues, research
and development expenses rose from 11.5% in the first three months of 1997 to
18.4% in the first three months of 1998. The increase in research and
development expenses were attributable primarily to increased staffing and
consulting fees, as well as increased costs related to enhancing the capacity,
features, content and functionality of the Company's online services and
enhancing or updating transaction-processing systems. 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, director and officer
insurance, investor relations and other general corporate expenses. General
and administrative expenses increased 38.8% from $1.0 million in the first
three months of 1997 to $1.4 million in the first three months of 1998. As a
percentage of total revenues, general and administrative expenses rose from
28.7% in the first three months of 1997 to 34.9% in the first three months of
1998. The increases in general and administrative expenses were due primarily
to increased salaries and expenses associated with the hiring of personnel
related to the expansion of the Company's online operations and expenses
associated with being a public company. 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.
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 $570,000 in
1997, none of which was recorded during the first three months of 1997.
Deferred compensation is recorded as a reduction of stockholders' equity and
is amortized ratably over the vesting period of the applicable options,
generally four years. Amortization of deferred compensation in the first three
months of 1998 for options granted was $36,000. The Company currently expects
to record amortization of deferred compensation for options granted of
approximately $143,000, $143,000, $143,000 and $71,000 for 1998 (including the
amount for the first three months of 1998 set forth above), 1999, 2000 and
2001, respectively. The amortization of deferred compensation will be recorded
as general and administrative expenses in such periods.
29
<PAGE>
Interest Income (Expense)
Interest income, net of interest expense, was approximately $21,000 and
$278,000 in the first three months of 1997 and 1998, respectively. Interest
expense is comprised primarily of interest on capital lease obligations. The
increase in net interest income was attributable primarily to a reduction on
borrowings under the Company's line of credit and interest income earned on
higher cash balances in the first three months of 1998, primarily from an
equity financing completed in September 1997 and net proceeds from the
Company's initial public offering in November 1997.
Income Taxes
The provision for income taxes recorded in the first three months of 1998
represents minimum state tax expense. The Company expects to incur a net loss
for 1998; therefore, no provision for federal income taxes has been recorded
for the first three months of 1998.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Revenues
Online Revenues. 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. As a result, online
revenues during 1996 included only five months of airline commissions and no
commissions on hotels or car rentals. Online revenues increased from $579,000
in 1995 to $2.6 million in 1996 due to the introduction of online airline
reservations. In 1997, online revenues increased from $2.6 million in 1996 to
$6.0 million due primarily to greater bookings and the offering of new online
services. Online advertising revenues were $235,000 and $580,000 in 1996 and
1997, respectively. Gross bookings increased from $20.3 million in 1996 to
$80.4 million in 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 735,000 profiles as of December 31, 1996 to
over 2.6 million profiles as of December 31, 1997. The Company's gross
bookings from Excite and the Company's own Web site comprised approximately
25.7% of the Company's total gross bookings for 1997.
Television Revenues. From 1995 to 1996 television revenues increased 3% to
$9.8 million. In 1997, revenues decreased 22% to $7.6 million primarily due to
the phase-out of MCI as an advertising sponsor for the Company's television
programming in 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 in 1997
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. Further,
during 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 continue to decline in 1998 relative to
1997. Advertising revenues constitute a majority of the Company's television
revenues and comprised 75%, 73% and 63% of television revenues in 1995, 1996
and 1997, respectively.
Cost of Revenues
Cost of Online Revenues. 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. In
1997, cost of online revenues increased to $3.6 million, but decreased as a
percentage of online revenues to 61%. The reduction in 1997, as a percentage
of the related revenue, reflected a continuation of efficiencies associated
with increased transactions and allocation of fixed costs over a larger
revenue base.
30
<PAGE>
Cost of Television Revenues. Cost of television revenues decreased from $8.4
million in 1995 to $7.0 million in 1996 and decreased to $5.8 million in 1997.
As a percentage of television revenues, cost of television revenues fell from
88% in 1995 to 71% in 1996, and increased to 75% in 1997. 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 $1.7 million, $1.5 million and
$1.3 million in 1995, 1996 and 1997, respectively. The increase in the cost of
revenues in 1997 as a percentage of the related revenue was due to allocation
of fixed personnel costs over lower revenues.
Operating Expenses
Marketing and Sales. Marketing and sales expenses increased 63% from $2.7
million in 1995 to $4.4 million in 1996. In 1997, marketing and sales expenses
increased 98% to $8.7 million. As a percentage of total revenues, marketing
and sales expenses rose from 26% in 1995 to 35% in 1996 and to 64% in 1997.
The increase in marketing and sales expenses from 1995 to 1997 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 strategic agreements
with AOL and Excite. The Company continues to pursue an aggressive branding
and marketing campaign, including significant advertising expenditures. In
addition, the Company is obligated to make minimum payments totaling $56
million to AOL and Excite over the term of its agreements with AOL and Excite,
and $4.3 million to Lycos over the two-year term of its agreement with Lycos,
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.
Research and Development. Research and development expenses increased 110%
from $626,000 in 1995 to $1.3 million in 1996. In 1997, research and
development expenses increased 39% to $1.8 million. As a percentage of total
revenues, research and development expenses rose from 6% in 1995 to 11% in
1996 and to 13% in 1997. The increases in 1996 and 1997 were 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. 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 increased
42% from $2.0 million in 1995 to $2.9 million in 1996 and increased 45% to
$4.2 million in 1997. As a percentage of total revenues, general and
administrative expenses rose from 20% in 1995 to 23% in 1996 and to 31% in
1997. The increases in general and administrative expenses in 1996 and 1997
were due primarily to increased salaries and expenses associated with the
hiring of personnel related to the Company's online operations. 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.
Interest Income (Expense)
Interest expense, net of interest income, was approximately $264,000 and
$89,000 in 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. For 1997,
interest income, net of expense, was approximately $266,000. The change from
1996 to 1997 was due primarily to a reduction on borrowings under the
Company's line of credit and interest income earned on higher cash balances in
1997, primarily from an equity financing completed in September 1997 and net
proceeds from the Company's initial public offering in November 1997.
31
<PAGE>
Income Taxes
No provision for income taxes has been recorded in 1996 or 1997 as a result
of net operating losses incurred in each of these years. As of December 31,
1997, the Company had net operating loss carryforwards of approximately $31.2
million and $15.6 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 1996 and 1997, 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 5 of Notes to
Consolidated Financial Statements.
32
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statement of
operations data for the five quarters ended March 31, 1998, 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
-----------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Online................... $ 1,496 $ 1,174 $ 1,556 $ 1,784 $ 2,332
Television............... 2,023 2,033 1,845 1,733 1,683
------- ------- ------- ------- -------
Total revenues.......... 3,519 3,207 3,401 3,517 4,015
Cost of revenues:
Online................... 910 853 909 976 1,201
Television............... 1,386 1,503 1,450 1,412 1,242
------- ------- ------- ------- -------
Total cost of revenues.. 2,296 2,356 2,359 2,388 2,443
------- ------- ------- ------- -------
Gross profit.............. 1,223 851 1,042 1,129 1,572
Operating expenses:
Marketing and sales...... 1,335 1,181 2,024 4,128 4,393
Research and development. 405 296 501 623 738
General and
administrative.......... 1,009 914 1,031 1,230 1,400
------- ------- ------- ------- -------
Total operating
expenses............... 2,749 2,391 3,556 5,981 6,531
------- ------- ------- ------- -------
Loss from operations...... (1,526) (1,540) (2,514) (4,852) (4,959)
Interest income (expense),
net...................... 21 (1) (17) 263 278
------- ------- ------- ------- -------
Loss before income taxes.. (1,505) (1,541) (2,531) (4,589) (4,681)
Income taxes.............. -- (1) (1) -- (7)
------- ------- ------- ------- -------
Net loss.................. $(1,505) $(1,542) $(2,532) $(4,589) $(4,688)
======= ======= ======= ======= =======
Basic and diluted net loss
per share................ $ (0.88) $ (0.90) $ (1.44) $ (0.73) $ (0.41)
======= ======= ======= ======= =======
Weighted average shares
used in net loss per
share calculation........ 1,702 1,712 1,753 6,306 11,353
SUPPLEMENTAL FINANCIAL
DATA:
Gross bookings (1)........ $14,117 $17,816 $22,074 $26,382 $35,890
======= ======= ======= ======= =======
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Online................... 42.5 % 36.6 % 45.8 % 50.7 % 58.1%
Television............... 57.5 63.4 54.2 49.3 41.9
------- ------- ------- ------- -------
Total revenues.......... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Online................... 25.9 26.6 26.7 27.7 29.9
Television............... 39.4 46.9 42.6 40.2 30.9
------- ------- ------- ------- -------
Total cost of revenues.. 65.3 73.5 69.3 67.9 60.8
Gross profit.............. 34.7 26.5 30.7 32.1 39.2
Operating expenses:
Marketing and sales...... 37.9 36.8 59.5 117.4 109.4
Research and development. 11.5 9.2 14.7 17.7 18.4
General and
administrative.......... 28.7 28.5 30.3 35.0 34.9
------- ------- ------- ------- -------
Total operating
expenses............... 78.1 74.5 104.5 170.1 162.7
------- ------- ------- ------- -------
Loss from operations...... (43.4) (48.0) (73.8) (138.0) (123.5)
Interest income (expense),
net...................... 0.6 0.0 (0.5) 7.5 6.9
------- ------- ------- ------- -------
Loss before income taxes.. (42.8) (48.0) (74.3) (130.5) (116.6)
Income taxes.............. -- -- -- -- 0.2
------- ------- ------- ------- -------
Net loss.................. (42.8)% (48.0)% (74.3)% (130.5)% (116.8)%
======= ======= ======= ======= =======
<CAPTION>
AS A PERCENTAGE OF RELATED
REVENUES:
<S> <C> <C> <C> <C> <C>
Cost of online revenues... 60.8 % 72.7 % 58.4 % 54.7 % 51.5%
Cost of television
revenues................. 68.5 % 73.9 % 78.6 % 81.5 % 73.8%
</TABLE>
- ---------------------
See footnotes on following page.
33
<PAGE>
(1) 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
and increased customer acceptance of electronic commerce. 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
continued to be adversely impacted during 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 1997 to the first quarter of
1998, reflecting increased spending on developing the Company's online
operations and expanding its AOL and Excite relationships.
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.
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
34
<PAGE>
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
In November 1997, the Company completed an initial public offering of its
common stock, resulting in net proceeds to the Company of approximately $24.6
million. Previously, the Company had financed its operations primarily through
private sales of common stock, convertible preferred stock, and convertible
notes, which totaled $34.7 million in aggregate net proceeds through 1997. As
of March 31, 1998, the Company also had a $2.0 million line of credit, of
which approximately $1.2 million was available at March 31, 1998, based on 80%
of the Company's accounts receivable. See Note 6 of Notes to Consolidated
Financial Statements.
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 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 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 1997 of $12.8 million was
attributable primarily to a net loss of $10.2 million, increases in accounts
receivables and other assets and a decrease in accounts payable, partly offset
by depreciation of $1.0 million and film library amortization of $1.3 million.
Cash used in operating activities in the first three months of 1998 of $4.1
million was attributable primarily to a net loss of $4.7 million, increases in
accounts receivable and a decrease in accounts payable and accrued
liabilities, partly offset by depreciation of $384,000 and film library
amortization of $274,000, as well as a decrease in other assets.
Cash used in investing activities was $1.9 million in 1995, $977,000 in
1996, $2.2 million in 1997 and $11.0 million in the first three months of
1998. Cash used in investing activities in all periods was primarily for
acquisition of equipment and additions to the film library. Cash used in
investing activities in the first three months of 1998 primarily consisted of
$10.7 million for the purchase of marketable securities.
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 totaled $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
35
<PAGE>
capital leases. In 1997, cash provided by financing activities of $37.0
million consisted primarily of net proceeds from the issuance by the Company
of Common Stock in its initial public offering and sales of preferred stock in
a private placement transaction, partly offset by repayment of an equipment
lease line and payment of obligations under capital leases. Cash used by
financing activities in the first three months of 1998 of $280,000 consisted
primarily of payments on capital lease obligations of $268,000.
As of March 31, 1998, the Company had $12.5 million of cash and cash
equivalents and $11.4 million of marketable securities. As of that date, the
Company's principal commitments consisted of obligations outstanding under the
agreements with AOL, Excite, Lycos and Fodor's and lease obligations. See Note
7 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, of which $7.5 million has been paid as of March 31, 1998, 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, of which
$500,000 has been paid as of March 31, 1998, as well as pay a percentage of
commissions earned by the Company in excess of certain thresholds. Pursuant to
its arrangement with Lycos, the Company is obligated to make minimum payments
totaling $4.25 million to Lycos, 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 content areas featured on AOL, Excite and Lycos
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, Excite
and Lycos," "--Risk of Termination of Distribution Agreement with AOL" and
Note 7 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 through
2000. 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 additional credit facilities. 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
In February 1997, SFAS No. 128, "Earnings Per Share," was issued and is
effective for the Company's year ending December 31, 1997. As a result, the
Company's earnings per share ("EPS") data for prior periods have been restated
in the accompanying financial statements to conform with SFAS No. 128. 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, the FASB issued SFAS No. 130, "Comprehensive Income," and SFAS
No. 131, "Disclosures About Segments of an Enterprise." The Company is
required to adopt these statements effective for 1998. The Company is
considering additional disclosures, if any, which will be required by these
pronouncements.
36
<PAGE>
BUSINESS
OVERVIEW
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), a co-branded travel
Web site with Excite, Inc. ("Excite") (City.Net) and a travel reservation
service and co-branded Web site with Lycos, Inc. ("Lycos"). 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,
including content licensed from Fodor's Travel Publications ("Fodor's"). 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 has
entered into various strategic relationships. In 1997, the Company entered
into long-term agreements with AOL, the leading online service provider with
over eleven 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 Excite's Travel Channel (City.Net). In February 1998,
the Company launched its Destinations Guides feature created with content
licensed from Fodor's. In March 1998, the Company entered into a two-year
agreement with Lycos, another leading search engine provider, under which the
Company will be the exclusive multi-service provider of travel reservations on
Lycos' Travel Web Guide and Travel Network. Through such strategic agreements,
the Company's travel services are prominently featured on the AOL, Excite and
Lycos travel channels and contextually integrated throughout the AOL, Excite
and Lycos services.
Since launching its online booking service in May 1996, the Company has
experienced significant growth in its gross bookings. As of March 31, 1998,
3.4 million users had registered on the Company's online site, and over $136
million in gross bookings of travel services had been purchased by
approximately 220,000 customers in over 409,000 transactions.
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 an extensive library of over
6,000 hours of proprietary, broadcast quality footage featuring over 2,000
destinations around the world.
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")
37
<PAGE>
estimates that the number of World Wide Web (the "Web") users will grow from
approximately 38 million in 1996 to approximately 170 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 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. Jupiter Communications estimates that the total
value of services and products sold over the Web by retailers, catalogers and
online merchants grew from $707 million in 1996 to approximately $2.7 billion
in 1997, and will increase to approximately $26.5 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 roundtrip
tickets, respectively), 10% for hotel reservations, 5% to 10% for 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 approximately
10% to approximately 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 approximately 8% to approximately 5%. In addition,
in a continuation of this trend, in the first half of 1998 one major airline
reduced its fixed rate commission structure for online roundtrip ticket sales
to ten dollars and a second major airline further reduced its cap on per-
roundtrip ticket commissions payable for
38
<PAGE>
online ticket sales to ten dollars. The Company expects that its weighted
average commission on online transaction revenue will decline as a result of
these reductions. 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 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 $911 million in 1997 to
$11.7 billion in 2002, representing a projected compounded annual growth rate
of 87% 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 by travel
suppliers on 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.
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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 co-branded travel Web sites with Excite and Lycos. Preview
Travel has already become one of the most widely known, used and cited online
services for travel. As of March 31, 1998, 3.4 million users had registered on
the Company's online site, and over $136 million in gross bookings of travel
services had been purchased by approximately 220,000 customers in over 409,000
transactions. According to data provided by Media Metrix, an independent Web
and online audience rating service, in February 1998, Preview Travel's service
on the Web and AOL attracted an estimated 1,750,000 unique visitors, and its
co-branded reservations service on Excite attracted an estimated 175,000
unique visitors. In addition, the Media Metrix data indicates that two of the
Company's primary travel service competitors' sites, Travelocity.com and
Expedia, received an estimated 1,046,000 million and 837,000 unique visitors,
respectively.
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
eleven million members, and with Excite and Lycos, two leading search engine
providers, the Company's travel services are prominently featured on the AOL,
Excite and Lycos travel channels and also contextually integrated throughout
the AOL, Excite and Lycos services.
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 seven days a week.
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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 round-trip 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.
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, through the Company's agreement with Fodor's, destination
information from Fodor's Gold Guides series is prominently featured in its
online areas, currently providing travel information for 87 destination sites.
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 television programs.
Enhance and Expand Strategic Relationships. The Company intends to continue
to leverage its strategic relationships with AOL, Excite, Fodor's, Lycos 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 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
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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.
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), destination information, travel
news and specials, vacation packages and contests. To use the Company's
reservation services or purchase an airline 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 Farefinder 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 purchase of an airline ticket, 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, airline tickets and itineraries are
sent to the customer at no additional charge by express delivery or through
regular mail. Upon returning from his or her trip, first time customers
automatically receive another e-mail that includes a thank-you message and a
customer satisfaction survey.
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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:
. Destination Guides. This feature, launched in February 1998, currently
provides comprehensive destination guides for 87 cities with content
from Fodor's Travel Publications. Users can access Fodor's reviews and
picks for restaurants and hotels, research information on sights and
attractions or create their own customized travel mini-guide.
. 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.
. Business Travel Center. This service, launched in February 1998, offers
access to travel information and resources of particular interest to the
small business and home office market. The center features a travel
newswire targeted to business travelers, as well as links to small-
business travel resources, hotel and restaurant finders and reservation
services.
. Travel Newswire. 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.
. 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.
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 toll-free
telephone support seven days per week 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 eleven 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 five year term of the restated
agreement, 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
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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. See "Certain Transactions" for a
description of the Company's relationship with AOL.
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 1998. Travel services sold through the AOL Network accounted for
77%, 67%, 62% and 52% of the Company's total online revenues for the three
months ended June 30, 1997, September 30, 1997, December 31, 1997 and March
31, 1998, 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, Excite and Lycos."
Excite. In September 1997, Preview Travel and Excite, a leading search
engine provider with over two million visitors a day, entered into an
agreement under which Preview Travel became the exclusive provider of travel
reservations services for Excite's Travel Channel (City.Net) in the U.S. and
on the WebCrawler Travel Channel. The agreement was amended and restated in
March 1998, permitting the Company to enter into similar arrangements with
other search engine providers and providing for the Company to continue to be
the exclusive provider of travel reservations services for the Excite Travel
Channel and to provide travel reservations services and content for the
WebCrawler Travel Channel. In addition, Preview Travel will create a co-
branded travel reservations site that will be included on all travel channels
within the Excite network, as well as travel-related content for the Excite
Travel Channel and other Excite services. Excite has agreed to promote and
advertise Preview Travel's services throughout the Excite network and to
deliver a minimum number of annual impressions within the Excite network. 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 five year
term of the agreement, 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 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. If the Company enters into
a third party Internet co-branding agreement with substantially the same scope
as its agreement with Excite and on terms which, taken as a whole, are more
favorable for such third party than the terms of the Excite agreement, then
the Company is required to offer such terms to Excite. Travel services sold
through Excite accounted for 8%, 13%, 15% and 16% of the Company's online
revenues for the three months ended June 30, 1997, September 30, 1997,
December 31, 1997 and March 31, 1998, 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, Excite and Lycos."
Lycos. In March 1998, Preview Travel and Lycos, a leading search engine
provider, entered into an agreement pursuant to which Preview Travel will be
the exclusive travel service provider of travel reservation services for
Lycos' Travel Web Guide and Travel Network. In addition, Preview Travel and
Lycos will create a co-branded Web site that will be promoted throughout the
Lycos Web site, and Lycos has agreed to deliver a minimum number of annual
impressions to promote the co-branded site. In addition, the Company is
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eligible to receive payments from Lycos representing a share of advertising
revenues received by Lycos in connection with the co-branded site; however,
there can be no assurance that such payments, if any, will be significant.
Over the two-year term of the agreement, the Company is obligated to make
minimum payments totaling $4.25 million to Lycos, as well as pay a portion of
commissions earned by the Company through the co-branded website in excess of
certain thresholds. In addition, the Company has committed to purchase an
aggregate of approximately $500,000 in advertising on Lycos' sites, which it
may resell to third parties. The Lycos arrangement is expected to represent a
significant distribution channel for the Company's travel services, and any
termination of the Company's agreement with Lycos 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, Excite and Lycos."
Fodor's. Preview Travel has entered into a nonexclusive agreement with
Fodor's Travel Publications, Inc. ("Fodor's"), a leading travel guide book
publisher, to license content from Fodor's Gold Guide series and other
guidebook series. In February 1998, the Company launched its Destinations
Guides feature created with the Fodor's content. The Destination Guides
feature is available on the Company's sites on America Online, Excite, Lycos
and the Web. Under the agreement, the Company created and operates a co-
branded Web site (www.fodors.previewtravel.com) that offers links to both
Fodor's and Preview Travel's websites. Under the terms of the agreement, the
name of the co-branded Web site will appear on the outside front covers of all
1999 Gold Guide editions. The agreement also requires that Fodor's include a
promotional page for Preview Travel in each of the 1999 and 2000 Gold Guide
editions published by Fodor's.
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, Excite,
and Lycos or that the Company will satisfy the minimum levels of travel
services bookings required to maintain the AOL and Excite agreements and
content delivery required to maintain the AOL, Excite and Lycos 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, Excite and
Lycos."
The Company is aggressively pursuing other strategic relationships for both
distribution, marketing and content that could generate additional significant
financial obligations over the next several years. There can be no assurance
that the Company will be successful in establishing such additional strategic
relationships. See "Risk Factors--Reliance on Distribution Agreements with
America Online, Excite and Lycos."
MARKETING AND SALES
Preview Travel's marketing strategy is to strengthen the Company's brand
name, enhance customer awareness, develop loyalty programs to better serve the
Company's customers, continue to add new customers to the Company's database
and pursue complementary revenue opportunities by leveraging the Company's
distribution capabilities, compelling content and extensive customer database.
The Company's sales strategy is focused in part on generating advertising and
promotional revenue from sponsors who seek a cost-effective way to reach a
travel-oriented audience online.
The Company maintains a proprietary customer database comprised of
demographic profiles, customer preferences, shopping and buying patterns and
other key customer attributes. This data enables the Company to create and
quickly implement marketing programs targeted to specific customer segments.
In addition, the Company regularly communicates with its customers through
targeted, relevant e-mail.
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, Excite and
Lycos, the Company invests in online advertising to drive traffic to its
online sites. By placing advertisements on selected high
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volume sites, as well as purchasing targeted keywords on several popular
search engines such as Yahoo!, Alta Vista, Infoseek and others, the Company
seeks to cost-effectively generate traffic to the Preview Travel online site.
The Company may also advertise from time to time in traditional media such as
print, radio and broadcast to increase the awareness of its service.
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 1,000 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 Amazon.com, AT&T, American Tourister Luggage, AVIS Rental
Car, SportsLine USA, Celebrity Cruises, Caribbean Tourism Organization, Dell
Computer and Microsoft.
TECHNOLOGY
The Company's transaction-processing system automates the processing of
customer orders, interacts with the systems of third party travel suppliers,
searches and filters travel information and provides real-time operational
reports to management. The Company has developed proprietary applications that
interact with third party systems such as GDS systems to present an integrated
easy-to-use interface to the Company's customers, accessible by either
standard Web browsers or AOL client software to access travel reservation
information and make purchases. In addition, the Company's systems support
automated e-mail communications with customers to facilitate confirmations of
orders, provide customer support, obtain customer feedback and engage in
targeted marketing programs. The Company's online sites also utilize a number
of proprietary search, screen-scraping and database tools. While the system is
built on a combination of proprietary and commercial software and hardware,
the Company seeks to utilize industry-standard technology whenever possible
and focuses its development efforts on creating and enhancing proprietary
software that is unique to its business, as well as enhancing its existing
service offerings and creating new products.
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Preview Travel maintains a relational database containing information
compiled from customer profiles, shopping patterns and sales data. The Company
has developed, and continues to develop, techniques for analyzing the
information in this database to develop targeted marketing programs, to
provide personalized and enhanced customer service and to take advantage of
short-term opportunities in the travel marketplace. The Company does not
retain credit card information from its customers and has committed to its
customers not to sell or rent customer data to third parties. The Company's
complex database was designed to be scaleable to permit large transaction
volumes with no significant software changes. In most circumstances, capacity
is increased through the addition of new servers or the addition of processing
boards to existing servers. The Company believes that the scaleability of its
architecture has been demonstrated by serving over 3.4 million registered
users since May 1996.
Internet users are linked to the Company's servers through a T3 data
communication line from the Company's Internet access provider, GeoNet
Communications, and AOL users are linked to the servers through a single T1
line. 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 continuing to do so in the 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, GeoNet Communications, any other
Internet service provider, or telecommunications 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. 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 Risk." There can be no
assurance that the Company will successfully utilize new technologies or adapt
its online sites, proprietary technology and transaction-processing systems to
customer requirements or emerging industry standards. See "Risk Factors--Rapid
Technological Change."
Substantially all of the Company's computer and communications hardware is
located at a single facility in San Francisco, California. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. The Company currently does not have redundant systems or a
formal disaster recovery plan and does not carry sufficient business
interruption insurance to compensate it for losses that may occur. Despite the
implementation of network security measures by the Company, its servers are
vulnerable to computer viruses, physical or electrical break-ins and similar
disruptions, which could lead to interruptions, delays, loss of data or the
inability to accept and confirm customer reservations. See "Risk Factors--Risk
of System Failure; Single Site."
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
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the in-flight market. NTN clients include affiliates of all major broadcast
networks in the United States and foreign broadcast, cable and satellite
networks. NTN handles program production, domestic program syndication and
media sales in-house. Revenues from the Company's television operations
accounted for 79%, 56% and 42% of total revenues for 1996 and 1997 and the
three months ended March 31, 1998, 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 55 markets throughout the United States. In addition, the
News Programming group produces fifty-minute documentaries for the sell-
through video market.
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 three other news insert series produced by third parties: Dr. Dean
Edell's Medical Reports, CNET Technology Reports and Jack Hanna's Animal
Tales. These news inserts are syndicated to local broadcast television
stations in exchange for either cash or commercial time during their local
newscasts. These local commercial time slots are packaged and sold to national
advertisers. Travel Update is syndicated to local stations in exchange for a
portion of the total commercial time within the program, which is then sold by
the Company to national advertisers. Internationally, programs are licensed
for specific uses and limited times for cash fees negotiated with the
broadcast or cable network.
The Company's ability to generate revenues from its television operations,
as well as its ability to use its television programming to promote and
enhance its online services and brand recognition, depends upon its ability to
reflect in its programming the changing tastes of consumers, news directors
and program directors, and to secure and maintain distribution for its
television programming on acceptable commercial terms through local stations,
and domestic and international cable and broadcast networks. These syndication
agreements typically have durations of one year or less, and there can be no
assurance that such stations and networks will continue to renew syndication
agreements for the Company's programs. In addition, the Company's ability to
cost-effectively update and expand its film library is essential to its
ability to continue to offer compelling content. Although the Company
maintains a back-up of the film library in offsite storage, both the film
library and the back-up library are vulnerable to damage from fire, flood,
break-ins, earthquake and similar events. Loss of access to its film library
for an extended period of time could have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Risks Associated with Television Operations."
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
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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), Cendant Corporation, TravelWeb
(operated by Pegasus), Internet Travel Network, Biztravel.com and TheTrip.com,
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, such as United Airlines,
offer travel services directly through their own Web sites, including travel
services from other travel suppliers, 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 "Risks
Factors--Competition."
PROPRIETARY RIGHTS
The Company regards its copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success,
and relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with the Company's employees,
customers, partners and others to protect its proprietary rights. The Company
pursues the registration of certain of its key trademarks and service marks in
the United States and internationally. Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which the Company's products and services are made available online. The
Company has licensed in the past, and expects that it may license in the
future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties. While the Company attempts to ensure that the
quality of its brand is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of the 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
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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 continue to strategically license certain
content for its online sites from third parties, such as it did with Fodor's,
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 REGULATION
Certain segments of the travel industry are heavily regulated by the United
States and international governments, and accordingly certain services offered
by the Company are affected by such regulations. For example, the Company is
subject to United States Department of Transportation ("DOT") regulations
prohibiting unfair and deceptive practices. In addition, DOT regulations
concerning the display and presentation of information that are currently
applicable to the GDS services accessed by the Company could be extended to
the Company in the future, as well as other laws and regulations aimed at
protecting consumers accessing online travel services or otherwise. In
California, under the Seller of Travel Act, the Company is required to
register as a seller of travel, comply with certain disclosure requirements
and participate in the State's restitution fund. The television industry is
also subject to extensive regulation at the federal, state and local levels,
including the Federal Communications Act and rules and regulations of the
Federal Communications Commission. In addition, legislative and regulatory
proposals under ongoing consideration by Congress and federal agencies may
materially affect the television industry and the Company's ability to obtain
distribution for its television programming.
The Company is also subject to regulations applicable to businesses
generally and laws or regulations directly applicable to access to online
commerce. Although there are currently few laws and regulations directly
applicable to the Internet and commercial online services, it is possible that
a number of laws and regulations may be adopted with respect to the Internet
or commercial online services covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality
of products and services. Furthermore, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies
conducting business online. The adoption of any additional laws or regulations
may decrease the growth of the Internet or commercial online services, which
could, in turn, decrease the demand for the Company's products and services
and increase the Company's cost of doing business, or otherwise have a
material adverse effect on the Company's business, operating results and
financial condition.
Moreover, the applicability to the Internet and commercial online services
of existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is 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
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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 March 31, 1998, the Company employed a total of 204 people, of whom
154 were involved in online travel service operations and 50 were involved in
television 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 Personnel."
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 and computer
and communications systems 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. In April 1998, the Company entered into a lease for
approximately 13,000 square feet in San Francisco, to which it intends to
relocate its television operations. Such lease expires in June 2003, with an
option for the Company to terminate the lease earlier in July 2001. The
Company anticipates that it will require additional space within the next 12
months, and there can be no assurance that such additional space will be
available on commercially reasonable terms, if at all.
LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the ordinary course of its business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company and their ages as of March
31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Kenneth J. Orton............ 46 President, Chief Executive Officer and
Director
James J. Hornthal........... 44 Chairman and Director
Kenneth R. Pelowski......... 38 Executive Vice President of Finance and
Administration and Chief Financial Officer
David E. Lambert............ 45 Executive Vice President and President of
Preview Travel Online, Inc.
Karen S. Askey.............. 38 Senior Vice President of Consumer Marketing
Christopher L. McAndrews.... 34 Senior Vice President of Online Media Sales
John M. Petrone............. 36 Senior Vice President of Technology
Barrie Seidenberg........... 33 Senior Vice President of Online Services
Thomas W. Cardy (1)......... 41 Director
Thomas A. Cullen (1)........ 38 Director
William R. Hearst, III...... 48 Director
Theodore J. Leonsis (2)..... 42 Director
Douglas J. Mackenzie (2).... 38 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.
Kenneth R. Pelowski joined the Company as Executive Vice President of
Finance and Administration, 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.
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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 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.
Karen S. Askey joined the Company as Senior Vice President of Consumer
Marketing in February 1998. From January 1996 to January 1998, Ms. Askey was
Vice President of Marketing and Analysis for Charles Schwab and Co.'s
Electronic Brokerage division and from 1983 to 1996 she held a series of
marketing and management positions with Charles Schwab and Co. Ms. Askey
received a B.A. degree from Stanford University and an M.B.A. degree from the
University of California, Berkeley.
Christopher L. 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 serving the
communications, entertainment and new media industries, and is currently
Executive Vice President, Entertainment and New Media at CEA. Prior to joining
CEA in 1988, Mr. Cardy was Senior Manager with Arthur Andersen & Co., a public
accounting firm. Mr. Cardy received a B.A. degree from the University of
Florida and is a certified public accountant.
Thomas A. Cullen has been a director of the Company since April 1997. Since
August 1989, Mr. Cullen has served in various senior management positions with
U S WEST, Inc., a telecommunications and media company, and, since April 1997,
he has been President of the Interactive Services Group of U S WEST Media
Group, a subsidiary of U S WEST, Inc. Mr. Cullen also serves as a director of
SportsLine USA, Inc. Mr. Cullen received a B.S.B.A. degree from Northern
Arizona University and an M.B.A. degree from the University of Colorado.
William R. Hearst, III has been a director of the Company since February
1995. Since January 1995, Mr. Hearst has served as a general partner of
Kleiner Perkins Caufield & Byers, a venture capital firm. From
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May 1995 to August 1996, 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. ("Signature"), a developer and operator of vacation
ownership resorts and has served as the Chief Operating Officer of Signature
since March 1998. 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/General Manager from 1982 through 1988 and its Vice
President of Marketing and Sales from 1980 to 1982. Mr. Noyes is also a
founder of Premier Yachts, Ltd. Mr. Noyes also serves as a director of Ball
Horticultural, Inc. and as Chairman of Grand Getaways, 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 Co-Chief Executive Officer and a director
of Schwab. He is also 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. Mr. Hearst has informed the Company that he does not intend to
stand for reelection to the Board of Directors in 1998. The officers of the
Company are appointed annually and serve at the discretion of the Board of
Directors.
BOARD OF DIRECTORS COMMITTEES
The Board of Directors also has an Audit Committee (consisting of Messrs.
Cardy and Cullen), which reviews the results and scope of the audit and other
services provided by the Company's independent accountants.
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The Company's Compensation Committee reviews and approves the compensation
and benefits for the Company's executive officers, administers the Company's
stock purchase and stock option plans and make recommendations to the Board of
Directors regarding such matters. The committee is currently composed of
Messrs. Leonsis, 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. See "Certain Relationships
and Related Transactions."
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
are eligible to participate in the Company's 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. Leonsis, Mackenzie and Pottruck, each of whom
was 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 of AOL Studios, an operating division of AOL.
Messrs. Hearst and Mackenzie are general partners of KPCB VII Associates, the
general partner of each of Kleiner Perkins Caufield & Byers VII, and KPCB
Information Sciences Zaibatsu Fund II, which collectively are a principal
stockholder of the Company (the "KPCB Funds").
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 five-year term of the agreement, 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, 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 limited partner of KPCB VII Associates.
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
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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 general partner of KPCB VII Associates. In addition, the KPCB
Funds and AOL are principal shareholders 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 terminated upon the completion of the Company's initial public
offering in November 1997.
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 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.
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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 four other
most highly compensated executive officers whose total cash compensation
exceeded $100,000 during the year ended December 31, 1997 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
------------------ ---- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Kenneth J. Orton,
President and Chief
Executive Officer...... 1997 $204,926 $20,000 120,000 $1,264
1996 157,125 25,000 30,000 1,323
James J. Hornthal,
Chairman............... 1997 170,139 15,000 25,000 1,764
1996 167,425 -- -- 1,440
Roy F. Walkenhorst,
President, News Travel
Network, Inc. (2)...... 1997 154,019 17,663 12,500 3,607
1996 123,481 41,680 3,125 2,737
John M. Petrone, Senior
Vice President of
Technology............. 1997 120,529 36,875 20,000 133
1996 95,572 47,500 10,000 --
Barrie Seidenberg,
Senior Vice President
of Online Services..... 1997 113,077 35,000 30,000 133
1996 89,217 27,500 10,000 --
</TABLE>
- ---------------------
(1) Consists of travel benefits and life insurance premiums paid by the
Company.
(2) Mr. Walkenhorst resigned from his position as President of News Travel
Network effective March 31, 1998.
57
<PAGE>
The following table shows certain information regarding stock options
granted to the Named Executive Officers during the year ended December 31,
1997. 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 OF
NUMBER 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........ 15,000 2.4% $2.60 2/25/2002 $ 10,775 $ 23,810
105,000 16.8% 2.60 6/3/2002 75,425 166,669
James J. Hornthal....... 25,000 4.0% 2.60 2/25/2002 17,958 39,683
Roy F. Walkenhorst (3).. 12,500 2.0% 8.50 9/15/2002 (2,552) 24,604
John M. Petrone......... 5,000 0.8% 2.60 1/28/2002 3,592 7,937
15,000 2.4% 8.50 9/15/2002 (3,063) 29,525
Barrie Seidenberg....... 10,000 1.6% 2.60 1/28/2002 7,183 15,873
20,000 3.2% 8.50 9/15/2002 (4,083) 39,366
</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
five-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.
(3) Mr. Walkenhorst resigned from his position as President of News Travel
Network effective March 31, 1998.
58
<PAGE>
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, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
NUMBER OF OPTIONS AT DECEMBER 31, DECEMBER 31,
SHARES VALUE 1997(#) 1997($) (2)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth J. Orton........ -- -- 121,041 148,959 $646,707 $747,168
James J. Hornthal....... -- -- 190,000 25,000 977,075 124,063
Roy F. Walkenhorst (3).. -- -- 9,191 18,308 48,818 30,369
John M. Petrone......... -- -- 27,499 42,500 146,630 144,307
Barrie Seidenberg....... -- -- 20,362 49,636 108,358 153,767
</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, 1997, minus the exercise
price, multiplied by the number of shares underlying the option.
(3) Mr. Walkenhorst resigned from his position as President of News Travel
Network effective March 31, 1998.
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.
In January 1998, Mr. Orton, Mr. Petrone and Ms. Seidenberg were granted
options to purchase 100,000, 20,000 and 20,000 shares of Common Stock,
respectively, at an exercise price of $9.25 per share, the fair market value
of the Common Stock on the date of grant. In addition, in January 1998 Mr.
Hornthal was granted an option to purchase 30,000 shares of Common Stock at an
exercise price of $13.50 per share, the fair market value of the Common Stock
on the date of grant.
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 March 31, 1998, options to purchase a total of
450,003 shares of Common Stock had been exercised, options to purchase a total
of 1,231,313 shares at a weighted average exercise price of $4.08 per share
were outstanding, and no 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 are not eligible for option grants under
the 1988 Stock Option Plan. To the extent an optionee would have the right in
any
59
<PAGE>
calendar year to exercise for the first time one or more incentive stock
options for shares having an aggregate fair market value (under all plans of
the Company and determined for each share as of the date the option to
purchase the share was granted) in excess of $100,000, any such excess options
shall be treated as nonstatutory stock options.
The 1988 Stock Option Plan is administered by the Board of Directors or a
committee of the Board of Directors (the "Administrator"). The Administrator
determines the terms of options granted under the 1988 Stock Option Plan,
including the number of shares subject to the option, exercise price, term and
exercisability. The exercise price of all incentive stock options granted
under the 1988 Stock Option Plan must be at least equal to the fair market
value of the Common Stock of the Company on the date of grant. The exercise
price of any stock option granted to an optionee who owns stock representing
more than 10% of the voting power of the Company's outstanding capital stock
(a "10% Stockholder") must equal at least 110% of the fair market value of the
Common Stock on the date of grant. The exercise price of all nonstatutory
stock options granted to persons who are not 10% Stockholders cannot be less
than 85% of the fair market value of the Common Stock of the Company on the
date of grant. Payment of the exercise price may be made in cash, delivery of
shares of the Company's Common Stock or other consideration determined by the
Administrator. The Administrator determines the term of options. The term of
an incentive stock option granted under the 1988 Stock Option Plan may not
exceed 10 years; provided, however, that the term may not exceed five years
for 10% Stockholders. No option may be transferred by the optionee other than
by will or the laws of descent or distribution. Each option may be exercised
during the lifetime of the optionee only by such optionee. Options granted to
each employee under the 1988 Stock Option Plan prior to March 1995 generally
become exercisable at the rate of 1/36th of the total number of shares subject
to the options monthly following a six-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 was approved by the
stockholders of the Company in November 1997. A total of 1,500,000 shares of
Common Stock has been reserved for issuance under the 1997 Stock Option Plan.
As of March 31, 1998, no options to purchase shares of Common Stock had been
exercised, options to purchase a total of 416,400 shares at a weighted average
exercise price of $11.76 per share were outstanding, and 1,083,600 shares
remained available for future option grants.
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
60
<PAGE>
all plans of the Company and determined for each share as of the date the
option to purchase the share was granted) in excess of $100,000, any such
excess options shall be treated as nonstatutory options.
The 1997 Stock Option Plan is administered by the Board of Directors or a
committee of the Board of Directors (the "Administrator"). The Administrator
determines the terms of options granted under the 1997 Stock Option Plan,
including the number of shares subject to the option, exercise price, term and
exercisability; provided, however, the maximum number of shares which may be
subject to options granted to any one person for any fiscal year of the
Company shall be 1,500,000. Such limitation shall not take effect until the
earliest date required under Section 162(m) of the Code. The exercise price of
all incentive stock options granted under the 1997 Stock Option Plan must be
at least equal to the fair market value of the Common Stock of the Company on
the date of grant. The exercise price of any incentive stock option granted to
an optionee who owns stock representing more than 10% of the voting power of
the Company's outstanding capital stock (a "10% Stockholder") must equal at
least 110% of the fair market value of the Common Stock on the date of grant.
The exercise price of all nonstatutory stock options cannot be less than 85%
of the fair market value of the Common Stock of the Company on the date of
grant. Payment of the exercise price may be made in cash, delivery of shares
of the Company's Common Stock or other consideration determined by the
Administrator. The Administrator determines the term of options. The term of
an incentive stock option granted under the 1997 Stock Option Plan may not
exceed 10 years; provided, however, that the term may not exceed five years
for 10% Stockholders. An option may not be transferred by the optionee other
than by will or the laws of descent or distribution, provided, however, that
the Administrator may in its discretion grant transferable nonstatutory stock
options. Each option may be exercised during the lifetime of the optionee only
by such optionee or by a permitted transferee. Options granted to each
employee under the 1997 Stock Option Plan generally become exercisable at the
rate of 25% of the total number of shares subject to the options after the
first anniversary following the date of grant, with 2.083% vesting monthly
thereafter.
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 was approved by the
stockholders of the Company in November 1997. 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 commenced on or about the date of the
Company's initial public offering and continue through July 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
61
<PAGE>
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 was approved by the stockholders in
November 1997. A total of 250,000 shares of Common Stock has been reserved for
issuance under the Directors' Plan. The Directors' Plan provides for the
automatic grant of nonstatutory stock options to nonemployee directors of 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 became effective on
the effectiveness of the registration statement relating to the Company's
initial public offering.
The Directors' Plan provides that each person who is or becomes a
nonemployee director of the Company 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. 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. 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
62
<PAGE>
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.
63
<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."
In 1997, the Company issued in a private placement transaction 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. The following
table summarizes the shares of such Series E Preferred Stock purchased by
Named Executive Officers, directors and 5% stockholders of the Company and
persons and entities associated with them in such transactions:
<TABLE>
<CAPTION>
SERIES E
PREFERRED
INVESTOR (1) STOCK
------------ ---------
<S> <C>
General Electric Capital Corporation (2)........................... 555,555
U S WEST Interactive Services, Inc. (Thomas A. Cullen) (2)......... 77,777
James J. Hornthal (2) (3).......................................... 590
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 the Hornthal Living Trust.
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 five-year term of the agreement,
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 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.
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 $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
64
<PAGE>
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 agreement was amended and restated in March 1998, permitting the Company
to enter into similar arrangements with other search engine providers and
providing for the Company to continue to be the exclusive provider of travel
reservations services for the Excite Travel Channel and to provide travel
reservations services and content for the WebCrawler Travel Channel. In
addition, Preview Travel will create a co-branded travel reservations site
that will be included on all travel channels within the Excite network, as
well as travel-related content for the Excite Travel Channel and other Excite
services. Excite has agreed to promote and advertise Preview Travel's services
throughout the Excite network and to deliver a minimum number of annual
impressions within the Excite network. 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 five year term of the agreement, 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 and Excite will cooperate in selling, and
share revenues from, advertising on the Excite Travel Channel. Vinod Khosla, a
director of Excite, is a general partner of KPCB VII Associates, the general
partner of each of Kleiner Perkins Caufield & Byers VII and KPCB Information
Sciences Zaibatsu Fund II (the "KPCB Funds") and KPCB VII Founders Fund. In
addition, the KPCB Funds and AOL are principal shareholders 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. Such warrant was
exercised in November 1997 on a net exercise basis for an aggregate of 17,181
shares. NBC is an affiliate of General Electric Capital Corporation.
In April 1998, the Company entered into an agreement with Roy Walkenhorst in
connection with Mr. Walkenhorst's resignation as President of News Travel
Network ("NTN"). Under the terms of the agreement, Mr. Walkenhorst will
continue as an employee of the Company in the position of sales representative
until September 30, 1998 and will be paid a salary of $500 per month in
connection with such services, in addition to continued vesting on stock
options during the term of his employment. In addition, the Company and Mr.
Walkenhorst entered into an agreement pursuant to which Mr. Walkenhorst will
represent on an exclusive basis the licensing of certain NTN programs and
other non-NTN programs until December 31, 1998. In connection with this
agreement, Mr. Walkenhorst will receive a percentage of the gross receipts
from the licenses associated with his representation and a non-refundable
advance of $100,000 paid against such commissions.
The Company has entered into indemnification agreements with 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.
65
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information that has been provided to the
Company with respect to beneficial ownership of shares of the Company's Common
Stock as of March 31, 1998, including all shares of Common Stock issuable upon
the exercise of outstanding options held as of such date, for (i) each person
who is known by the Company to own beneficially more than five percent of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers, and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
----------------------- NUMBER OF ----------------------
NAME AND ADDRESS NUMBER PERCENT SHARES OFFERED NUMBER PERCENT
---------------- ------------ ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Kleiner Perkins 1,231,419 10.8% -- 1,231,419 9.6%
Caufield & Byers (2)...
2750 Sand Hill Road
Menlo Park, CA 94025
William R. Hearst, III 1,231,419 10.8 -- 1,231,419 9.6
(2)....................
Douglas J. Mackenzie 1,231,419 10.8 -- 1,231,419 9.6
(2)....................
James J. Hornthal (3)... 1,130,000 9.7 79,000 1,051,000 8.0
America Online, Inc. 1,001,312 8.8 150,000 851,312 6.6
(4)....................
8619 Westwood Center
Drive
Vienna, Virginia 22182-
2285
U S WEST Interactive 932,539 8.2 -- 932,539 7.2
Services, Inc..........
9000 East Nichols
Avenue, Suite 100
Englewood, Colorado
80112
Thomas A. Cullen (5).... 932,539 8.2 -- 932,539 7.2
KLAS, Inc............... 635,456 5.6 -- 635,456 4.9
3228 Channel 8 Drive
Las Vegas, NV 89114
General Electric Capital 572,736 5.0 83,590 489,146 3.8
Corporation (6)........
60 Long Ridge Road
Stamford, CT 06927
Kenneth J. Orton (7).... 370,000 3.2 30,000 340,000 2.6
Trase Miller Solutions, 330,025 2.9 230,565 99,460 *
Inc. ..................
1220 Kensington
Oak Brook, IL 60521
Olympus Growth Fund II, 165,000 1.5 165,000 -- --
L.P. ..................
One Station Place, 4th
Floor
Metro Center
Stamford, Connecticut
06902
Entities affiliated with
Dawson Samberg 166,666 1.5 83,333 83,333 *
Capital Management Inc.
(8)....................
354 Pequot Ave.
Southport, Connecticut
06490
H&Q Preview Media 141,294 1.2 17,383 123,911 *
Investors, L.P. (9)....
One Bush Street, 18th
Floor
San Francisco,
California 94104
Lamoreaux Partners...... 133,333 1.2 133,333 -- --
1505 Bridgeway, Suite
125
Sausalito, California
94965
Leo B. and Florence 115,714 1.0 100,000 -- --
Helzel Living Trust....
5550 Redwood Road,
Suite 4
Oakland, California
94619
Roy F. Walkenhorst (10). 97,650 * 45,000 52,650 *
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
----------------------- NUMBER OF ---------------------
NAME AND ADDRESS NUMBER PERCENT SHARES OFFERED NUMBER PERCENT
---------------- ------------ ------------------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
John M. Petrone (11).... 90,000 * 10,000 80,000 *
Barrie Seidenberg (12).. 90,000 * -- 90,000 *
Theodore J. Leonsis 78,100 * -- 78,100 *
(13)...................
James E. Noyes ......... 45,974 * 30,000 15,974 *
Thomas W. Cardy (14).... 37,863 * 5,000 32,863 *
David S. Pottruck....... 22,222 * 4,000 18,222 *
Additional Selling
Stockholders (30
persons), each holding
less than 1% of the
Common Stock
outstanding prior to
the offering(15)....... 854,252 7.5 433,796 420,456 3.3
All directors and
executive officers as a
group (16 persons)
(16)................... 4,522,497 36.0 4,294,497 30.6
</TABLE>
- ---------------------
*Less than 1%.
(1) Applicable percentage of beneficial ownership is based on 11,362,927
shares of Common Stock outstanding as of March 31, 1998, together with
applicable options and warrants for such stockholder. The number of
shares beneficially owned by a person includes all shares of Common Stock
subject to options held by that person, including the unvested portions
of such options. 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.
(2) Includes 1,230,626 shares and 793 shares held by Kleiner Perkins Caufield
& Byers VII and KPCB Information Sciences Zaibatsu Fund II, respectively.
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 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.
(3) Includes options outstanding to purchase 245,000 shares, of which 197,812
are exercisable within 60 days of March 31, 1998. 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
816,616 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.
(4) Does not include 78,100 shares held by Theodore J. Leonsis, a director of
the Company. Mr. Leonsis is President of AOL Studios, an operating
division of AOL. Mr. Leonsis disclaims beneficial ownership of the shares
held by AOL.
(5) Includes 932,539 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.
(6) Includes 555,555 shares and 17,181 shares held by General Electric
Capital Corporation and NBC Multimedia, Inc., an affiliate of General
Electric Capital Corporation, respectively. The shares offered include
8,590 shares offered by NBC Multimedia, Inc.
(7) Includes options outstanding to purchase 370,000 shares, of which 137,881
are exercisable within 60 days of March 31, 1998.
67
<PAGE>
(8) Includes 147,936 shares and 18,730 shares held by Pequot Private Equity
Fund, L.P. and Pequot Offshore Private Equity Fund, L.P., respectively.
Number of shares offered includes 73,968 shares and 9,365 shares held by
Pequot Private Equity Fund, L.P. and Pequot Offshore Private Equity Fund,
L.P., respectively.
(9) H&Q Preview Media Investors, L.P. is affiliated with Hambrecht & Quist
LLC, one of the Representatives for the Underwriters.
(10) Includes options outstanding to purchase 27,500 shares, of which 10,906
are exercisable within 60 days of March 31, 1998.
(11) Includes options outstanding to purchase 90,000 shares, of which 34,373
are exercisable within 60 days of March 31, 1998.
(12) Includes options outstanding to purchase 90,000 shares, of which 27,862
are exercisable within 60 days of March 31, 1998.
(13) Does not include 1,001,312 shares held by AOL, of which shares Mr.
Leonsis disclaims beneficial ownership.
(14) Includes 20,000 shares held by Mr. Cardy, 2,500 shares held by Eugenia C.
Cardy, 15,363 shares held by Thomas W. Cardy Family Trust.
(15) Includes 111,111 shares and 52,205 shares held by Spitfire Capital
Partners, L.P. and Montgomery Associates 1992, L.P., respectively, and
11,333 shares and 5,667 shares, respectively, to be offered by such
Selling Stockholders in this offering. Each of Spitfire Capital Partners,
L.P. and Montgomery Associates 1992, L.P. are affiliated with NationsBanc
Montgomery Securities LLC, one of the Representatives for the
Underwriters.
(16) Includes options outstanding to purchase 1,192,500 shares, of which
447,895 are exercisable within 60 days of March 31, 1998. 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.
68
<PAGE>
DESCRIPTION OF CAPITAL STOCK
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 March 31, 1998, there were 11,362,927 shares of Common Stock
outstanding that were held of record by approximately 244 stockholders. There
will be 12,862,927 shares of Common Stock outstanding (assuming no exercise of
the Underwriters' over-allotment option and no exercise or conversion of
outstanding options after March 31, 1998) after giving effect to the sale of
the shares of Common Stock offered hereby.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions available to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has 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
After the offering, the holders of approximately 5,660,645 shares of Common
Stock (the "Registrable Securities") 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, that the Company use its
best efforts to register the Registrable Securities for public resale,
provided that the proposed aggregate offering price is at least $5,000,000. If
the Company registers any of its Common Stock either for its own account or
for the account of other security holders, the holders of Registrable
Securities are entitled to include their shares of Common Stock in the
registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in the offering. All fees, costs and expenses of such
registrations must be borne by the Company and all selling expenses (including
underwriting discounts, selling commissions and stock transfer taxes) relating
to Registrable Securities must be borne by the holders of the securities being
registered.
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
69
<PAGE>
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, 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 March 31, 1998, warrants to purchase 31,666 shares of Common Stock of
the Company at an aggregate exercise price of $188,994 were outstanding.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is U. S.
Stock Transfer Corporation.
LISTING
The Company's Common Stock is traded on the Nasdaq National Market under the
trading symbol "PTVL."
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding
12,862,927 shares of Common Stock, assuming no exercise of outstanding
warrants, and no exercise of options after March 31, 1998. Of these shares,
all of 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. In addition, the 2,500,000 shares sold in the Company's
initial public offering in November 1997, as well as approximately 119,500
additional shares are currently eligible to be resold immediately in the
public market.
The remaining 7,143,427 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. Beginning May 19, 1998, 180 days after the completion date
of the Company's initial public offering, upon expiration of pre-existing
lock-up agreements and lock-up agreements between the representatives of the
underwriters in the initial public offering and officers, directors and
certain stockholders of the Company, approximately 999,236 Restricted Shares
will be eligible for immediate resale without restriction under Rule 144(k)
and approximately 3,113,387 Restricted Shares will be eligible for resale
pursuant to Rule 144 under the Securities Act, subject to compliance with the
volume limitations and other restrictions under Rule 144 and, under certain
circumstances, Rule 701 under the Securities Act. In addition, following
expiration of such lock-up agreements, 483,506 Restricted Shares will become
eligible for sale at various times over a period of less than one year,
subject in some cases to volume and manner of sale limitations.
As a result of lock-up agreements (the "Lock-Up Agreements") that were
entered into between the Company's officers, directors and the Selling
Stockholders and the Underwriters in connection with this offering,
approximately 2,547,298 Restricted Shares will not be available for sale in
the public market until the expiration of the 90 day period following the
effective date of this offering. Upon expiration of the Lock-Up Agreements,
approximately 240,313 Restricted Shares will be eligible for immediate sale
without restriction under Rule 144(k) and approximately 1,464,569 Restricted
Shares will be eligible for sale pursuant to Rule 144 under the Securities
Act, subject to compliance with the volume limitations and other restrictions
under such rule. The remaining 842,416 shares will become eligible for sale at
various times over a period of less than 1 year, subject in some cases to the
volume and manner of sale limitations under Rule 144. Any early release of the
Lock-Up Agreements 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, certain holders of Common Stock have
the right to include their 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.
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
71
<PAGE>
restrictions, including the holding period requirements, contained in Rule
144. The Company has filed a registration statement on Form S-8 under the
Securities Act to register shares of Common Stock issuable under the Company's
1997 Employee Stock Purchase Plan, 1997 Directors' Stock Option Plan and 1988
and 1997 Stock Option Plans. Such registration will permit the resale of
shares so registered by non-affiliates in the public market without
restriction under the Securities Act.
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 approximately 5,660,645 shares of Common Stock (the
"Registrable Securities") 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.
72
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, Hambrecht & Quist
LLC, BancAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC and
PaineWebber Incorporated, 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..............................................
BancAmerica Robertson Stephens.....................................
NationsBanc Montgomery Securities LLC..............................
PaineWebber Incorporated...........................................
---------
Total.............................................................. 3,100,000
=========
</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' obligations 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 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 465,000
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.
73
<PAGE>
In September 1997, the Company issued an aggregate of 3,125,613 shares of
the Company's convertible Series E Preferred Stock at a per share price of
$4.50 (the "Series E Financing"). In connection with the Series E Financing,
H&Q Preview Media Investors, L.P., an affiliate of Hambrecht & Quist LLC,
purchased an aggregate of 44,444 shares of Series E Preferred Stock, which
shares were converted into 22,222 shares of the Company's Common Stock in
connection with the completion of the Company's initial public offering in
November 1997 (the "IPO"). In addition, the following affiliates of
NationsBanc Montgomery Securities LLC, purchased shares in the Series E
Financing: (i) Montgomery Associates 1992 L.P. purchased an aggregate of
104,411 shares of Series E Preferred Stock, which shares were converted into
52,206 shares of Common Stock in connection with the IPO, and (ii) Spitfire
Capital Partners, L.P. purchased and aggregate of 222,222 shares of Series E
Preferred Stock, which shares were converted into 111,111 shares of Common
Stock in connection with the IPO. All such shares of Series E Preferred Stock
were acquired by the named affiliates as part of the Series E Financing on the
same terms pursuant to which all other participants in the Series E Financing
purchased their shares of Series E Preferred Stock.
H&Q Preview Media Investors, L.P. is selling 17,000 shares of Common Stock
in this offering. In addition, Montgomery Associates 1992 L.P. and Spitfire
Capital Partners, L.P. are collectively selling 17,000 shares of Common Stock.
See "Principal and Selling Stockholders."
The executive officers and directors who are stockholders of the Company and
certain of the other stockholders of the Company, who own in the aggregate
approximately 8,716,859 shares of Common Stock, have agreed, subject to
certain exceptions, that they 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 owned
by them during the 90-day period following the effective date of this
offering. In addition, Company's officers and directors and the Selling
Stockholders, who own in the aggregate approximately 4,036,849 shares of
Common Stock, have agreed, subject to certain exceptions, that they 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 owned by them until the date 90 days following the
completion of this offering. 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 90-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.
In general, the rules of the Securities and Exchange Commission (the
"Commission") will prohibit the Underwriters from making a market in the
Company's Common Stock during the "cooling-off" period immediately preceding
the commencement of sales in this offering. The Commission has, however,
adopted exemptions from these rules that permit passive market making under
certain conditions. These rules permit an Underwriter to continue to make a
market subject to the conditions among others, that its bid not exceed the
highest bid by a market maker not connected with this offering and that its
net purchases on any one trading day not exceed prescribed limits. Pursuant to
these exemptions, certain Underwriters, selling group members (if any) or
their respective affiliates intend to engage in passive market making in the
Common Stock during the "cooling-off" period.
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 or effecting syndicate
covering transactions. 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
74
<PAGE>
on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. 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 of 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 7,885 shares of
Common Stock.
EXPERTS
The consolidated balance sheets as of December 31, 1996 and 1997 and the
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997 included in this
Prospectus have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, which report is given on the
authority of that firm as experts in accounting and auditing.
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.
75
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
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 Stockholders' 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
Stockholders of Preview Travel,
Inc.:
We have audited the accompanying consolidated balance sheets of Preview
Travel, Inc. and Subsidiaries (the Company) as of December 31, 1996 and 1997
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
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, 1996 and 1997 and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
San Francisco, California
January 28, 1998
F-2
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 6,016 $ 27,912 $ 12,477
Marketable securities.......................... -- 750 11,407
Accounts receivable, net of allowance for
doubtful accounts of $25, $40 and $40,
respectively.................................. 1,259 1,990 2,700
Other assets................................... 212 6,087 5,878
-------- -------- --------
Total current assets..................... 7,487 36,739 32,462
Film library, net of accumulated amortization
of $4,823, $3,428 and $3,699 respectively..... 2,967 2,402 2,291
Property and equipment, net of accumulated
depreciation of $2,095, $2,039 and 2,423,
respectively.................................. 2,100 3,644 3,651
-------- -------- --------
Total assets............................. $ 12,554 $ 42,785 $ 38,404
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................... $ 938 $ 2,189 $ 1,127
Accrued liabilities............................ 1,951 2,480 3,381
Deferred revenues.............................. 598 255 227
Convertible notes payable...................... 750 -- --
Current portion of notes payable and line of
credit........................................ 2,136 -- --
Current portion of capital lease obligations... 722 882 1,110
-------- -------- --------
Total current liabilities................ 7,095 5,806 5,845
Capital lease obligations, less current
portion....................................... 776 1,614 1,858
Notes payable, long term....................... 272 -- --
-------- -------- --------
Total liabilities........................ 8,143 7,420 7,703
-------- -------- --------
Commitments (Note 7)
Stockholders' equity:
Preferred Stock: 1996; $0.001 par value:
6,134,563 shares authorized, 4,322,666
shares issued and outstanding, 1997;
5,000,000 shares authorized, no shares
issued and outstanding...................... 5 -- --
Common Stock, $0.001 par value:
Authorized: 10,000,000 shares in 1996, and
50,000,000 in 1997 and 1998. Issued and
outstanding: 1,701,731 shares in 1996,
11,337,205 shares in 1997, and 11,362,927 at
March 31, 1998 (unaudited).................. 2 11 11
Additional paid-in capital..................... 19,796 61,676 61,700
Other stockholders' equity..................... 223 (539) (539)
Accumulated deficit............................ (15,615) (25,783) (30,471)
-------- -------- --------
Total stockholders' equity............... 4,411 35,365 30,701
-------- -------- --------
Total liabilities and stockholders' equity... $ 12,554 $ 42,785 $ 38,404
======== ======== ========
</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 THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Online................. $ 579 $ 2,573 $ 6,010 $ 1,496 $ 2,332
Television............. 9,564 9,801 7,634 2,023 1,683
---------- ---------- ----------- ------- -------
Total revenues........ 10,143 12,374 13,644 3,519 4,015
Costs of revenues:
Online................. 1,078 2,308 3,648 910 1,201
Television............. 8,393 7,000 5,751 1,386 1,242
---------- ---------- ----------- ------- -------
Total cost of
revenues............. 9,471 9,308 9,399 2,296 2,443
Gross profit.......... 672 3,066 4,245 1,223 1,572
Operating expenses:
Marketing and sales.... 2,687 4,373 8,668 1,335 4,393
Research and
development........... 626 1,314 1,825 405 738
General and
administrative........ 2,026 2,880 4,184 1,009 1,400
---------- ---------- ----------- ------- -------
Total operating
expenses............. 5,339 8,567 14,677 2,749 6,531
Loss from operations.. (4,667) (5,501) (10,432) (1,526) (4,959)
Interest income
(expense), net......... (264) (89) 266 21 278
---------- ---------- ----------- ------- -------
Loss before income
taxes................ (4,931) (5,590) (10,166) (1,505) (4,681)
Income tax expense...... (2) (2) (2) -- (7)
---------- ---------- ----------- ------- -------
Net loss................ $ (4,933) $ (5,592) $ (10,168) $(1,505) $(4,688)
========== ========== =========== ======= =======
Basic and diluted net
loss per share......... $ (4.02) $ (3.43) $ (3.54) $ (0.88) $ (0.41)
========== ========== =========== ======= =======
Weighted average shares
outstanding used in per
share calculation...... 1,228 1,631 2,869 1,702 11,353
========== ========== =========== ======= =======
SUPPLEMENTAL INFORMATION
(UNAUDITED) (NOTE 1)
Gross bookings.......... $ 2,043 $ 20,263 $ 80,389 $14,117 $35,890
========== ========== =========== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER ACCUMU- STOCKHOLDERS'
------------------ ------------- PAID-IN STOCKHOLDERS' LATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL EQUITY DEFICIT (DEFICIT)
--------- ------- ------ ------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995.................... 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.................. 496 1,065 1,065
Issuance of common
stock--IPO............. 2,500 3 24,616 24,619
Exercise of preferred
stock warrants......... 264 501 (504) (3)
Exercise of Series C
preferred stock
warrants............... 149 406 (4) 402
Issuance of Series E
preferred stock........ 1,563 1 13,973 13,974
Issuance of warrants... 118 118
Conversion of preferred
stock to common stock.. (6,298) (6) 6,298 6 --
Conversion of
subordinated debt to
common stock........... 341 749 749
Unearned compensation
in connection with
issuance of stock
options
(net of amortization of
$70)................... 570 (500) 70
Repayment of notes
receivable............. 255 255
Issuance of notes
receivable............. (127) (127)
Net loss............... (10,168) (10,168)
--------- ------ ------ --- ------- ----- -------- --------
Balance, December 31,
1997.................... -- -- 11,337 11 61,676 (539) (25,783) 35,365
Issuance of common
stock.................. 26 -- 63 63
Unearned compensation
in connection with
issuance of stock
options
(net of amortization of
$106).................. 36 36
Issuance costs of
common stock........... (39) (39)
Issuance of notes
receivable............. (36) (36)
Net loss............... (4,688) (4,688)
--------- ------ ------ --- ------- ----- -------- --------
Balance, March 31, 1998
(unaudited)............. -- $ -- 11,363 $11 $61,700 $(539) $(30,471) $ 30,701
========= ====== ====== === ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------------------- -----------------------
1995 1996 1997 1997 1998
------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(4,933) $(5,592) $(10,168) $(1,505) $ (4,688)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............ 671 828 1,013 214 384
Amortization of film
library................. 1,724 1,527 1,281 321 274
Loss on disposal of
property and equipment.. -- 188 -- -- --
Unearned compensation.... -- -- 70 -- 36
Charges related to
issuance of warrants.... -- 172 130 -- --
Changes in operating
assets and liabilities:
Accounts receivable..... 486 (330) (731) (82) (710)
Travel inventory........ 191 602 -- -- --
Other assets............ 215 664 (5,875) (133) 759
Accounts payable and
accrued liabilities.... (1,090) 886 1,780 (51) (161)
Deferred revenue........ 457 (222) (343) (48) (28)
------- ------- -------- ------- --------
Net cash used in
operating activities.. (2,279) (1,277) (12,843) (1,284) (4,134)
------- ------- -------- ------- --------
Cash flows from investing
activities:
Acquisition of property
and equipment............ (841) (239) (776) (136) (201)
Purchase of marketable
securities............... -- -- (750) -- (10,657)
Additions to film library. (1,072) (738) (716) (155) (163)
------- ------- -------- ------- --------
Net cash used in
investing activities.. (1,913) (977) (2,242) (291) (11,021)
------- ------- -------- ------- --------
Cash flows from financing
activities:
Proceeds from borrowings
on long-term debt........ 1,318 100 1,350 -- --
Payment of long-term debt. (2,700) (718) (3,350) (2,000) --
Proceeds from equipment
note..................... 543 -- -- -- --
Payments on equipment
note..................... -- (135) (408) (34) --
Payments on obligations
under capital leases..... (596) (623) (725) (86) (268)
Proceeds from repayment of
stockholder notes........ 77 8 254 -- --
Proceeds from issuance of
convertible bridge loans. -- 1,000 -- -- --
Proceeds from issuance of
common stock............. 37 11 72 309 27
Proceeds from issuance of
common stock--IPO, net... -- -- 24,619 -- (39)
Proceeds from issuance of
preferred stock.......... 6,160 7,562 14,487 85
Proceeds from stock
warrant exercises........ 279 1 682 -- --
------- ------- -------- ------- --------
Net cash provided
(used) by financing
activities............ 5,118 7,206 36,981 (1,726) (280)
------- ------- -------- ------- --------
Net increase
(decrease) in cash... 926 4,952 21,896 (3,301) (15,435)
Cash and cash equivalents
at beginning of period ... 138 1,064 6,016 6,016 27,912
------- ------- -------- ------- --------
Cash and cash equivalents
at end of period.......... $ 1,064 $ 6,016 $ 27,912 $2,715 $ 12,477
======= ======= ======== ======= ========
</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
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
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 primary travel service on
America Online, Inc. ("AOL") (AOL keyword: previewtravel) and co-branded
travel Web sites with Excite, Inc. ("Excite") (City.Net) and with Lycos, Inc.
("Lycos"). Through its News Travel Network, Inc. ("NTN"), Preview Travel
produces entertainment programming for broadcast and cable television and the
in-flight markets. In addition to its reservation and ticketing service, the
Company offers vacation packages, discounted and promotional fares, travel
news and destination content, including content licensed from Fodor's Travel
Publications, Inc. ("Fodor's").
Reverse Stock Split:
In November 1997, the Company completed a reincorporation of the Company in
Delaware having the effect of a 1:2 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.
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:
Online revenues consist of transaction revenues and advertising revenues.
Transaction revenues consist of commissions received from travel suppliers for
air travel, hotel rooms, car rentals and vacation packages, net of allowances
for cancellations, which are recognized upon confirmation of the reservation.
Certain travel suppliers also pay performance-based compensation, known as
overrides, which are recognized on an accrual basis once the amount has been
confirmed with the travel supplier, which generally reflects the performance
for a prior quarterly period. In addition, transaction revenues include
segment fees received from global distribution services ("GDS") suppliers.
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.
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
F-7
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
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.
Cash and Cash Equivalents:
The Company invests certain of its excess cash in debt instruments of the
U.S. Government, its agencies, and high-quality corporate issuers as well as
money market funds. All highly liquid instruments with an original maturity of
90 days or less are considered cash equivalents; those with original
maturities greater than 90 days and current maturities less than twelve months
from the balance sheet date are considered marketable securities.
Marketable Securities:
Available-for-sale securities are carried at fair value, based on quoted
market prices, with the unrealized gains or losses, net of tax, reported in
stockholders' equity. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity, both of which
are included in interest income. Realized gains and losses are recorded using
the specific identification method.
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 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 ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 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 SFAS No. 109, "Accounting
for Income Taxes," which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events
F-8
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
that have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
temporary 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.
Deferred Revenues:
Deferred revenues primarily represents prepayments by vendors for television
or online 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 two major financial institutions.
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, 1997 and for the
three months ended March 31, 1997 and March 31, 1998, revenues from one
customer approximated $5.7 million, $2.3 million, $764,000 and $124,000
respectively, and accounted for approximately 46%, 17%, 22% and 3% of total
Company revenues, respectively, and 33%, 9% and 5% of accounts receivable as
of December 31, 1996, 1997 and March 31, 1998, respectively. The majority of
contracts with this customer have subsequently been terminated.
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 approximate their fair value.
F-9
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
Recently Issued Accounting Pronouncements:
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and No. 131, "Disclosure About Segments of
an Enterprise and Required Information," (which are effective for the year
ending December 31, 1998). The Company is considering additional disclosures,
if any, which will be required by these pronouncements.
2. OTHER ASSETS:
Other assets comprise (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
-------------
<S> <C> <C>
Prepaid online distribution expense......................... $ -- $ 5,533
Other....................................................... 212 554
----- -------
$ 212 $ 6,087
===== =======
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Furniture and fixtures................................... $ 311 $ 661
Production equipment..................................... 1,782 2,255
Leasehold improvements................................... 275 497
Computer equipment....................................... 1,827 2,270
------- -------
4,195 5,683
Less accumulated depreciation and amortization........... (2,095) (2,039)
------- -------
Property and equipment, net.............................. $ 2,100 $ 3,644
======= =======
</TABLE>
Equipment under capital leases included in property and equipment amounted
to $1,264,000 (net of $1,104,000 accumulated amortization) and $2,328,000 (net
of $1,143,000 accumulated amortization) at December 31, 1996 and 1997,
respectively.
4. ACCRUED LIABILITIES:
Accrued liabilities comprise (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Accrued rent expense........................................ $ 350 $ 394
Accrued employee compensation............................... 605 1,024
Accrued sales commissions................................... 115 175
Accrued trade payables...................................... 390 557
Commission revenue share.................................... 173 56
Other....................................................... 318 274
------ ------
$1,951 $2,480
====== ======
</TABLE>
F-10
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
5. INCOME TAXES:
For the years ended December 31, 1996 and 1997, the provision for income
taxes comprised minimum state tax expense.
Deferred tax assets (liabilities) as of December 31, 1996 and 1997 comprise
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Film library........................................... $ (264) $ (149)
Property and equipment................................. 86 373
Other.................................................. 55 105
Warrants............................................... 179 27
Deferred rent.......................................... 140 157
Net operating loss carryforwards....................... 5,382 11,502
------- --------
5,578 12,015
Less valuation allowance............................... (5,578) (12,015)
------- --------
-- --
======= ========
</TABLE>
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 increased by $2,130,000
and $6,437,000 during 1996 and 1997, respectively.
The difference between the statutory rate of approximately 37% (34% federal
and 3% state, net of federal benefits) and the tax benefit of zero recorded by
the Company is primarily due to the Company's full valuation allowance against
its net deferred tax assets.
At December 31, 1997, the Company had available net operating loss
carryforwards for federal and state income tax purposes of approximately
$31,156,000 and $15,587,000, respectively. These carryforwards expire from
2002 to 2012. Due to changes in the Company's ownership in 1996 and 1997,
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.
6. NOTES PAYABLE AND LINE OF CREDIT:
Notes payable and line of credit consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- ------
<S> <C> <C>
Line of credit (1)......................................... $ -- $ --
Subordinated convertible stockholder notes payable (2)..... 750 --
Subordinated notes payable (3)............................. 2,000 --
Bank equipment note (4).................................... 407 --
------- ------
$ 3,157 $ --
Less current portion....................................... (2,885) --
------- ------
$ 272 $ --
======= ======
</TABLE>
F-11
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
- ---------------------
(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% (9.75% and 8.50% at December 31, 1996
and 1997, respectively), 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, 1996 and 1997, the Company was in compliance with these
financial covenants.
(2) In November 1997 the notes to stockholders were converted into 340,909
shares of common stock at a rate of one share per $2.20 of principal
amount of such notes with the closing of the Company's initial public
offering. The notes bore interest at the rate of 8% per annum payable
semi-annually on June 30 and December 31, starting June 30, 1995.
(3) Subordinated notes payable to various stockholders, trusts and
partnerships at December 31, 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 was payable in equal monthly payments of $11,300
plus interest at 2% over bank's prime rate (8.25% and 8.50% at December
31, 1996 and 1997, respectively) through December 1999. The note was paid
in full October 1997.
7. COMMITMENTS AND CONTINGENCIES:
The Company leases its office space under a non-cancelable 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 operating and capital leases
are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
<S> <C> <C>
12 months ending December 31:
1998..................................................... $ 473 $1,107
1999..................................................... 536 969
2000..................................................... 580 645
2001..................................................... 300 181
------ ------
Total minimum lease payments............................... $1,889 2,902
======
Less amounts representing interest......................... 406
------
Present value of minimum lease payments.................... $2,496
======
</TABLE>
Total rent expense for office space was $479,000, $457,000, $107,000 and
$124,000 for 1996, 1997 and the three months ended March 31, 1997 and 1998,
respectively.
F-12
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
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 made aggregate payments to AOL and Excite totaling $8.5
million in 1997, and is obligated to make aggregate and payments to AOL and
Excite totalling $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.
In March 1998, the Company entered into an agreement with Lycos, a search
engine provider, for distribution and promotion of the Company's online travel
services. Over the two-year term of the agreement, the Company is obligated to
make minimum payments totaling $4.25 million, as well as a portion of
commissions earned by the Company under the agreement in excess of certain
thresholds. In addition, the Company has committed to purchase an aggregate of
approximately $500,000 in advertising on Lycos' sites, which it may resell to
third parties.
8. PREFERRED STOCK:
In November 1997 all 6,033,686 shares of Series A, B, C, D and E preferred
stock were converted on a one to one basis into common stock of the Company.
In November 1997 the stockholders of the Company approved an amendment to
the Company's certificate of incorporation authorizing 5,000,000 shares of
undesignated preferred stock of which the Board of Directors has the authority
to issue and to determine the rights, preferences and privileges.
9. STOCK WARRANTS:
At December 31, 1997, warrants to purchase 31,666 shares of common stock of
the Company were outstanding at an aggregate exercise price of $188,994,
expiring in November 2002 and in December 2005.
10. OTHER STOCKHOLDERS' EQUITY:
Other stockholders' equity comprise the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Unearned compensation..................................... $ -- $ (500)
Stockholder notes receivable.............................. (234) (106)
Stock warrants............................................ 457 67
------ ------
$ 223 $ (539)
====== ======
</TABLE>
Stockholder notes receivable represent the amounts due from stockholders in
exchange for the 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. The receivables are collateralized by
a pledge of a portion of the underlying common stock issued.
F-13
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
11. STOCK OPTION PLAN:
In 1988, the stockholders of the Company approved the 1988 Stock Option Plan
(the "1988 Plan"), which, as amended, authorized 1,681,750 shares of the
Company's common stock as available for the granting of options. Under the
1988 Plan, 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
four years.
In November 1997, the stockholders of the Company approved the 1997 Stock
Option Plan (the "1997 Plan"), which authorized an additional 1,500,000 shares
of the Company's common stock as available for the granting of options with
terms and conditions substantially similar to those of the 1988 Plan.
In November 1997, the stockholders of the Company approved the 1997
Directors' Stock Option Plan (the "1997 Directors' Plan"), which authorized an
additional 250,000 shares of the Company's common stock as available for the
granting of options. Options granted under the 1997 Directors' Plan are
nonstatutory options and will be issued at 100% of fair market value at the
time of grant. Options granted become exercisable over four years. The 1997
Directors' Plan calls for an initial grant of shares for each new non-employee
member of the Board of Directors in addition to an automatic annual grant
thereafter.
At December 31, 1996 and 1997, 1,306,750 and 2,382,330 shares of common
stock, respectively, were reserved for the exercise of stock options.
The following table summarizes activity under the Company's stock option
plans for the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
NUMBER AGGREGATE WEIGHTED
OF SHARES OPTION PRICE PRICE AVERAGE
(THOUSANDS) PER SHARE (THOUSANDS) EXERCISE PRICE
----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
January 1, 1995........ 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............... 658 $2.60 - $9.94 3,978 6.05
Exercised............. (65) $1.20 - $2.60 (140) 2.15
Terminated............ (27) $1.20 - $2.60 (64) 2.37
----- ----- ----- ------ -----
Options outstanding at
December 31, 1997...... 1,301 $2.00 - $9.94 $5,440 $4.18
===== ===== ===== ====== =====
</TABLE>
At December 31, 1997, options to purchase 465,504 shares of common stock
were exercisable. At December 31, 1996 and 1997, 212,698 shares and 1,706,600
shares, respectively, remain available for issuance.
F-14
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- --------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT 12/31/97 CONTRACTUAL LIFE EXERCISE AT 12/31/97 EXERCISE
EXERCISE PRICES (THOUSANDS) (YEARS) PRICE (THOUSANDS) PRICE
- --------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.00--$2.40 368 7.46 $2.24 244 $2.22
$2.42--$2.60 495 8.30 $2.53 222 $2.45
$6.50--$9.94 438 9.76 $7.77 -- --
----- ---
1,301 466
===== ===
</TABLE>
The following information concerning the Company's stock option plans is
provided in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for such plans in accordance with APB No.
25, "Accounting for Stock Issued to Employees."
The fair value of each option grant has been estimated on the date of grant
using the minimum value method for all years ended prior to the initial public
offering, and subsequently through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the minimum value method in 1996 and the Black-
Scholes option pricing model in 1997 with the following weighted average
assumptions used for grants in 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Risk-free interest rate.................................... 6.15% 7.00%
Expected volatility........................................ 0% 50%
Expected life.............................................. 5 years 5 years
Dividends.................................................. 0 0
</TABLE>
The weighted average fair value per option granted in 1996 and 1997 was
$0.64 and $4.46, respectively.
The following pro forma net loss and loss per share information has been
prepared as if the Company had followed the provisions of SFAS No. 123 (in
thousands except per share data):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Net loss:
As reported.......................................... $(5,592) $(10,168)
Pro forma............................................ $(5,732) $(10,901)
Basic and diluted net loss per share:
As reported.......................................... $ (3.43) $ (3.54)
Pro forma............................................ $ (3.51) $ (3.80)
</TABLE>
F-15
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
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.
In connection with the completion in November 1997 of the Company's initial
public offering, certain options granted in 1997 have been considered to be
compensatory. Compensation associated with such options as of December 31,
1997 amounted to $570,000. Of that amount, $70,000 has been charged to
operations in the year ended December 31, 1997 and $500,000 will be charged to
operations over the remaining period to 2001.
In November 1997, the stockholders of the Company approved the 1997 Employee
Stock Purchase Plan (the "ESPP") and reserved 500,000 shares of common stock
for sale to employees at a price no less than 85% of the lower of the fair
market value of the common stock at the beginning of the two-year offering
period or the end of each of the six-month purchase periods.
12. 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 1995,
1996 or 1997.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the years ended December 31, 1996 and 1997, the Company made cash
payments for interest of approximately $260,000 and $168,000, respectively,
and state franchise taxes of $2,400 for both years.
The following noncash investing and financing transactions occurred during
the years ended December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1996 1997 1997 1998
------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Property and equipment obtained through
capital leases.......................... $1,039 $1,721 $339 $190
====== ====== ==== ====
Common stock issued for notes and
interest receivable..................... $ 234 $ 128 $ 5 $ 36
====== ====== ==== ====
Common stock issued for services......... $ -- $ 46 $ -- $ --
====== ====== ==== ====
Series E preferred stock issued upon
conversion of bridge loans.............. $1,000 $ -- $ -- $ --
====== ====== ==== ====
Common stock issued upon conversion of
notes payable........................... $ -- $ 750 $ -- $ --
====== ====== ==== ====
Unearned compensation in connection with
the issuance of stock options........... $ -- $ 570 $ -- $ --
====== ====== ==== ====
</TABLE>
14. RELATED PARTY TRANSACTION:
During the years ended December 31, 1996 and 1997, the Company recorded
$2,143,000 and $3,595,000, respectively, of online revenues pursuant to an
agreement with AOL, a stockholder of the Company. The Company also recorded
marketing expenses of $108,000 and $2,631,000 for services in connection with
the agreement during 1996 and 1997, respectively.
F-16
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED.)
15. EARNINGS PER SHARE (EPS) DISCLOSURES:
In accordance with the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," a reconciliation of the numerator and
denominator of basic and diluted EPS is provided as follows (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -----------------------
1995 1996 1997 1997 1998
------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator--Basic and
Diluted EPS
Net loss................. $(4,933) $(5,592) $(10,168) $(1,505) $(4,688)
======= ======= ======== ======= =======
Denominator--Basic and
Diluted EPS
Weighted average common
stock outstanding....... 1,228 1,631 2,869 1,702 11,353
======= ======= ======== ======= =======
Basic and diluted earnings
per share................. $ (4.02) $ (3.43) $ (3.54) $ (0.88) $ (0.41)
======= ======= ======== ======= =======
</TABLE>
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, toll-free
customer service seven days a week 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 OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 20
Price Range of Common Stock............................................... 20
Dividend Policy........................................................... 20
Capitalization............................................................ 21
Dilution.................................................................. 22
Selected Consolidated Financial Data...................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 37
Management................................................................ 52
Certain Relationships and Related Transactions............................ 64
Principal and Selling Stockholders........................................ 66
Description of Capital Stock.............................................. 69
Shares Eligible for Future Sale........................................... 71
Underwriting.............................................................. 73
Legal Matters............................................................. 75
Experts................................................................... 75
Additional Information.................................................... 75
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,100,000 SHARES
[LOGO OF PREVIEW TRAVEL, INC.]
PREVIEW TRAVEL, INC.
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
BANCAMERICA
ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY
SECURITIES LLC
PAINEWEBBER INCORPORATED
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
SEC Registration Fee.................................................. $ 41,262
NASD Filing Fee....................................................... 14,487
Nasdaq Listing Fee.................................................... 17,500
Printing Fees and Expenses............................................ 150,000
Legal Fees and Expenses............................................... 150,000
Accounting Fees and Expenses.......................................... 50,000
Blue Sky Fees and Expenses............................................ 5,000
Transfer Agent and Registrar Fees..................................... 10,000
Miscellaneous......................................................... 61,751
--------
Total............................................................... $500,000
========
</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 March 31, 1995, 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 exchanged shares of its capital stock for the outstanding
shares of capital stock of Preview Travel, Inc., a California
corporation.
(2) As of December 31, 1997, an aggregate of 424,398 shares of Common
Stock had been issued upon exercise of options under the Registrant's
1988 Stock Option Plan.
II-1
<PAGE>
(3) 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.
(4) 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.
(5) In January 1997, the Registrant issued Series C Preferred Stock upon
exercise of warrants held by 13 holders for an aggregate exercise
price of $415,000. Such shares of Series C Preferred Stock are
convertible into an aggregate of 148,214 shares of Common Stock.
(6) 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 December 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; (B) 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; and (C) in January 1995, a
warrant to purchase shares of 160,000 shares of Common Stock for an
aggregate purchase price of $352,000.
(7) 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
$105,000.
(8) 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)(8) 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>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<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.
3.3* Form of Amended and Restated Certificate of Incorporation of the
Registrant.
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.
10.15* Amendment No. 2 to the Third Amended and Restated Registration
Rights Agreement, dated November 17, 1997, by and among the
Registrant and certain holders of the Registrant's capital stock.
10.16**++ Agreement, dated as of March 15, 1998, between the Registrant and
Lycos, Inc.
10.17**++ Restated and Amended Excite Agreement, dated as of March 12, 1998,
between the Registrant and Excite, Inc.
10.18 Sublease, dated as of April 7, 1998, by and between the Company and
CNET, Inc.
10.19 Employment Transition Agreement effective as of April 1, 1998, by
and between the Company and Roy F. Walkenhorst.
10.20 Television Program Representation Agreement effective as of January
1, 1998, by and between the Company and Roy F. Walkenhorst.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* Incorporated herein by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (Commission File No. 333-37183)
II-3
<PAGE>
** Incorporated herein by reference to the exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain information in these exhibits.
++Confidential treatment requested.
(b) Financial Statement Schedules
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 April 16, 1998.
PREVIEW TRAVEL, INC.
/s/ Kenneth J. Orton
By:
-----------------------------------
KENNETH J. ORTON, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT ON FORM S-1 HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
/s/ Kenneth J. Orton President, Chief April 16, 1998
- ------------------------------------- Executive Officer
(KENNETH J. ORTON) and Director
/s/ Kenneth R. Pelowski Executive Vice April 16, 1998
- ------------------------------------- President, Finance
(KENNETH R. PELOWSKI) and Administration,
and Chief Financial
Officer (Principal
Financial Officer)
/s/ Bruce Carmedelle Vice President and April 16, 1998
- ------------------------------------- Corporate
(BRUCE CARMEDELLE) Controller
(Principal
Accounting Officer)
* Chairman and April 16, 1998
- ------------------------------------- Director
(JAMES J. HORNTHAL)
* Director April 16, 1998
- -------------------------------------
(THOMAS W. CARDY)
* Director April 16, 1998
- -------------------------------------
(THOMAS A. CULLEN)
II-5
<PAGE>
SIGNATURE CAPACITY DATE
* Director April 16, 1998
- ------------------------------------
(WILLIAM R. HEARST, III)
* Director April 16, 1998
- ------------------------------------
(THEODORE J. LEONSIS)
* Director April 16, 1998
- ------------------------------------
(DOUGLAS J. MACKENZIE)
* Director April 16, 1998
- ------------------------------------
(JAMES E. NOYES)
* Director April 16, 1998
- ------------------------------------
(DAVID S. POTTRUCK)
/s/ Kenneth J. Orton
*By:________________________________
ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<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.
3.3* Form of Amended and Restated Certificate of Incorporation of the
Registrant.
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.
10.15* Amendment No. 2 to the Third Amended and Restated Registration
Rights Agreement, dated November 17, 1997, by and among the
Registrant and certain holders of the Registrant's capital stock.
10.16**++ Agreement, dated as of March 15, 1998, between the Registrant and
Lycos, Inc.
10.17**++ Restated and Amended Excite Agreement, dated as of March 12, 1998,
between the Registrant and Excite, Inc.
10.18 Sublease, dated as of April 7, 1998, by and between the Company and
CNET, Inc.
10.19 Employment Transition Agreement effective as of April 1, 1998, by
and between the Company and Roy F. Walkenhorst.
10.20 Television Program Representation Agreement effective as of January
1, 1998, by and between the Company and Roy F. Walkenhorst.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* Incorporated herein by reference to the exhibit filed with the
Registrant's Registration Statement on Form S-1 (Commission File No. 333-
37183)
** Incorporated herein by reference to the exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain information in these exhibits.
++Confidential treatment requested.
<PAGE>
Exhibit 1.1
PREVIEW TRAVEL, INC.
3,100,000 SHARES(1)
COMMON STOCK
------------
UNDERWRITING AGREEMENT
----------------------
April __, 1998
HAMBRECHT & QUIST LLC
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
PAINEWEBBER INCORPORATED
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Preview Travel, Inc., a Delaware corporation (herein called the "Company"),
proposes to issue and sell 1,500,000 shares of its authorized but unissued
Common Stock, $0.001 par value (herein called the "Common Stock"), and the
stockholders of the Company named in Schedule II hereto (herein collectively
called the "Selling Securityholders") propose to sell an aggregate of 1,600,000
shares of Common Stock of the Company (said 3,100,000 shares of Common Stock
being herein called the "Underwritten Stock"). The Company proposes to grant to
the Underwriters (as hereinafter defined) an option to purchase up to 465,000
additional shares of Common Stock (herein called the "Option Stock" and with the
Underwritten Stock herein collectively called the "Stock"). The Common Stock is
more fully described in the Registration Statement and the Prospectus
hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the "Underwriter," which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the
----------------------
Securities and Exchange Commission (herein called the "Commission") a
registration statement on Form S-1 (No. 333-49631), including the related
preliminary prospectus, for the registration under the Securities Act of 1933,
as amended (herein called the "Securities Act") of the Stock. Copies of such
registration statement and of each amendment thereto, if any, including the
related preliminary prospectus (meeting the requirements of Rule 430A of the
rules and regulations of the Commission) heretofore filed by the Company with
the Commission have been delivered to you.
- --------------
(1) Plus an option to purchase from the Company up to 465,000 additional
shares to cover over-allotments.
<PAGE>
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective,
and any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a "Rule
462(b) registration statement"), and, in the event of any amendment thereto
after the effective date of such registration statement (herein called the
"Effective Date"), shall also mean (from and after the effectiveness of such
amendment) such registration statement as so amended (including any Rule
462(b) registration statement). The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Stock first filed with the
Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is
required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall
also mean (from and after the filing with the Commission of such supplement or
the effectiveness of such amendment) such prospectus as so supplemented or
amended. The term Preliminary Prospectus as used in this Agreement shall mean
each preliminary prospectus included in such registration statement prior to
the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
-------------------------------------------------------------
SECURITYHOLDERS.
- ---------------
A. Each of Kenneth J. Orton and James J. Hornthal (the "Affiliated
Selling Securityholders") and the Company hereby represents and warrants as
follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect on
the business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole).
(ii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business,
other than as set forth in the Registration Statement and the Prospectus, and
since such dates, except in the ordinary course of business, neither the Company
nor any of its subsidiaries has entered into any material transaction not
referred to in the Registration Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply,
and on the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on the
Effective Date the Prospectus did not and, on the Closing Date and any later
date on which Option Stock is to be purchased, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were
<PAGE>
made, not misleading; provided, however, that none of the representations and
warranties in this subparagraph (iii) shall apply to statements in, or
omissions from, the Registration Statement or the Prospectus made in reliance
upon and in conformity with information herein or otherwise furnished in
writing to the Company by or on behalf of the Underwriters for use in the
Registration Statement or the Prospectus.
(iv) The Stock is duly and validly authorized, is (or, in
the case of shares of the Stock to be sold by the Company, will be, when issued
and sold to the Underwriters as provided herein) duly and validly issued, fully
paid and nonassessable and conforms to the description thereof in the
Prospectus. No further approval or authority of the stockholders or the Board
of Directors of the Company will be required for the transfer and sale of the
Stock to be sold by the Selling Securityholders or the issuance and sale of the
Stock as contemplated herein.
(v) Except as disclosed in the Prospectus, the Company and
each of its subsidiaries owns or possesses adequate licenses or other rights to
use all patents, copyrights, trademarks, service marks, trade names, technology
and know-how necessary (in any material respect) to conduct its business in the
manner described in the Prospectus and, except as disclosed in the Prospectus,
neither the Company nor any of its subsidiaries has received any notice of
infringement or conflict with (and neither the Company nor any of its
subsidiaries knows of any infringement or conflict with) asserted rights of
others with respect to any patents, copyrights, trademarks, service marks, trade
names, technology or know-how which could result in any material adverse effect
upon the Company and its subsidiaries, taken as a whole; and, except as
disclosed in the Prospectus, the discoveries, inventions, products or processes
of the Company and its subsidiaries referred to in the Prospectus do not, to the
best knowledge of the Company or any of its subsidiaries, infringe or conflict
with any right or patent of any third party, or any discovery, invention,
product or process which is the subject of a patent application filed by any
third party, known to the Company or any of its subsidiaries which could have a
material adverse effect on the Company and its subsidiaries, taken as a whole.
(vi) No consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation of the
transactions contemplated herein, except such as have been obtained under the
Securities Act and such as may be required under state securities or blue sky
laws in connection with the purchase and distribution of the Stock by the
Underwriters.
(vii) The Stock to be sold by the Selling Securityholders is
listed and duly admitted to trading on the Nasdaq National Market, and prior to
the Closing Date the Stock to be issued and sold by the Company will be
authorized for listing by the Nasdaq National Market upon official notice of
issuance.
(b) Each of the Selling Securityholders hereby represents and
warrants as follows:
(i) Such Selling Securityholder has good and marketable
title to all the shares of Stock to be sold by such Selling Securityholder
hereunder, free and clear of all liens, encumbrances, equities, security
interests and claims whatsoever, with full right and authority to deliver the
same hereunder, subject, in the case of each Selling Securityholder, to the
rights of __________, as Custodian (herein called the "Custodian"), and that
upon the delivery of and payment for such shares of the Stock hereunder, the
several Underwriters will receive good and marketable title thereto, free and
clear of all liens, encumbrances, equities, security interests and claims
whatsoever.
(ii) Certificates in negotiable form for the shares of the
Stock to be sold by such Selling Securityholder have been placed in custody
under a Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Securityholder specifically agrees that the shares of the Stock
represented by the certificates so held in custody for such Selling
Securityholder are
3
<PAGE>
subject to the interests of the several Underwriters and the Company, that the
arrangements made by such Selling Securityholder for such custody, including
the Power of Attorney provided for in such Custody Agreement, are to that
extent irrevocable, and that the obligations of such Selling Securityholder
shall not be terminated by any act of such Selling Securityholder or by
operation of law, whether by the death or incapacity of such Selling
Securityholder (or, in the case of a Selling Securityholder that is not an
individual, the dissolution or liquidation of such Selling Securityholder) or
the occurrence of any other event; if any such death, incapacity, dissolution,
liquidation or other such event should occur before the delivery of such
shares of the Stock hereunder, certificates for such shares of the Stock shall
be delivered by the Custodian in accordance with the terms and conditions of
this Agreement as if such death, incapacity, dissolution, liquidation or other
event had not occurred, regardless of whether the Custodian shall have
received notice of such death, incapacity, dissolution, liquidation or other
event.
(iii) Such Selling Securityholder has reviewed the Registration
Statement and Prospectus and, although such Selling Securityholder has not
independently verified the accuracy or completeness of all the information
contained therein, nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that on
the Effective Date, the Registration Statement contained any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading;
and, on the Effective Date the Prospectus contained and, on the Closing Date,
contains any untrue statement of a material fact or omitted or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
-----------------------------------------
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
1,500,000 shares of the Underwritten Stock to the several Underwriters, each
Selling Securityholder agrees to sell to the several Underwriters the number of
shares of the Underwritten Stock set forth in Schedule II opposite the name of
such Selling Securityholder, and each of the Underwriters agrees to purchase
from the Company and the Selling Securityholders the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the Company
and the Selling Securityholders and purchased by the several Underwriters shall
be $___ per share. The obligation of each Underwriter to the Company and each of
the Selling Securityholders shall be to purchase from the Company and the
Selling Securityholders that number of shares of the Underwritten Stock which
represents the same proportion of the total number of shares of the Underwritten
Stock to be sold by each of the Company and the Selling Securityholders pursuant
to this Agreement as the number of shares of the Underwritten Stock set forth
opposite the name of such Underwriter in Schedule I hereto represents of the
total number of shares of the Underwritten Stock to be purchased by all
Underwriters pursuant to this Agreement, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of shares of the Underwritten Stock
specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail
or refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Sections 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or the Selling Securityholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice to
purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter or
Underwriters and upon the terms herein set forth, all or any part of the shares
of the Stock which such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail so to make such arrangements
with respect to all such shares and portion, the number of shares of the Stock
which each
4
<PAGE>
non-defaulting Underwriter is otherwise obligated to purchase under this
Agreement shall be automatically increased on a pro rata basis to absorb the
remaining shares and portion which the defaulting Underwriter or Underwriters
agreed to purchase; provided, however, that the non-defaulting Underwriters
shall not be obligated to purchase the shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of such
shares of the Stock exceeds 10% of the total number of shares of the Stock
which all Underwriters agreed to purchase hereunder. If the total number of
shares of the Stock which the defaulting Underwriter or Underwriters agreed to
purchase shall not be purchased or absorbed in accordance with the two
preceding sentences, the Company and the Selling Securityholders shall have
the right, within 24 hours next succeeding the 24-hour period above referred
to, to make arrangements with other underwriters or purchasers satisfactory to
you for purchase of such shares and portion on the terms herein set forth. In
any such case, either you or the Company and the Selling Securityholders shall
have the right to postpone the Closing Date determined as provided in Section
5 hereof for not more than seven business days after the date originally fixed
as the Closing Date pursuant to said Section 5 in order that any necessary
changes in the Registration Statement, the Prospectus or any other documents
or arrangements may be made. If neither the non-defaulting Underwriters nor
the Company and the Selling Securityholders shall make arrangements within the
24-hour periods stated above for the purchase of all the shares of the Stock
which the defaulting Underwriter or Underwriters agreed to purchase hereunder,
this Agreement shall be terminated without further act or deed and without any
liability on the part of the Company or the Selling Securityholders to any non-
defaulting Underwriter and without any liability on the part of any non-
defaulting Underwriter to the Company or the Selling Securityholders. Nothing
in this paragraph (b), and no action taken hereunder, shall relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 525,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
------------------------
(a) The terms of the initial public offering by the Underwriters
of the Stock to be purchased by them shall be as set forth in the Prospectus.
The Underwriters may from time to time change the public offering price after
the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.
(b) The information set forth in the penultimate paragraph on
the inside front cover page and under "Underwriting" in the Registration
Statement, any Preliminary Prospectus and the Prospectus relating to the Stock
filed by the Company (insofar as such information relates to the Underwriters)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in the Registration Statement, any Preliminary Prospectus, and the
Prospectus, and you on behalf of the respective Underwriters represent and
warrant to the Company that the statements made therein are correct.
5
<PAGE>
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
-------------------------------------
(a) Delivery of certificates for the shares of the Underwritten
Stock and the Option Stock (if the option granted by Section 3(c) hereof shall
have been exercised not later than 7:00 A.M., San Francisco time, on the date
two business days preceding the Closing Date), and payment therefor, shall be
made at the office of Venture Law Group, 2800 Sand Hill Road, Menlo Park,
California, 94025, at 7:00 a.m., San Francisco time, on the [fourth] business
day after the date of this Agreement, or at such time on such other day, not
later than seven full business days after such [fourth] business day, as shall
be agreed upon in writing by the Company, the Selling Securityholders and you.
The date and hour of such delivery and payment (which may be postponed as
provided in Section 3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be
exercised after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of certificates for the shares of Option
Stock, and payment therefor, shall be made at the office of Venture Law Group,
2800 Sand Hill Road, Menlo Park, California, 94025, at 7:00 a.m., San Francisco
time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall
be made to the Company or its order, and payment for the Stock purchased from
the Selling Securityholders shall be made to the Custodian, for the account of
the Selling Securityholders, in each case by one or more certified or official
bank check or checks in same day funds. Such payment shall be made upon
delivery of certificates for the Stock to you for the respective accounts of the
several Underwriters against receipt therefor signed by you. Certificates for
the Stock to be delivered to you shall be registered in such name or names and
shall be in such denominations as you may request at least one business day
before the Closing Date, in the case of Underwritten Stock, and at least one
business day prior to the purchase thereof, in the case of the Option Stock.
Such certificates will be made available to the Underwriters for inspection,
checking and packaging at the offices of Lewco Securities Corporation, 2
Broadway, New York, New York 10004 on the business day prior to the Closing Date
or, in the case of the Option Stock, by 3:00 p.m., New York time, on the
business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
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Each of the Company and the Selling Securityholders respectively covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy or to which you shall have reasonably objected in
writing or which is not in compliance with the Securities Act or the rules and
regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the
event of (i) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional information,
(ii) the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement, (iii) the institution or notice of
intended institution of any action or proceeding for that purpose, (iv) the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Stock for sale in any jurisdiction, or (v) the receipt by
it of notice of the initiation or threatening of any proceeding for such
purpose. The
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Company and the Selling Securityholders will make every reasonable effort to
prevent the issuance of such a stop order and, if such an order shall at any
time be issued, to obtain the withdrawal thereof at the earliest possible
moment.
(c) The Company will (i) on or before the Closing Date, deliver
to you a signed copy of the Registration Statement as originally filed and of
each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the
initial public offering of the Stock by the Underwriters and during such period,
the Underwriters shall propose to vary the terms of offering thereof by reason
of changes in general market conditions or otherwise, you will advise the
Company in writing of the proposed variation, and, if in the opinion either of
counsel for the Company or of counsel for the Underwriters such proposed
variation requires that the Prospectus be supplemented or amended, the Company
will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus setting forth such variation. The Company
authorizes the Underwriters and all dealers to whom any of the Stock may be sold
by the several Underwriters to use the Prospectus, as from time to time amended
or supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in
the qualification of the Stock for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, in keeping such qualifications in good standing under said securities or
blue sky laws; provided, however, that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
Stock.
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(g) During a period of five years commencing with the date
hereof, the Company will furnish to you, and to each Underwriter who may so
request in writing, copies of all periodic and special reports furnished to
stockholders of the Company and of all information, documents and reports filed
with the Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company and the Selling Securityholders jointly and
severally agree to pay all costs and expenses incident to the performance of
their obligations under this Agreement, including all costs and expenses
incident to (i) the preparation, printing and filing with the Commission and the
National Association of Securities Dealers, Inc. ("NASD") of the Registration
Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to
the Underwriters of copies of any Preliminary Prospectus and of the several
documents required by paragraph (c) of this Section 6 to be so furnished, (iii)
the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v)
the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees. The
Selling Securityholders will pay any transfer taxes incident to the transfer to
the Underwriters of the shares the Stock being sold by the Selling
Securityholders.
(j) The Company and the Selling Securityholders jointly and
severally agree to reimburse you, for the account of the several Underwriters,
for blue sky fees and related disbursements (including counsel fees and
disbursements and cost of printing memoranda for the Underwriters) paid by or
for the account of the Underwriters or their counsel in qualifying the Stock
under state securities or blue sky laws and in the review of the offering by the
NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Securityholders hereby agree to pay and shall
not affect any agreement which the Company and the Selling Securityholders may
make, or may have made, for the sharing of any such expenses and costs.
(l) The Company and each of the Selling Securityholders hereby
agrees that, without the prior written consent of Hambrecht & Quist LLC on
behalf of the Underwriters, the Company or such Selling Securityholder, as the
case may be, will not, for a period of 90 days following the commencement of the
public offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) shares of Common Stock issued by the Company pursuant to the
Option Plans or pursuant to currently outstanding contractual obligations,
options, warrants or similar rights, all as described in the Preliminary
Prospectus, (C) shares of Common Stock and securities convertible into or
exchangeable for Common Stock issues in connection with corporate partnerships
and other collaborative arrangements entered into by the Company; provided that
such corporate partner or collaborator will be bound by and subject to the
restrictions set forth in this Section 6(l) for the remainder of such 90 day
period, and (D) options to purchase Common Stock granted under the Option Plans.
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(m) The Company agrees to use its best efforts to cause all
directors, officers, and beneficial holders of more than 5% of the outstanding
Common Stock stockholders to agree that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will
not, for a period of 90 days following the commencement of the public offering
of the Stock by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
(n) The Company is familiar with the Investment Company Act of
1940, as amended, and, to the best of the Company's knowledge, has in the past
conducted its affairs, and will take such reasonable steps in the future as
shall be necessary to ensure that the Company was not and will not be an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.
7. INDEMNIFICATION AND CONTRIBUTION.
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(a) Subject to the provisions of paragraph (f) of this Section
7, the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls any Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Securities Exchange
Act of 1934, as amended (herein called the "Exchange Act"), or the common law or
otherwise, and the Company and the Selling Securityholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
and the Selling Securityholders contained in this paragraph (a) shall not apply
to any such losses, claims, damages, liabilities or expenses if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, (2) the indemnity agreement contained in this paragraph (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented)
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unless the failure is the result of noncompliance by the Company with
paragraph (c) of Section 6 hereof, and (3) each Selling Securityholder (other
than the Affiliated Selling Securityholders) shall only be liable under this
paragraph with respect to (A) information pertaining to such Selling
Securityholder furnished by or on behalf of such Selling Securityholder
expressly for use in any Preliminary Prospectus or the Registration Statement
or the Prospectus or any such amendment thereof or supplement thereto or (B)
facts that would constitute a breach of any representation or warranty of such
Selling Securityholder set forth in Section 2(b) hereof. The indemnity
agreements of the Company and the Selling Securityholders contained in this
paragraph (a) and the representations and warranties of the Company and the
Selling Securityholders contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration Statement
on his own behalf or pursuant to a power of attorney, each of its directors,
each other Underwriter and each person (including each partner or officer
thereof) who controls the Company or any such other Underwriter within the
meaning of Section 15 of the Securities Act, and the Selling Securityholders
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, or the common law or otherwise and
to reimburse each of them for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto) or
the omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto. The indemnity agreement of
each Underwriter contained in this paragraph (b) shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock.
(c) Each party indemnified under the provision of paragraphs (a)
and (b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the "Notice") of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its
own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any indemnifying
party shall be entitled, if it so elects within a
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<PAGE>
reasonable time after receipt of the Notice by giving written notice (herein
called the "Notice of Defense") to the indemnified party, to assume (alone or
in conjunction with any other indemnifying party or parties) the entire
defense of such action, suit, investigation, inquiry or proceeding, in which
event such defense shall be conducted, at the expense of the indemnifying
party or parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided,
however, that (i) if the indemnified party or parties reasonably determine
that there may be a conflict between the positions of the indemnifying party
or parties and of the indemnified party or parties in conducting the defense
of such action, suit, investigation, inquiry or proceeding or that there may
be legal defenses available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then counsel for the indemnified party or parties shall be entitled to conduct
the defense to the extent reasonably determined by such counsel to be
necessary to protect the interests of the indemnified party or parties and
(ii) in any event, the indemnified party or parties shall be entitled to have
counsel chosen by such indemnified party or parties participate in, but not
conduct, the defense. If, within a reasonable time after receipt of the
Notice, an indemnifying party gives a Notice of Defense and the counsel chosen
by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or
other expenses subsequently incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding, except that (A) the indemnifying party or parties shall bear the
legal and other expenses incurred in connection with the conduct of the
defense as referred to in clause (i) of the proviso to the preceding sentence
and (B) the indemnifying party or parties shall bear such other expenses as it
or they have authorized to be incurred by the indemnified party or parties.
If, within a reasonable time after receipt of the Notice, no Notice of Defense
has been given, the indemnifying party or parties shall be responsible for any
legal or other expenses incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Securityholders on the one hand and the Underwriters on
the other shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Stock received by the Company and the
Selling Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the
first sentence of this paragraph (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection
with investigation, preparing to defend or defending against any action or
claim which is the subject of this paragraph (d).
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Notwithstanding the provisions of this paragraph (d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Stock purchased by such Underwriter. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this paragraph (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholders will,
without the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought hereunder
(whether or not such Underwriter or any person who controls such Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act is a party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of such
Underwriter and each such controlling person from all liability arising out of
such claim, action, suit or proceeding.
(f) The liability of each Selling Securityholder under the indemnity
and reimbursement agreements contained in the provisions of this Section 7 and
Section 11 hereof shall be limited to an amount equal to the initial public
offering price of the stock sold by such Selling Securityholder to the
Underwriters. The Company and the Selling Securityholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time
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prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Stock
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, or The Nasdaq Stock Market, or limitations on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses
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incident to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses
referred to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
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several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and
no stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing the Stock,
all corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Wilson Sonsini Goodrich & Rosati, counsel for the
Underwriters.
(c) You shall have received from Venture Law Group, counsel for
the Company and the Selling Securityholders, an opinion, addressed to the
Underwriters and dated the Closing Date, covering the matters set forth in Annex
-----
A hereto, and if Option Stock is purchased at any date after the Closing Date,
- -
additional opinions from each such counsel, addressed to the Underwriters and
dated such later date, confirming that the statements expressed as of the
Closing Date in such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date,
the statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have not
been filed as required, (vii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing Date or
any later date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any material change in the market for securities in
general or in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make a
public offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
13
<PAGE>
(e) You shall have received on the Closing Date and on any later
date on which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from Coopers & Lybrand L.L.P., a
letter or letters, addressed to the Underwriters and dated the Closing Date and
any later date on which Option Stock is purchased, confirming that they are
independent public accountants with respect to the Company within the meaning of
the Securities Act and the applicable published rules and regulations thereunder
and based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the "Original
Letter"), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which, in your
sole judgment, makes it impractical or inadvisable to proceed with the public
offering of the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(h) Prior to the Closing Date, the Stock to be issued and sold
by the Company shall have been duly authorized for listing by the Nasdaq
National Market upon official notice of issuance.
(i) On or prior to the Closing Date, you shall have received
from all directors, officers, and beneficial holders of more than 5% of the
outstanding Common Stock stockholders agreements, in form reasonably
satisfactory to Hambrecht & Quist LLC, stating that without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or
entity will not, for a period of 90 days following the commencement of the
public offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Wilson Sonsini Goodrich & Rosati, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
14
<PAGE>
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company or the
Selling Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
-----------------------------------------------------------
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
- ---------------
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall
not be fulfilled, this Agreement may be terminated by the Company and the
Selling Securityholders by giving notice to you. Any such termination shall be
without liability of the Company and the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that in the event of any such
termination the Company and the Selling Securityholders jointly and severally
agree to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
---------------------------------
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (f) of Section 7), the
Company and the Selling Securityholders hereby jointly and severally agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
----------------------------------------
inure to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
-------
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or
15
<PAGE>
delivered to it at its office, 747 Front Street, San Francisco, California
94111, Attention: Kenneth J. Orton; and if to the Selling Securityholders,
shall be mailed, telegraphed or delivered to the Selling Securityholders in
care of ___________ at _______________. All notices given by telegraph shall
be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and
-------------
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or the Selling Securityholders or their respective
directors or officers, and (c) delivery and payment for the Stock under this
Agreement; provided, however, that if this Agreement is terminated prior to the
-----------------
Closing Date, the provisions of paragraphs (l) and (m) of Section 6 hereof shall
be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
[Remainder of page intentionally left blank]
16
<PAGE>
Please sign and return to the Company and to the Selling
Securityholders in care of the Company the enclosed duplicates of this letter,
whereupon this letter will become a binding agreement among the Company, the
Selling Securityholders and the several Underwriters in accordance with its
terms.
Very truly yours,
PREVIEW TRAVEL, INC.
By__________________________
Kenneth J. Orton
President and Chief Executive Officer
AFFILIATED SELLING SECURITYHOLDERS
______________________________
Kenneth J. Orton
______________________________
James J. Hornthal
SELLING SECURITYHOLDERS:
[LIST NAMES]
By__________________________
[ATTORNEY-IN-FACT]
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
PAINEWEBBER INCORPORATED
By__________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
17
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
UNDERWRITERS NUMBER OF SHARES TO
BE PURCHASED
- -------------------------------------------------------------------------------------------------------
<S> <C>
Hambrecht & Quist LLC
- -------------------------------------------------------------------------------------------------------
BancAmerica Robertson Stephens
- -------------------------------------------------------------------------------------------------------
NationsBanc Montgomery Securities LLC
- -------------------------------------------------------------------------------------------------------
PaineWebber Incorporated
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Total 3,100,000
====================
- -------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NAME [AND ADDRESS] OF SELLING SECURITYHOLDERS NUMBER OF SHARES TO
BE SOLD
- -------------------------------------------------------------------------------------------------------
<S> <C>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Total 2,000,000
====================
- -------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
SUBJECT TO NEGOTIATION
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF VENTURE LAW GROUP
COUNSEL FOR THE COMPANY
AND THE SELLING SECURITYHOLDERS
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, is duly qualified as a foreign
corporation and in good standing in each state of the United States of America
in which its ownership or leasing of property requires such qualification
(except where the failure to be so qualified would not have a material adverse
effect on the business, properties, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole), and has full corporate
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement; all the issued and outstanding capital
stock of each of the subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is owned by the Company
free and clear of all liens, encumbrances and security interests, and to the
best of such counsel's knowledge, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests in such
subsidiaries are outstanding;
(ii) effective upon the closing of the Offering, the
authorized capital stock of the Company consists of ______ shares of Preferred
Stock, none of which are outstanding, and _____ shares of Common Stock, $0.001
par value, of which there are outstanding ________ shares (including the
Underwritten Stock plus the number of shares of Option Stock issued on the date
hereof); proper corporate proceedings have been taken validly to authorize such
authorized capital stock; all of the outstanding shares of such capital stock
(including the Underwritten Stock and the shares of Option Stock issued, if any)
have been duly and validly issued and are fully paid and nonassessable; any
Option Stock purchased after the Closing Date, when issued and delivered to and
paid for by the Underwriters as provided in the Underwriting Agreement, will
have been duly and validly issued and be fully paid and nonassessable; and no
preemptive rights of, or rights of refusal in favor of, stockholders exist with
respect to the issue and sale of the Stock, pursuant to the Certificate of
Incorporation or Bylaws of the Company and, to the knowledge of such counsel,
there are no contractual preemptive rights that have not been waived, rights of
first refusal or rights of co-sale which exist with respect to the Stock being
sold by the Selling Securityholders or the issue and sale of the Stock;
(iii) the Registration Statement has become effective under
the Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending or threatened by the Commission;
(iv) the Registration Statement and the Prospectus (except
as to the financial statements and schedules and other financial or statistical
data derived therefrom and contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
requirements of the Securities Act and with the rules and regulations of the
Commission thereunder;
(v) such counsel have no reason to believe that the
Registration Statement (except as to the financial statements and schedules and
other financial or statistical data derived therefrom and contained therein, as
to which such counsel need not express any opinion or belief) at the Effective
Date contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus (except as to the financial
statements and schedules and other financial or statistical data derived
therefrom and contained therein, as to which such counsel need not express any
opinion or belief)
20
<PAGE>
as of its date or at the Closing Date (or any later date on which Option Stock
is purchased), contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(vi) the information required to be set forth in the
Registration Statement in answer to Items 9, 10 (insofar as it relates to such
counsel) and 11(c) of Form S-1 is to the best of such counsel's knowledge
accurately and adequately set forth therein in all material respects or no
response is required with respect to such Items, and the description of the
Company's stock option plans and other stock plans and arrangements and the
options or other rights granted and which may be granted thereunder set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to said plans, arrangements and options to the extent
required by the Securities Act and the rules and regulations of the Commission
thereunder;
(vii) such counsel do not know of any franchises, contracts,
leases, documents or legal proceedings, pending or threatened, which in the
opinion of such counsel are of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described and filed as required;
(viii) the Underwriting Agreement has been duly authorized,
executed and delivered by the Company;
(ix) the Underwriting Agreement has been duly authorized,
executed and delivered by or on behalf of the Selling Securityholders, and the
Custody Agreement between the Selling Securityholders and ___________, as
Custodian, and the Power of Attorney referred to in such Custody Agreement have
been duly authorized, executed and delivered by the several Selling
Securityholders; the Custody Agreement entered into by, and the Power of
Attorney given by, such Selling Securityholder is valid and binding on such
Selling Securityholder; and each Selling Securityholder has full legal right and
authority to enter into the Underwriting Agreement and to sell, transfer and
deliver in the manner provided in the Underwriting Agreement the shares of Stock
sold by such Selling Securityholder hereunder;
(x) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, the Underwriting Agreement,
and the issue and sale by the Company of the shares of Stock sold by the Company
as contemplated by the Underwriting Agreement will not conflict with, or result
in a breach of, the Certificate of Incorporation or Bylaws of the Company or any
of its subsidiaries or any agreement or instrument identified in a schedule to
such counsel's opinion to which the Company or any of its subsidiaries is a
party or any applicable law or regulation, or so far as is known to such
counsel, any order, writ, injunction or decree, of any jurisdiction, court or
governmental instrumentality;
(xi) all holders of securities of the Company having rights
to the registration of shares of Common Stock, or other securities, because of
the filing of the Registration Statement by the Company have waived such rights
or such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(xii) good and marketable title to the shares of Stock sold
by the Selling Securityholders under the Underwriting Agreement, free and clear
of all liens, encumbrances, equities, security interests and claims, has been
transferred to the Underwriters who have severally purchased such shares of
Stock under the Underwriting Agreement, assuming for the purpose of this opinion
that the Underwriters purchased the same in good faith without notice of any
adverse claims;
(xiii) no consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation of the
transactions contemplated in the
21
<PAGE>
Underwriting Agreement, except such as have been obtained under the Securities
Act and such as may be required under state securities or blue sky laws in
connection with the purchase and distribution of the Stock by the Underwriters;
(xiv) the statements (1) in the Prospectus under the captions
"Risk Factors --Reliance on Distribution Agreements with America Online, Excite
and Lycos," "Risk Factors -- Shares Eligible for Future Sale," "Business --
Strategic Relationships," "Management -- Limitation of Liability and
Indemnification Matters" "Management -- Stock Plans," "Certain Relationships and
Related Transactions," "Description of Capital Stock" and "Shares Eligible for
22
<PAGE>
Future Sale" and (2) in the Registration Statement in Items 14 and 15, in each
case insofar as such statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and proceedings and
fairly summarize the matters referred to therein;
(xv) the Stock sold by the Selling Securityholders is listed
and duly admitted to trading on the Nasdaq National Market, and the Stock issued
and sold by the Company will been duly authorized for listing by the Nasdaq
National Market upon official notice of issuance.
____________________________________
Counsel rendering the foregoing opinion may (i) state that its opinion is
limited to matters governed by the federal law of the United States, the laws of
the State of California and the General Corporation law of the State of Delaware
and (ii) rely as to questions of law not involving the laws of the United States
or of the States of California and Delaware, upon opinions of local counsel
satisfactory in form and scope to counsel for the Underwriters. Copies of any
opinions so relied upon shall be delivered to the Representatives and to counsel
for the Underwriters and the foregoing opinion shall also state that counsel
knows of no reason the Underwriters are not entitled to rely upon the opinions
of such local counsel.
23
<PAGE>
EXHIBIT 5.1
April 16, 1998
Preview Travel, Inc.
747 Front Street
San Francisco, CA 94111
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-49631)
-------------------------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (the
"Registration Statement") filed by you, Preview Travel, Inc., with the
----------------------
Securities and Exchange Commission on April 8, 1998, in connection with the
registration under the Securities Act of 1933, as amended, of a total of
3,565,000 shares shares of your Common Stock (the "Shares") to be sold by the
------
Company. The Shares include an overallotment option to purchase 465,000 shares
granted to the underwriters and are to be sold to the underwriters as
described in the Registration Statement for resale to the public. As your
counsel in connection with this transaction, we have examined the proceedings
taken and we are familiar with the proceedings proposed to be taken by you in
connection with the sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares when issued and sold in the manner
described in the Registration Statement will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and in any amendment thereto.
Very truly yours,
VENTURE LAW GROUP
A Professional Corporation
/s/ Venture Law Group
<PAGE>
EXHIBIT 10.18
ONE BEACH STREET
SAN FRANCISCO, CALIFORNIA
SUBLEASE
--------
THIS SUBLEASE (this "SUBLEASE") is entered into as of this 7th day of
April, 1998, by and between CNET, INC., a Delaware corporation ("SUBLESSOR"),
and PREVIEW TRAVEL, INC. a Delaware corporation ("SUBLESSEE").
RECITALS
--------
A. Pursuant to that certain Office Lease (the "LEASE") dated as of
September 24, 1997, No. 1 Beach Street, LLC, a California limited liability
company ("LANDLORD"), as landlord, leased to Sublessor the entire space (the
"MASTER PREMISES") in the office building commonly known as One Beach Street,
San Francisco, California (the "BUILDING"), as more particularly described in
the Lease.
B. Sublessor now desires to sublease to Sublessee and Sublessee
desires to sublease from Sublessor a portion of the Master Premises consisting
of approximately thirteen thousand fifty-five (13,055) rentable square feet,
shown outlined in red on the floor plan attached hereto as Exhibit "A" (the
"PREMISES"), situated on the eastern portion of the third floor of the Building.
NOW, THEREFORE, Sublessor and Sublessee agree as follows:
1. Premises.
--------
(a) Sublessor leases to Sublessee and Sublessee hires from
Sublessor the Premises. The Premises include the appurtenant right to the use,
in common with others, of the ground floor reception area and elevator lobby,
the third floor elevator lobby and the restrooms located on the third floor.
Except as may be expressly permitted by this Sublease, Sublessee shall have no
right of access to any other portion of the Building.
(b) Sublessee acknowledges that it has inspected the Premises,
and is thoroughly familiar with its condition. Subject to Sublessor's
obligations under Paragraph 3(c) hereof, Sublessee accepts the Premises in its
present, improved, "AS IS" condition, with any and all latent defects, and
Sublessee acknowledges that, except for the covenant of Sublessor contained in
Paragraph 3(c) hereof, neither Sublessor nor any of its agents or
representatives has made, and does not hereby make, any representations,
warranties, or covenants of any kind or character whatsoever with respect to
the condition of the Premises, whether express or implied. Sublessee agrees
that, except as expressly provided in Paragraph 3(c) hereof, Sublessee has
made no promise to alter, remodel, improve, repair or bring into compliance
with applicable law any portion of the Premises, or any portion of the
Building (or common areas within the Building) outside the Premises.
Notwithstanding anything to the contrary in the foregoing, Sublessor agrees to
A-1
<PAGE>
enforce Sublessor's rights and remedies under the Lease as against Landlord
with respect to the condition of the Premises upon notice by Sublessee of any
defect in the condition of the Premises.
(c) Sublessor and Sublessee acknowledge and agree that the square
footage of the Premises noted in this Sublease is final and binding on the
parties.
2. Master Lease.
------------
(a) Except for the Excluded Lease Provisions (as hereinafter
defined), the Sublease is subject to all of the terms and conditions of the
Lease, a copy of which has been provided to Sublessee under cover of letter
dated March __, 1998. Sublessee hereby assumes and agrees to perform each and
every obligation of Sublessor, as lessee, under the Lease, to the extent such
terms and conditions are applicable to the Premises, except for the Excluded
Lease Provisions. Sublessee shall not commit or permit to be committed on the
Premises any act or omission which shall violate any term or condition of the
Lease. Sublessor represents and warrants to Sublessee that Sublessor has
received no written notice of any default under the Lease.
(b) Except for the Basic Lease Information, Sections 1.1, 1.2,
1.4, 1.5 (to the extent inconsistent with this Sublease), 2.1(a), (c) and (d),
2.2, 2.3, 2.4, 3.1, 3.2, 3.3, 3.5, 3.6, 3.7, 4.2(d), 4.4, 5.1, Article 6, 7.1,
7.2(b), 7.3, 7.4, 8.1(c), 8.4 (to the extent inconsistent with this Sublease),
Article 13, Article 14, Sections 16.1, 16.5(b), 16.6, 16.9, 16.18, 16.19,
16.22, Exhibits A - E of the Lease (all of which shall be deemed "EXCLUDED
LEASE PROVISIONS"), all of the terms and conditions contained in the Lease are
incorporated herein as terms and conditions of this Sublease (with each
reference therein to "Landlord" and "Tenant" to be deemed to refer to
Sublessor and Sublessee, respectively) and, along with all of the paragraphs
contained in this Sublease, shall be the complete terms and conditions of this
Sublease. To the extent that the Lease provides that the Landlord will provide
services, utilities, insurance, repairs, maintenance or any and all other
Landlord obligations rendered in connection with the Premises or the Building
(including, without limitation, any representations and warranties of
Landlord), Sublessee shall seek recourse from the Landlord only, and Sublessor
shall not be liable for any breach by the Landlord under the Lease. Any costs
incurred by Sublessor as a result of the provision of any services, or the
exercise of any rights, under the Lease for the benefit of Sublessee shall be
reimbursed to Sublessor by Sublessee within twenty (20) days of receipt of
invoice therefor.
(c) Sublessor agrees to cooperate with Sublessee, at no out-of-
pocket cost or expense to Sublessor, in obtaining any required consents or
authorizations of Landlord reasonably requested by Sublessee in connection
with its use and occupancy of the Premises. Sublessee shall communicate to
Landlord with respect to any services or work requested or required by
Sublessee in the Premises only through Sublessor unless Sublessor authorizes
Sublessee in writing to directly communicate with Landlord. Subject to the
terms of this Sublease, Sublessor agrees not to unreasonably
A-2
<PAGE>
withhold its consent in connection with any work or services requested by
Sublessee of Landlord in or to the Premises, to the extent the consent of
Sublessor is required or requested.
(d) Sublessor covenants and agrees not to do anything that would
cause the Lease to be canceled or terminated or that would adversely affect
the rights of Sublessee under this Sublease or in or to the Premises.
Sublessor shall not amend or modify the terms of the Lease insofar as the same
may materially adversely affect Sublessee's rights and obligations under this
Sublease without the prior written consent of Sublessee. Subject to the
foregoing, in the event the Lease is terminated for any reason, this Sublease
shall automatically cease and terminate as of the date the Lease is so
terminated, and upon such termination, for reasons other than Sublessee's
default under this Sublease, all rent and other charges and sums due and owing
hereunder shall terminate. Sublessor shall send to Sublessee promptly
following receipt thereof from the Landlord all notices of default under the
Lease, and all notices affecting the Premises received. Notwithstanding
anything in the foregoing to the contrary, if this Sublease is terminated as a
consequence of the termination of the Lease following a default by Sublessor,
as Tenant, thereunder (and not attributable to a default by Sublessee under
this Sublease), Sublessee shall have the remedies provided under Paragraph
11(f) hereof.
3. Term and Delivery of Premises.
--------------------------------
(a) The term (the "TERM") of this Sublease shall commence on the
date of delivery of the Premises to Sublessee (the "COMMENCEMENT DATE"). If
Landlord, for any reason whatsoever, does not deliver possession of the
Premises to Tenant on any given date, this Sublease shall not be void or
voidable and Sublessor shall not be liable to Sublessee for any loss or damage
resulting therefrom; provided, however, if the term of this Sublease does not
commence by June 15, 1998, as such date is extended due to any act or omission
of Sublessee, Sublessee may at any time thereafter terminate this Sublease on
five (5) days prior written notice to Sublessor, and this Sublease shall
terminate on the fifth (5th) day following the receipt of said notice unless
Sublessor delivers possession of the Premises to Sublessee in the condition
required by this Sublease. In the event of any such delay, the Expiration Date
of this Sublease shall be extended by an equivalent number of days. The term
of this Sublease shall expire on June 30, 2003; provided, however, Sublessor,
and, provided no Event of Default (as that term is hereinafter defined) shall
then exist under this Sublease, Sublessee, each shall have the right to
terminate this Sublease effective on July 1, 2001, by giving not less than six
(6) months prior written notice of such party's intent to terminate this
Sublease (the last day of the Term, whether such date is June 30, 2003 or July
1, 2001, is hereinafter referred to as the "EXPIRATION DATE").
(b) Sublessor's obligation to deliver the Premises to Sublessee,
and Sublessee's access to the Premises for any purposes shall be subject to
and conditioned upon the delivery to Sublessor of certificates of insurance
evidencing the insurance coverages required by Paragraph 15 of this Sublease.
In addition, the Term of
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this Sublease shall not commence until the contingency provided in Paragraph
25 of this Sublease has been satisfied.
(c) Notwithstanding anything to the contrary in this Paragraph 3,
if after the Commencement Date Sublessor undertakes any improvements in or to
any portion of the Building, and such improvements result in a requirement
that any upgrades, improvements or alterations be made to the Premises or to
any common areas (including restrooms) located on the third floor of the
Building, Sublessor shall be solely responsible for such mandated
improvements, alterations and upgrades (and the same shall be done in
compliance with any and all applicable building codes and laws); provided,
however, if at any time during calendar year 1998 any local or State
governmental agency mandates or requires the installation of fire sprinklers
or other life safety equipment on the third floor of the Building, Sublessor
shall perform such work, at its expense, and Sublessee shall reimburse
Sublessor a proportionate share of such expenses (based on the proportion that
the rentable square footage of the Premises bears to the total rentable square
footage on the third floor of the Building), not to exceed $40,000.
4. Monthly Rent.
---------------
(a) Subject to Paragraph 3(a) hereof, monthly base rent (the
"MONTHLY BASE RENT") for the Premises shall begin to accrue commencing on the
later of (X) the later of the Commencement Date, and (Y) the earlier of (i)
Sublessee's occupancy of the Premises for the purpose of conducting business
therein, or (ii) June 1, 1998 (the "RENT COMMENCEMENT DATE"). Monthly Base
Rent shall be payable as follows:
<TABLE>
<S> <C>
Rent Commencement Date through June 30, 1999: $28,068.25
July 1, 1999 through June 30, 2000: $28,851.55
July 1, 2000 through June 30, 2001: $29,895.95
July 1, 2001 through the Expiration Date (provided this Sublease $39,165.00
is not terminated as herein provided)
</TABLE>
Sublessee shall pay Monthly Base Rent in advance on the first (1st) day of each
month of the term of this Sublease; provided, however that Sublessee shall pay
to Sublessor, upon Sublessee's execution of this Sublease, the sum of Twenty
Eight Thousand and Sixty Eight and Twenty Five Hundredths Dollars ($28,068.25),
which shall represent the Monthly Base Rent for the first full calendar month
for which rent is due. If the Rent Commencement Date is a day other than the
first day of a calendar month or ends on a day other than the last day of a
calendar month, a prorated monthly installment shall be paid at the then current
rate for the fractional month during which the Sublease commences and/or
terminates.
(b) All sums due to Sublessor under this Sublease shall be
deemed payable as rent. All rent (whether referred to herein as Monthly Base
Rent or as additional rent) shall be paid without deduction, offset, prior
notice or demand, in lawful money of the United States of America. All rent
shall be paid to Sublessor at Sublessor's offices in the Master Premises or to
such other person or at such other place as Sublessor
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may from time to time designate in writing. Sublessee hereby acknowledges that
late payment by Sublessee to Sublessor of rent and other sums due hereunder
will cause Sublessor to incur costs not contemplated by this Sublease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges and late
charges which may be imposed by Sublessor by the terms of the Lease.
Accordingly, if any installment of Monthly Base Rent or additional rent
payable under Paragraph 5 hereof shall not be received by Sublessor within
five (5) days after such amount shall be due, Sublessee shall pay to Sublessor
a late charge equal to three percent (3%) of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable estimate
of the costs Sublessor will incur by reason of late payment by Sublessee.
Acceptance of such late charge by Sublessor shall in no event constitute a
waiver of Sublessee's default with respect to such overdue amount, nor prevent
Sublessor from exercising any of the other rights and remedies granted
hereunder.
5. Additional Rent. In addition to Monthly Base Rent payable by
---------------
Sublessee, Sublessee shall pay to Sublessor during the Term, as additional
rent, Sublessee's Percentage Share (as hereinafter defined) of any increase in
Operating Expenses (as defined in the Lease) and any increase in Real Estate
Taxes (as defined in the Lease) paid or incurred by Sublessor during such
calendar year over the amount of Operating Expenses and Real Estate Taxes paid
or incurred by Sublessor during the calendar year 1998 (which increase is
hereinafter referred to as "INCREASED OPERATING AND TAX COSTS"). "Sublessee's
Percentage Share" shall be _____________ percent (____%). Sublessee shall pay
to Sublessor each month, in advance, together with the payment of Monthly Base
Rent, an amount equal to one-twelfth (1/12) of Sublessee's Percentage Share of
the estimated Increased Operating and Tax Costs, as reasonably determined by
Sublessor. After the end of any calendar, Sublessor shall provide Sublessee
with a copy of any statement of Additional Lease Charges provided by Landlord
pursuant to Section 4.1(c) of the Lease. If Sublessee's Percentage Share of
actual Increased Operating and Tax Costs is greater than Sublessee's
Percentage Share of estimated Increased Operating and Tax Costs for any
calendar year, Sublessee shall pay the difference to Sublessor within twenty-
five (25) days after the date of Landlord's notice pursuant to Section 4.1 of
the Lease. If actual Increased Operating and Tax Costs are less than estimated
Increased Operating and Tax Costs, Sublessee shall be entitled to a refund or
credit against the installments of Increased Operating and Tax Costs next due.
If Sublessee has an objection to Landlord's statement provided pursuant to
Section 4.1(c) of the Lease, Sublessee shall raise any such objection to
Landlord's statement with Sublessor, and Sublessor, in its sole and absolute
discretion, shall determine whether to pursue Tenant's right of audit under
Section 4.4 of the Lease. Subject to the foregoing, Landlord's statement of
Additional Lease Charges shall be final and binding on Sublessee.
6. Security Deposit. Upon execution of this Sublease by Sublessor,
----------------
Sublessee shall deposit with Sublessor the sum of Fifty-Nine Thousand Seven
Hundred and Ninety Two Dollars ($59,792.00) (the "DEPOSIT"). The Deposit shall
be held by
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Sublessor as security for the faithful performance by Sublessee of all of the
provisions of this Sublease to be performed or observed by Sublessee. If
Sublessee fails to pay rent or other charges due hereunder, or otherwise
defaults with respect to any provision of this Sublease, Sublessor may use,
apply or retain all or any portion of the Deposit for the payment of any rent
or other charge in default, or for the payment of any other sum to which
Sublessor may become obligated by reason of Sublessee's default, or to
compensate Sublessor for any loss or damage which Sublessor may suffer
thereby. If Sublessor so uses or applies all or any portion of the Deposit,
Sublessee shall within ten (10) days after demand therefor deposit cash with
Sublessor in an amount sufficient to restore the Deposit to the full amount
thereof and Sublessee's failure to do so shall be a material breach of this
Sublease. Sublessor shall not be required to keep the Deposit separate from
its general accounts. No trust relationship is created herein between
Sublessor and Sublessee with respect to the Deposit. Within thirty (30) days
following the expiration or sooner termination of this Sublease, provided
Sublessee has faithfully performed its obligations hereunder, the Deposit (or
so much thereof as remains) shall be refunded to Sublessee, without interest.
7. Use. Sublessee shall use the Premises for general office use and
---
for no other purpose, and with occupancy of the Premises not to exceed one
person per 100 square feet of usable space.
8. Electric Current and Interruption of Building Services.
------------------------------------------------------
(a) It is the intention of the parties that Sublessee pay directly
for all electric current used in the Premises. Sublessor shall have the right
to install a meter or submeter at the electrical panel serving the Premises to
determine the exact amount of electricity used by Sublessee. Sublessee and
Sublessor shall share equally in the cost of installation and replacement of
the submeter (but with the cost of any maintenance and replacement
attributable to the act or omission of Sublessee being borne solely by
Sublessee). Sublessee shall pay, as they become due, all charges shown by the
meter or submeter for the use of electric current. Sublessor shall not charge
a rate for the use of electric current higher than the rate charged to
Sublessor by the electric company for electricity consumption in the Building.
If Sublessor is able to do so, Sublessor reserves the right to cause all
electrical power to be metered directly to, and for the separate and sole
account of, Sublessee by the public utility company.
(b) Sublessee shall not use or install any apparatus, device or
equipment in the Premises, which will in any way require cooling load
capabilities in excess of 3.5 watts per usable square foot, or require
electrical loads in excess of the capacity available at the existing
electrical panel on the third floor of the Building.
(c) Notwithstanding anything to the contrary in this Sublease, in
the event any of the Building services provided to Sublessee under this
Sublease or the Lease are interrupted, other than due in whole or in part to
the act or omission of Sublessee or as a consequence of a casualty described
in Paragraph 19 of this Sublease
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(an "UNSCHEDULED INTERRUPTION"), and the Unscheduled Interruption results in
an actual and material interference with Sublessee's ability to conduct its
business operations in the Premises for a period of more than twenty (20)
consecutive days, Sublessee, as its sole and exclusive remedy, shall be
entitled to terminate this Sublease, without penalty, effective on the date
that is five (5) days after written notice of termination given to Sublessor,
provided that the Unscheduled Interruption is not remedied to enable Sublessee
to conduct its business operations in the Premises prior to the expiration of
said five day period.
9. Construction of Tenant Improvements.
-----------------------------------
(a) Subject to the terms and provisions of this Paragraph 9,
Sublessee shall have the right, at Sublessee's sole cost and expense, to
construct certain tenant improvements (the "LEASEHOLD IMPROVEMENTS") in the
Premises. Any and all plans related to or in connection with the construction
of the Leasehold Improvements and any contractors or vendors used by Sublessee
in connection with the construction of the Leasehold Improvements shall be
subject to (a) Sublessor's prior written approval, which may not be
unreasonably withheld or delayed, and (b) Landlord's approval in accordance
with the terms and provisions of the Lease.
(b) Notwithstanding anything to the contrary in this Paragraph 9,
Sublessee acknowledges that it shall be reasonable for Sublessor to withhold
its consent to any proposed Leasehold Improvements if the same (i)
contemplates any structural changes to the Premises or any other portion of
the Building, (ii) contemplates any penetrations of the floor slab, utility or
telecommunication risers or roof of the Building, (iii) would require the use
of additional electrical power from that presently available at the electric
panel serving the third floor of the Building, (iv) would require supplemental
air ventilation and/or air conditioning equipment from that allocated to the
Premises by the existing air ventilation and cooling system of the Building,
(v) would require any building code upgrades or trigger compliance with law
improvements elsewhere on the third floor of the Building, or (vi)
contemplates a build-out or improvements that would not be readily reusable or
easily demolished (without additional expense) following the expiration of the
Term.
(c) Notwithstanding anything to the contrary in this Paragraph 9,
if Sublessee's Leasehold Improvements (as approved by Sublessor) require any
building code upgrades or trigger compliance with law improvements outside of
the Premises on the third floor of the Building (the "CODE COMPLIANCE WORK"),
and Sublessee proceeds to undertake such work, Sublessor shall reimburse
Sublessee at the end of the term of this Sublease (unless this Sublease is
terminated as a result of a default by Sublessee hereunder), for the
unamortized cost of the Code Compliance Work, based on a 10 year useful life
and a straight line amortization schedule.
10. Hazardous Waste. Sublessee shall not store, use or dispose of any
---------------
hazardous materials in, on or about the Premises or the Building, other than
incidental
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<PAGE>
storage and use of customary office products and cleaning solutions used in
the conduct of Sublessee's business in the Premises, in which case all such
substances shall be stored, used and disposed of strictly in accordance with
all applicable laws. Sublessee shall be solely responsible for and shall
defend, indemnify and hold harmless, Sublessor, its agents and employees from
and against, and shall reimburse Sublessor, its agents and employees for all
claims, costs and liabilities, including attorneys' fees and costs, arising
out of or in connection with Sublessee's breach of its obligations hereunder.
Sublessee shall be solely responsible for and shall defend, indemnify and hold
harmless Sublessor, its agents and employees from and against, and shall
reimburse Sublessor, its agents and employees for, any and all claims, costs
and liabilities, including attorneys' fees and costs, arising out of or in
connection with the removal, cleanup and restoration work and materials
necessary to return the Premises and/or the Building and any other property of
whatever nature located in the Building to the condition existing prior to
Sublessee's breach of the provisions of this paragraph. Sublessee shall
immediately provide Sublessor with copies of any notice, report or other
correspondence between Sublessee and any governmental agency concerning any
hazardous materials in, on or about the Premises or the Building. Sublessee's
obligations hereunder shall survive the expiration or termination of this
Sublease. California Health and Safety Code Section 25359.7(b) requires any
tenant of real property who knows, or has reasonable cause to believe, that
any release of a hazardous substance has come to be located on or beneath such
real property to give written notice of such condition to the owner. Sublessee
shall comply with the requirements of Section 25359.7(b) and any successor
statute thereto and with all other statutes, laws, ordinances, rules,
regulations and orders of governmental authorities with respect to hazardous
substances. Sublessor shall have the right to pursue all legal and equitable
remedies available to it in the event of failure of Sublessee to comply with
the requirements of this paragraph.
11. Default.
-------
(a) Events of Default. In addition to any other event specified in
-----------------
this Sublease as an event of default, the occurrence of any one or more of the
following events (individually and collectively, an "EVENT OF DEFAULT") shall
constitute a breach of this Sublease by Sublessee: (i) failure by Sublessee to
pay rent or any other sum when and as the same becomes due and payable; (ii)
any breach by Sublessee of any obligation of Sublessor, as Tenant, under the
Lease (other than the Excluded Lease Provisions); (iii) failure by Sublessee
to perform or observe any other obligations of Sublessee hereunder (except as
otherwise provided in this Paragraph 10), and such failure or breach continues
for more than fifteen (15) days after Sublessee gives written notice thereof
to Tenant; provided, however, that if, by the nature of such agreement or
covenant, such failure or breach cannot reasonably be cured within such period
of fifteen (15) days, an Event of Default shall not exist as long as Sublessee
commences with due diligence and dispatch the curing of such failure or breach
within such period of fifteen (15) days and, having so commenced, thereafter
prosecutes with diligence and dispatch and completes the curing of such
failure or breach within a reasonable time; (iv) the transfer of any interest
in the Premises or under this Sublease without Sublessor's prior written
consent;
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<PAGE>
(v) a default or breach by any guarantor of this Sublease under its guaranty;
(vi) the making by Sublessee of a general assignment for the benefit of
creditors, or the admission of its inability to pay its debts as they become
due or the filing of a petition, case or proceeding in bankruptcy, or the
adjudication of Sublessee bankrupt or insolvent, or the filing of a petition
seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future
statute, law or regulation, or the filing of an answer admitting or failing to
contest the material allegations of a petition filed against it in any such
proceeding, or the seeking or consenting to or acquiescence in the appointment
of any trustee, receiver or liquidator of Sublessee or any material part of
its properties; (vii) the failure to have any proceeding against Sublessee
seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future
statute, law or regulation, dismissed within sixty (60) days after
commencement, or the failure to have the appointment, without the consent or
acquiescence of Sublessee, of any trustee, receiver or liquidator of Sublessee
or of any material part of its properties vacated within sixty (60) days after
such appointment; or (viii) the failure to have any levy upon this Sublease or
any estate of Sublessee hereunder pursuant to any attachment or execution
vacated within ten (10) days after such attachment or execution.
(b) Sublessor's Remedies. If an Event of Default occurs, at any time
--------------------
thereafter:
(i) Sublessor may reenter the Premises and remove all persons and
property and again repossess and enjoy the Premises, without notice, either by
summary proceedings, or by any other applicable action or proceeding, or by
force or otherwise (without being liable to indictment, prosecution, or
damages therefor). Sublessor may use the Premises for Sublessor's own purposes
or relet it, without prejudice to any other remedies that Sublessor may have
by reason of Sublessee's default. None of these actions will be deemed an
acceptance of surrender by Sublessee. To the extent permitted by law,
Sublessee expressly waives the service of any notice of intention to terminate
this Sublease or to retake the Premises, and waives service of any demand for
payment of rent or for possession, and of any and every other notice or demand
required or permitted under applicable law.
(ii) Sublessor, at its option may relet the whole or any part of
the Premises from time to time, either in the name of Sublessor or otherwise,
to such tenants, for such terms ending before, on or after the Expiration
Date, at such rentals and upon such other conditions (including concessions
and free rent periods) as Sublessor, in its sole discretion, may determine to
be appropriate. Sublessor shall have no obligation to relet the Premises or
any part thereof and shall not be liable for refusal or failure to relet the
Premises or, in the event of any such reletting, for refusal or failure to
collect any rent due upon such reletting. No such refusal or failure shall
operate to relieve Sublessee of any liability under the Sublease or otherwise
affect any such liability. Sublessor, at its option, may make such physical
changes to the Premises as Sublessor, in its sole discretion, considers
advisable or necessary in connection with any such reletting
A-9
<PAGE>
or proposed reletting, without relieving Sublessee of any liability under this
Sublease or otherwise affecting Sublessee's liability.
(iii) Whether or not Sublessor retakes possession or relets the
Premises, Sublessor shall have the right to recover unpaid rent and all
damages caused by the default, including attorneys' fees. Damages shall
include, without limitation, (A) all arrears of Monthly Base Rent and all
other sums payable by Sublessee under this Sublease (together with interest
thereon at the Specified Rate), (B) all legal expenses and related costs
incurred by Sublessor following Sublessee's default, (C) all costs incurred by
Sublessor in making such physical changes to the Premises as Sublessor, in its
sole discretion, considers necessary in connection with any reletting, (D) all
cost incurred by Sublessor in reletting the Premises, including, without
limitation, any brokerage commissions and the value of Sublessor's time, and
(E) all other costs and expenses incurred by or on behalf of Sublessor
hereunder.
(iv) Upon such termination, in addition to any other rights and
remedies to which Sublessor may be entitled under applicable law, Sublessor
may recover from Sublessee: (A) the worth at the time of award of the unpaid
rent which had been earned at the time of termination; (B) the worth at the
time of award of the amount by which the unpaid rent which would have been
earned after termination until the time of award exceeds the amount of such
rent loss that Sublessee proves could have been reasonably avoided; (C) the
worth at the time of award of the amount by which the unpaid rent for the
balance of the term of this Sublease after the time of award exceeds the
amount of such rent loss that Sublessee proves could be reasonably avoided;
and (D) any other amount necessary to compensate Sublessor for all the
detriment proximately caused by Sublessee's failure to perform its obligations
under this Sublease or which in the ordinary course of things would be likely
to result therefrom. The "worth at the time of award" of the amounts referred
to in clauses (A) and (B) above shall be computed by allowing interest at the
Specified Rate. The worth at the time of award of the amount referred to in
clause (C) above shall be computed by discounting such amount at a rate equal
to the greater of nine percent (9%) per annum or the discount rate of the
Federal Reserve Board of San Francisco at the time of award plus one
percentage point.
(v) If Sublessee shall fail to pay any sum of money required to be
paid by Sublessee hereunder or shall fail to perform any other act on
Sublessee's part to be performed hereunder, Sublessee may, but shall not be
obligated so to do, and without waiving or releasing Sublessee from any
obligations of Sublessee, make any such payment or perform any such other act
of Sublessee's part to be made or performed under this Sublease. All sums so
paid by Sublessor and all necessary incidental costs shall be paid to
Sublessor on demand, together with interest thereon at the Specified Rate.
(c) Specified Rate. Every installment of rent and every other
--------------
payment due hereunder from Sublessee to Sublessor which shall not be paid when
due shall bear interest at the interest rate specified in Section 3.2(a) of
the Lease (the
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<PAGE>
"SPECIFIED RATE"), from the date that the same became due and payable until
paid, whether or not demand be made therefor.
(d) Sublease Continues Until Termination. If Sublessee has
------------------------------------
breached this Sublease and abandoned the Premises, this Sublease shall
nonetheless right to possession, and Sublessor may enforce all its rights and
remedies under this Sublease, including the right to recover the rent as it
becomes due under this Sublease. Acts of maintenance or preservation or
efforts to relet the Premises or the appointment of a receiver upon initiative
of Sublessor to protect Sublessor's interest under this Sublease shall not
constitute a termination of Sublessee's right to possession.
(e) Breach of Lease. If Sublessee breaches any of the terms
---------------
of the Lease, then, in addition to its other rights and remedies under this
Sublease, Sublessee shall indemnify, defend and hold Sublessor harmless from
all damages, costs and expenses resulting from the default (including, without
limitation, Sublessor's attorneys' fees and costs).
(f) Sublessee Remedies. If this Sublease is terminated as a
------------------
result of a default by Sublessor, as Tenant, under the Lease, Sublessor shall
pay to Sublessee, as liquidated damages (and as Sublessee's sole and exclusive
remedy against Sublessor), the unamortized cost (based on a 3 year
amortization schedule on a straight line basis) of Sublessee's Leasehold
Improvements (assuming a maximum cost of Sublessee's Leasehold Improvements of
not to exceed $200,000), plus Sublessee's actual costs of relocation,
including brokerages charges (adjusted proportionately to equal the commission
that is payable for the period comprising the remaining unexpired term of this
Sublease), and any increased rental payable by Sublessee for the remaining
unexpired term of this Sublease.
12. Holding Over. If Sublessee remains in possession after the
------------
expiration or sooner termination of this Sublease, all of the terms, covenants
and agreements hereof shall continue to apply and bind Sublessee so long as
Sublessee remains in possession insofar as the same are applicable, except
that if Sublessee remains in possession without Sublessor's written consent,
the Monthly Base Rent shall be two (2) times the rent payable by Sublessor
pursuant to the Lease during the period of Sublessee's holding over, prorated
on a daily basis for each day that Sublessee remains in possession, and
Sublessee shall indemnify Sublessor against any and all claims, losses and
liabilities for damages resulting from failure to surrender possession,
including, without limitation, any claims made by any succeeding tenant or
Landlord. If Sublessee remains in possession with Sublessor's written consent,
such tenancy shall be from month to month, terminable by either party on not
less than thirty (30) days' written notice.
13. Assignment and Subletting.
-------------------------
(a) Sublessee shall not (i) assign, mortgage, pledge, encumber
or otherwise transfer this Sublease, the term or estate hereby granted, or any
interest
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hereunder; (ii) permit the Premises or any part thereof to be utilized by
anyone other than Sublessee (whether as alliance partner, consultant,
licensee, permittee or otherwise); or (iii) sublet or offer or advertise for
subletting the Premises or any part thereof, in each case without the prior
written consent of Sublessor, which consent Sublessor may withhold in its sole
and absolute discretion. Any assignment, mortgage, pledge, encumbrance,
transfer or sublease not in accordance with this Paragraph 13 shall be
voidable and, at Sublessor's election, shall constitute a default. If
Sublessee is a corporation, any merger, consolidation or other reorganization
of Sublessee, or the sale or other transfer of a controlling percentage of the
capital stock of Sublessee, shall be deemed a voluntary assignment of this
Sublease by Sublessee. The phrase "controlling percentage" shall mean the
ownership of, and the right to vote, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of Sublessee's capital
stock issued, outstanding, and entitled to vote for the election of directors.
The preceding two sentences shall not apply to corporations, the stock of
which is traded on a national public stock exchange, or to transactions
pursuant to which stock is issued in connection with a transaction whereby the
stock of said corporation becomes so traded. If Sublessee is a partnership, a
withdrawal or change, voluntary, involuntary, or by operation of law of any
partner or partners owning a total of fifty percent (50%) or more of the
partnership, or the dissolution of the partnership, shall be deemed a
voluntary assignment of this Sublease by Sublessee. If Sublessee consists of
more than one person, a purported assignment, voluntary, involuntary, or by
operation of law, by any one of the persons executing this Sublease shall be
deemed a voluntary assignment of this Sublease by Sublessee.
(b) If at any time or from time to time during the Term, Sublessee
desires to assign or sublet all or any part of the Premises, then Sublessee
shall given the same notice to Sublessor that Landlord is entitled to receive
pursuant to Section 13.2 of the Lease. If Sublessee assigns this Sublease or
sublets the Premises, Sublessee shall reimburse Sublessor for all costs and
expenses incurred in connection therewith, and shall pay to Landlord any and
all sums due pursuant to Section 13.8 of the Lease, including, without
limitation, Sublessor's reasonable attorneys' fees incurred in connection
therewith.
(c) Sublessee acknowledges that Sublessor and Sublessee engage in
a field of business where the secrecy of certain business activities and
opportunities is of paramount importance to the business of each party, and
that the right of Sublessor to be able to withhold its consent to a potential
sublessee or assignee of Sublessee (or following a merger, reorganization or
other change in a controlling percentage of Sublessee as hereinabove
provided), based on Sublessor's good faith, but otherwise sole and absolute,
discretion as to the impact or related nature of the business of such third
party (or reorganized entity) is a material consideration for Sublessor in
entering into this Sublease, and has been separately bargained for by
Sublessor in this transaction.
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(d) No subletting or assignment shall release Sublessee from its
obligation or alter the primary liability of Sublessee to pay the rent and to
perform all other obligations to be performed by Sublessee hereunder. The
acceptance of rent by Sublessor from any other person shall not be deemed to
be a waiver by Sublessor of any provision hereof. If any assignee of Sublessee
or any successor of Sublessee defaults in the performance of any of the terms
hereof, Sublessor may proceed directly against Sublessee without the necessity
of exhausting remedies against such assignee or successor.
14. Waiver of Liability. Sublessor shall not be liable or
-------------------
responsible in any way for, and Sublessee hereby waives all claims against
Sublessor, its agents or employees, with respect to or arising out of any
death or any injury of any nature whatsoever that may be suffered or sustained
by Sublessee or any employee, licensee, invitee, guest, agent or customer of
Sublessee or any other person, from any causes whatsoever, or for any loss or
damage or injury to any property outside or within the Premises belonging to
Sublessee or its employees, agents, customers, licensees, invitees, guests or
any other person, unless and to the extent such death, injury, loss or damage
is caused by the gross negligence or willful misconduct of Sublessor, its
employees or agents. Without limiting the generality of the foregoing,
Sublessor shall not be liable for any loss or damages of any nature whatsoever
to persons or property caused by explosion, fire, or sprinkler damage, or by
the interruption of any public utility or service, by steam gas, water, rain
or other substances leaking, issuing or flowing into any part of the Premises,
by natural occurrence, acts of the public, riot, strike, insurrection, war,
court order, or order of governmental body or authority, or for any damage or
inconvenience which may arise through repair, maintenance or alteration of any
part of the Building, or by anything done or omitted to be done by any tenant,
occupant or person in the Building.
15. Indemnity. Sublessee shall indemnify and hold Sublessor and
---------
Landlord, its agents and employees harmless from, and defend Sublessor and
Landlord, and their respective agents and employees against, any and all
losses, damages, claims, or liability for any damage to any property or
injury, illness or death of any person occurring in, on, or about the
Premises, or any part thereof, arising at any time and from any cause
whatsoever other than solely by reason of the gross negligence or willful
misconduct of Sublessor or Landlord, or their respective agents or employees.
The provisions of this paragraph shall survive the termination of this
Sublease with respect to any damage, injury, illness or death occurring prior
to such termination.
16. Insurance.
---------
(a) Sublessee, at its cost, shall maintain such insurance in such
amounts as is required of Sublessor pursuant to Sections 10.1 and 10.3 of the
Lease; provided, however, where any such insurance requires the "Landlord" to
be named as an additional insured, Sublessee shall cause Sublessor and
Landlord to be named as an additional insured thereunder. Sublessee's entry
upon the Premises for any purpose is conditioned upon the deliver to Sublessor
of certificates of insurance, in form and
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<PAGE>
substance reasonably acceptable to Sublessor, confirming that Sublessee
maintains en effect the insurance coverages required under this Paragraph
16(a).
(b) Each policy, or a certificate of the policy, together with
evidence of payment of premiums, shall be deposited with Sublessor at the
commencement of the term, and on renewal of the policy not less than twenty
(20) days before expiration of the term of the policy. If Sublessee fails to
insure or fails to furnish to Sublessor any insurance policy required herein,
Sublessor may from time to time effect such insurance for the benefit of
Sublessee for a period not exceeding one year, and any premium paid by
Sublessor shall be recoverable from Sublessee on demand with interest thereon
at the Specified Rate, without waiver or other remedies available to Sublessor
because of the default.
17. Notices. Whenever in this Sublease it is required or permitted
-------
that notice or demand be given or served by Sublessor or Sublessee to or on
the other, such notice or demand shall be deemed properly given only if made
in writing and either deposited in the United States mail, postage prepaid,
certified with return receipt requested, or delivered by hand (which may be
through a messenger or recognized delivery, courier or air express service)
and addressed, if to Sublessor, at the address hereinafter provided and, if to
Sublessee, at the Premises, or at such other place as either party may from
time to time designate in a written notice to the other. Such notices or
demands shall be effective on the date of receipt (evidenced by the certified
mail receipt), if mailed, or on the date of hand delivery, if hand delivered.
If any such notice or demand is not received or cannot be delivered due to a
change in the address of the receiving party of which notice was not
previously given to the sending party or due to a refusal to accept by the
receiving party, such request, approval, consent, notice or other
communication shall be effective on the date delivery is attempted. Sublessee
hereby appoints as its agent to receive the service of all default notices and
notice of commencement of unlawful detainer proceedings the person in charge
of or apparently in charge of or occupying the Premises at the time, and, if
there is not such person, then such service may be made by attaching the same
on the entrance of the Premises and such service shall be effective for all
purposes under this Sublease. The address for notices to Sublessor is 150
Chestnut Street, San Francisco, CA 94111, Attention: David Overmyer.
18. Attorneys' Fees. The prevailing party in any action or
---------------
proceeding brought by either party against the other under this Sublease shall
be entitled to recover court costs and the fees of its attorneys in such
action or proceeding (whether at the administrative, trial or appellate
levels) in such amount as the court or administrative body may adjudge
reasonable, plus all costs and expenses incurred for title and lien searches,
deposition costs and all other costs and expenses reasonably incurred by the
prevailing party in connection with the subject proceeding. For purposes
hereof, the giving of any notice of default by Sublessor shall be deemed to
constitute part of an action or proceeding thereby entitling Sublessor to
reimbursement of attorneys' fees and disbursements even if an action or
proceeding is not commenced. All sums due under
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<PAGE>
this paragraph shall be deemed additional rental. Sublessee's obligations
hereunder shall survive expiration and/or termination of this Sublease.
19. Casualty. The terms and provisions of Article 11 of the Lease are
--------
specifically incorporated herein by reference (with each reference therein to
Landlord and Tenant to be deemed to refer to Sublessor and Sublessee,
respectively); provided that to the extent Article 11 requires that the Landlord
repair or restore any portion of the Premises arising out of a casualty to the
Building, the Master Premises or the Premises, Sublessee shall seek recourse
from the Landlord only, and Sublessor shall not be liable for any breach by the
Landlord under the Lease; and provided, further, that Sublessee shall only be
entitled to rent abatement to the extent Sublessor is entitled to rent abatement
pursuant to Section 11.8 of the Lease for that portion of the Master Premises
consisting of all or a portion of the Premises. In addition to any rights
granted to Sublessee, as Tenant under the Lease, Sublessee shall have the right
to terminate this Sublease, if the time estimated by Landlord in Landlord's
Casualty Notice (as that term is defined in the Lease) is greater than ninety
(90) days, Sublessee may terminate this Sublease by written notice to Sublessor;
provided, however, notwithstanding anything to the contrary in this Sublease or
in the Lease, upon any termination of this Sublease following a casualty where
the Lease is not terminated, any and all insurance proceeds payable to Sublessee
with respect to the replacement, repair and/or restoration of the Premises
(other than Tenant's furniture, fixtures and equipment) shall be paid over by
Sublessee to Sublessor. Sublessee's obligations under this Paragraph 19 shall
survive the termination of this Sublease.
20. Entry.
-----
(a) Sublessee agrees that Sublessor may, upon twenty-four (24)
hours' telephonic notice (except in the event of an emergency, in which case
no notice shall be required), at any time during regular business hours, enter
upon the Premises for the purpose of inspecting the same and determining
whether Sublessee is complying with all of its obligations hereunder;
provided, that any such entry shall be conducted so as to cause as little
interference to the Sublessee as reasonably possible, and Sublessee shall have
the right to have a representative accompany Sublessor during any such
inspection.
(b) Sublessee acknowledges that Sublessor intends to occupy the
remainder of the third floor of the Building (subject to the terms of
Paragraph 26 below), and that in connection with such occupancy Sublessor will
require access to the Premises in order to facilitate the improvements and
work being conducted by Sublessor to the remainder of the third floor of the
Building. In furtherance thereof, Sublessee agrees that Sublessor, upon twenty-
four hours' telephonic notice, may enter and perform work in the Premises
during the hours after 6:00 p.m. and before 6:00 a.m., Monday through Friday,
and at anytime on Saturdays and Sundays, as is reasonably required in
connection with Sublessor's build-out and improvement of the remainder of the
third floor of the Building; provided that the same does not, as a whole,
materially interfere with the ability of Sublessee to conduct its business
operations in the Premises, taking
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<PAGE>
into account that there may be times during the first six months of the term
of this Sublease when as a consequence of Sublessor's build-out of the
remainder of the third floor of the Building non-critical electrical power and
other services may need to be interrupted to the Premises, and when
construction may need to be conducted in the Premises (with attendant noise
and disruption) and that during said hours of Sublessor's entry into the
Premises, and in the specific areas where Sublessor is causing work to be
performed, Sublessee's business may be interfered with and interrupted.
Without limiting the generality of the foregoing, Sublessor agrees that it
will cooperate with Sublessee to reschedule work that would cause an
interference with any television studio production and editing activities in
the Premises.
21. Estoppel Certificate. Sublessee shall, without charge to
--------------------
Sublessor or Landlord, at any time from time to time, within ten (10) days
after receipt of written request therefor, deliver a fully executed
certificate certifying, if true: (a) that this Sublease is unmodified and in
full force and effect, or if there have been any modifications, that same is
in full force and effect as modified and stating any such modifications; (b)
whether or not there is then existing any claim of default of the other party
hereunder and if so, specifying the nature thereof; and (c) the current amount
of fixed rent payable hereunder by Sublessee and the date to which the same
has been paid.
22. Signage.
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(a) Sublessor will provide a Building directory sign in the
ground floor and third floor elevator lobby of the Building to allow Sublessee
to insert a panel identifying Sublessee and, space permitting, other relevant
information therein, at Sublessee's sole cost and expense. Sublessee shall
have no other signage or identification rights in or on the Building.
(b) Sublessee shall not place any posters, signs (including neon
or electrically illuminated signage) or other material along the exterior
windows of the Premises and visible from the outside of the Building.
Sublessor shall have the right to adopt and implement uniform window covering
standards and materials for the Building, and Sublessee shall place such
window coverings in the Premises (or allow Sublessor to install the same, at
the request of Sublessor), and shall reimburse Sublessor, promptly following
being invoiced thereof, the pro-rata cost of such window coverings; provided
the window coverings selected by Sublessor are not materially more expensive
than that generally provided for general office tenants of comparable office
buildings in the vicinity of the Building.
23. Parking. Subject to the consent of the owner of the parking
-------
facility, Sublessee shall have the right, at Sublessee's sole cost and
expense, to use up to twenty five (25) of the non-exclusive parking spaces to
which Sublessor is entitled to use pursuant to Section 1.5(a) of the Lease, at
the same rate and in the same manner Sublessor is charged for such parking
spaces pursuant to Section 1.5(a) of the Lease.
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<PAGE>
24. Access. Sublessor reserves the right to exclude from the Building
------
during the evening, night and early morning hours beginning at 6 P.M. and
ending at 8 A.M. Monday through Friday, and at all hours on Saturdays,
Sundays, and legal holidays, all persons who do not present identification
acceptable to Sublessor. Sublessee shall provide Sublessor with a list of all
persons authorized by Tenant to enter the Premises and shall be liable to
Sublessor for all acts of such persons. Landlord shall in no case be liable
for damages for any error with regard to the admission to or exclusion from
the Building of any person. Subject to the foregoing, Sublessee shall have
access to the Building on a twenty-four (24) hour, seven (7) day a week basis.
25. Contingency. This Sublease is subject to and conditioned upon
-----------
receipt of Landlord's consent to this Sublease, including, without limitation,
Landlord's approval of the Tenant Improvements. If such consent is not
obtained on or before May 1, either party hereto shall have the right to
cancel this Sublease, and this Sublease shall be null and void upon receipt of
such written notice of such cancellation from either party hereto.
26. Right of First Offer. There is presently approximately 2,500
--------------------
rentable square feet of additional space available for sublease occupancy on
the third floor of the Building (the "ADDITIONAL THIRD FLOOR PREMISES"). The
location of the Additional Third Floor Premises is identified as such on
Exhibit "A" to this Sublease. Upon written notice to Sublessor given prior to
May 1, 1998 (the "EXERCISE NOTICE") Sublessee may lease the Additional Third
Floor Premises on the same terms and conditions of this Sublease. If Sublessee
delivers an Exercise Notice to Sublessor, Sublessor and Sublessee will
promptly execute an amendment to this Lease adding the Additional Third Floor
Premises to the Premises (and Sublessee's Base Monthly Rent and Sublessee's
Percentage Share shall be increased accordingly). On or after May 1, 1998:
(i) If Sublessor wishes to lease any of the Additional Third
Floor Premises, and provided that no Event of Default shall then exist
under this Sublease, Sublessor shall give Sublessee written notice of the
availability of the Additional Third Floor Premises and the economic
terms and conditions (including rent) (the "RIGHT OF FIRST OFFER TERMS")
that Sublessor is willing to offer to prospective tenants for such space
(the "OFFER"), and Sublessee shall have two (2) business days following
receipt of the Offer to accept the Offer and elect to lease the
Additional Third Floor Premises upon the terms and conditions contained
in the Offer. If Sublessee accepts the Offer and leases the Additional
Third Floor Premises, such space shall be added to the Premises on the
terms and conditions of this Sublease, except for and as modified by the
Right of First Offer Terms.
(ii) If Sublessee does not timely notify Sublessor in writing
of Sublessee's response to the Offer, the failure to respond shall be
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<PAGE>
deemed a rejection of the Offer. In the event of the rejection or deemed
rejection of the Offer, Sublessor shall be permitted to lease the
Additional Third Floor Premises to any third party on any terms it
chooses, without any further obligation to reoffer the Additional Third
Floor Premises to Sublessee.
(iii) Notwithstanding anything to the contrary in this
Paragraph 26, if the Offer contains a proposed lease term which is
longer than the remaining term of this Lease, any monetary concessions
and allowances contained in the Offer, if any, shall be proportionately
reduced based on the period remaining in the term of this Sublease.
(iv) Notwithstanding anything to the contrary in this
Paragraph 26, the right granted Sublessee herein shall be subject to the
right of Sublessor to occupy the space and to remove the Additional Third
Floor Premises from the market as space subject to sublease.
27. Brokers. Each of Sublessor and Sublessee represents that it has not
-------
incurred an obligation to any broker in connection with this Sublease, other
than Cushman & Wakefield of California ("SUBLESSOR'S BROKER"), and each party
hereto shall hold the others harmless from and against any and all liability,
loss, damage, expense, claim, action, demand, suit or obligation arising out
of or relating to a breach by either party of this representation. Sublessor
shall pay the commission of Sublessor's Broker.
28. Entire Agreement. This Sublease represents the entire agreement
----------------
between the parties to this Sublease, and supersedes all prior agreements by
the parties, both written and verbal.
IN WITNESS WHEREOF, this Sublease is made the day and year first above
written.
SUBLESSEE: SUBLESSOR:
PREVIEW TRAVEL, INC., CNET, a Delaware corporation
a Delaware corporation
By: /s/ JAMES HORNTHAL By: /s/ DAVID OVERMYER
---------------------------------- ------------------------------
Its: CHAIRMAN Its:
---------------------------------- ------------------------------
By:
----------------------------------
Its:
----------------------------------
A-18
<PAGE>
EXHIBIT 10.19
PREVIEW TRAVEL, INC.
EMPLOYMENT TRANSITION AGREEMENT
This Employment Transition Agreement (the "Agreement") is made by and
between Preview Travel, Inc. (the "Company") and Roy F. Walkenhorst
("Employee"), effective as of April 1, 1998 (the "Effective Date").
WHEREAS, Employee is presently serving as an executive officer of the
Company;
WHEREAS, the Company and Employee have mutually agreed to (i) terminate
Employee's status as an executive officer of the Company; and (ii) transition
Employee into a position wherein he provides certain services as a non-executive
employee of the Company.
NOW, THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee hereby agree as follows:
1. Duties and Scope of Employment Relationship. Employee hereby resigns
-------------------------------------------
from the position of President of News Travel Network, Inc. effective as of the
date of this Agreement. The Company shall employ the Employee as a full-time
sales representative of the Company reporting to Kenneth R. Pelowski, Executive
Vice President of Finance and Administration and Chief Financial Officer of the
Company, for a period commencing with the Effective Date and terminating on
September 30, 1998 (the "Term"). During the Term, the sole duty of Employee
shall be to submit reports to the Company on a monthly basis summarizing any
proposed and/or negotiated licenses for all NTN programs and non-NTN programs
that Employee represents pursuant to that certain Television Program
Representation Agreement between Employee and the Company dated April 1, 1998
(the "Representation Agreement").
2. Employee Benefits. During the Term, Employee shall be eligible to
-----------------
participate in the employee benefit plans maintained by the Company to the full
extent provided for under those plans and except as otherwise specifically
provided for herein. Notwithstanding the foregoing, the Company shall provide
the Employee with health benefits substantially similar to those he currently
receives under the Company's employee benefit plans for a period of two (2)
years from the Effective Date.
3. Compensation and Fringe Benefits. During the Term, Employee shall
--------------------------------
receive a salary from the Company in the amount of $500 per month. Such salary
shall be paid periodically in accordance with normal Company payroll practices
and subject to the usual required withholding. Employee shall be eligible for
all other benefits Employee currently receives from the Company including, but
not limited to, an IATAN card and the continued vesting of Employee's
outstanding stock options. If Employee is terminated for Cause (as defined in
Section 6 hereof) or if Employee
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<PAGE>
voluntarily terminates his employment relationship prior to the end of the Term
of this Agreement, such benefits shall be canceled.
4. Mutual Release of Claims. Employee agrees that the foregoing
------------------------
consideration represents settlement in full of all outstanding obligations owed
to Employee by the Company, other than the obligations set forth in this
Agreement and in the Representation Agreement. Employee and the Company, on
behalf of themselves, and their respective heirs, executors, officers,
directors, employees, investors, shareholders, administrators, predecessor and
successor corporations, and assigns, hereby fully and forever release each other
and their respective heirs, executors, officers, directors, employees,
investors, shareholders, administrators, predecessor and successor corporations,
and assigns, of and from any claim, duty, obligation or cause of action relating
to any matters of any kind, whether presently known or unknown, suspected or
unsuspected, that any of them may possess arising from any omissions, acts or
facts that have occurred up until and including the effective date of this
Agreement including, without limitation,
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Employee's right
to purchase, or actual purchase of shares of stock of the Company, other than
those set forth in Section 3 of this Agreement;
(c) any and all claims for wrongful discharge of employment; breach
of contract, both express and implied; breach of a covenant of good faith and
fair dealing, both express and implied; negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage; and
defamation;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, and the California
Fair Employment and Housing Act;
(e) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fees and costs.
The Company and Employee agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released. This release does not extend to any obligations incurred
under this Agreement or the Representation Agreement.
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<PAGE>
5. Expenses. During the Term, Employee shall be responsible for his own
--------
travel, entertainment and other expenses incurred by him in the furtherance of
or in connection with the performance of Employee's duties hereunder, provided,
however, that the Company shall provide to Employee office space and reasonable
office services at no cost to Employee through December 31, 1998.
6. Termination for Cause. The Company may terminate Employee's employment
---------------------
for cause by giving Employee thirty (30) days' advance notice in writing. For
the purposes of this Agreement, "Cause" is defined as (i) Employee's conviction
of a felony, (ii) a willful act by Employee which constitutes gross misconduct
and which is injurious to the Company, (iii) Employee's continued substantial
violations of his employment duties which are demonstrably willful and
deliberate on Employee's part after Employee has received a written demand for
performance from the Company which specifically sets forth the factual basis for
the Company's belief that Employee has not substantially performed his duties,
or (iv) Employee's breach of the non-compete provisions set forth in Sections 8
and 9 hereof. In the event the Company wishes to terminate Employee's
employment pursuant to (ii) or (iii) above, Employee shall be given an
opportunity to cure such misconduct or violation. If such misconduct or
violation is not cured by Employee to the Company's satisfaction during the
thirty (30) days following the Company's notice of termination to Employee,
Employee's employment shall terminate immediately upon the expiration of such
thirty (30) day period.
7. Death of Executive. If Employee dies during the Term of this
------------------
Agreement, this Agreement shall terminate immediately; provided, however, that
Employee's estate shall be permitted to exercise any vested stock options held
by Employee prior to his death in accordance with the terms of the stock option
plan and stock option agreements pursuant to which such stock options were
granted.
8. Covenant Not to Compete.
------------------------
(a) Covenant Not to Compete. Until the end of the Term, Employee will
-----------------------
not directly or indirectly engage in (whether as an employee, consultant,
proprietor, partner, director or otherwise), or have any ownership interest in,
or participate in the financing, operation, management or control of, any
person, firm, corporation or business that engages in a "Restricted Business" in
a "Restricted Territory" (as such terms are defined in Section 9 hereof). It is
agreed that ownership of no more than 2% of the outstanding voting stock of a
publicly traded corporation shall not constitute a violation of this provision.
(b) Representations. The parties intend that the covenant contained
---------------
in Section 8(a) shall be construed as a series of separate covenants, one for
each county, city and state (or analogous entity) and country of the Restricted
Territory. Except for geographic coverage, each such separate covenant shall be
deemed identical in terms to the covenant contained in the preceding paragraphs.
If, in any judicial proceeding, a court shall refuse to enforce any of the
separate covenants (or any part thereof) deemed included in said paragraphs,
then such unenforceable
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<PAGE>
covenant (or such part) shall be deemed eliminated from this Agreement for the
purpose of those proceedings to the extent necessary to permit the remaining
separate covenants (or portions thereof) to be enforced.
(c) Reformation. In the event that the provisions of this Section 8
-----------
should ever be deemed to exceed the time or geographic limitations, or the scope
of this covenant, permitted by applicable law, then such provisions shall be
reformed to the maximum time or geographic limitations, as the case may be,
permitted by applicable laws.
(d) Reasonableness of Covenants. Employee represents that he (i) is
---------------------------
familiar with the covenants not to compete, and (ii) is fully aware of his
obligations hereunder, including, without limitation, the reasonableness of the
length of time, scope and geographic coverage of these covenants.
9. Definitions. As used herein, the terms listed below shall have the
-----------
following meanings:
(a) Restricted Business. "Restricted Business" means the design,
-------------------
marketing or support of online travel services.
(b) Restricted Territory. "Restricted Territory" means worldwide.
--------------------
10. Arbitration and Equitable Relief.
--------------------------------
(a) The parties hereto agree that any dispute or controversy arising
out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof shall be settled by arbitration to be held in San Francisco County,
California, in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association (the
"Rules"). The arbitrator may grant injunctions or other relief in such dispute
or controversy. The decision of the arbitrator shall be final, conclusive and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction.
(b) The arbitrator shall apply California law to the merits of any
dispute or claim, without reference to rules of conflict of law. The
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law. The parties hereto hereby
expressly consent to the personal jurisdiction of the state and federal courts
located in California for any action or proceeding arising from or relating to
this Agreement and/or relating to any arbitration in which the parties are
participants.
(c) The Company and Employee shall each pay one-half of the costs and
expenses of such arbitration, and shall separately pay its counsel fees and
expenses.
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<PAGE>
(d) THE PARTIES HERETO HAVE READ AND UNDERSTAND SECTION 10, WHICH
DISCUSSES ARBITRATION. THE PARTIES HERETO UNDERSTAND THAT BY SIGNING THIS
AGREEMENT, THEY AGREE TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO,
OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY,
CONSTRUCTION, PERFORMANCE, BREACH, OR TERMINATION THEREOF TO BINDING
ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF THEIR
RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO
ALL ASPECTS OF THE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO,
THE FOLLOWING CLAIMS:
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD
FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL
INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION;
NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC
ADVANTAGE; AND DEFAMATION.
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS
ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT
ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR
STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABOR CODE
SECTION 201, et seq;
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
11. Enforcement. In the event of any action to enforce the terms of this
-----------
Agreement, the prevailing party in such action shall be entitled to such party's
reasonable costs and expenses of enforcement including, without limitation,
reasonable attorneys' fees.
12. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of (a) the heirs, executors and legal representatives of Employee upon
Employee's death and (b) any successor of the Company. Any such successor of
the Company shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, "successor" shall include any
person, firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires all or
substantially all of the assets or business of the Company. None of the rights
of Employee to receive any form of compensation payable pursuant to this
Agreement shall be assignable or transferable except through a testamentary
disposition or by the laws of descent and distribution upon the death of
Employee following termination without cause. Any attempted assignment,
transfer, conveyance or other disposition (other than as aforesaid)
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<PAGE>
of any interest in the rights of Employee to receive any form of compensation
hereunder shall be null and void.
13. Notices. All notices, requests, demands and other communications
-------
called for hereunder shall be in writing and shall be deemed given if delivered
personally or three (3) days after being mailed by registered or certified mail,
return receipt requested, prepaid and addressed to the parties or their
successors in interest at the following addresses, or at such other addresses as
the parties may designate by written notice in the manner aforesaid:
If to the Company: Preview Travel, Inc.
747 Front Street
San Francisco, CA 94111
Attn: Kenneth R. Pelowski
If to Executive: Roy F. Walkenhorst
160 Funston Avenue
San Francisco, CA 94118
14. Severability. In the event that any provision hereof becomes or is
------------
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
15. Entire Agreement. This Agreement, the Representation Agreement, the
----------------
stock option agreements between Employee and the Company and any written
proprietary information agreement between Employee and the Company represent the
entire agreement and understanding between the Company and Employee concerning
Employee's employment relationship with the Company, and supersede and replaces
any and all prior agreements and understandings concerning Employee's employment
relationship with the Company. In the event that there is any conflict between
the provisions of this Agreement and any other agreement or benefit plan between
Company and Employee regarding Employee's right to participate in any stock
option or other stock related benefit agreement between the Company and
Employee, the provisions of this agreement shall govern.
16. No Oral Modification. This Agreement may only be amended in writing
--------------------
signed by Employee and the Company.
17. Governing Law. This Agreement shall be governed by the laws of the
-------------
State of California.
18. Acknowledgment. Employee acknowledges that he has had the
--------------
opportunity to discuss this matter with and obtain advice from his private
attorney, has had sufficient time to, and has carefully read and fully
understands all the provisions of this Agreement, and is knowingly and
voluntarily entering into this Agreement.
-6-
<PAGE>
19. Tax Treatment. Executive acknowledges that the Company makes no
-------------
representations regarding the tax treatment of amounts payable hereunder.
-7-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
date first set forth above.
PREVIEW TRAVEL, INC.
/s/ Kenneth R. Pelowski
- --------------------------
By: Kenneth R. Pelowski
Title: Executive Vice President, Finance and
Administration and Chief Financial Officer
ROY F. WALKENHORST
/s/ Roy F. Walkenhorst
- -------------------------
Signature
<PAGE>
EXHIBIT 10.20
TELEVISION PROGRAM REPRESENTATION AGREEMENT
This Agreement (the "Agreement") is made and entered into as of January 1,
1998 by and between Roy F. Walkenhorst, an individual residing at 160 Funston
Avenue, San Francisco, California 94118 ("RFW") and PREVIEW TRAVEL, INC., a
Delaware Corporation located at 747 Front Street, San Francisco, California
94111 ("PREVIEW TRAVEL") in connection with the distribution of television
programs as set forth in Appendices A and B attached hereto and made a part
hereof and the New NTN Programs as defined below.
PREVIEW TRAVEL and RFW agree as follows:
1. Appointment to Represent Existing NTN Programs, Existing Non-NTN
----------------------------------------------------------------
Programs and New NTN Programs. Subject to the terms and conditions of this
- -----------------------------
Agreement, PREVIEW TRAVEL hereby appoints RFW for the Term of this Agreement on
an exclusive basis to represent for licensing the Existing NTN Programs as set
forth in Appendix A and the Existing Non-NTN Programs as set forth in Appendix B
and the New NTN Programs as defined in Section 5 below within the Licensed Media
and Licensed Territory as set forth in Appendix C. During the Term, RFW shall
be entitled to negotiate licenses for the Existing NTN Programs, the Existing
Non-NTN Programs and the New NTN Programs that extend beyond the expiration of
the Term of this Agreement, but in no event shall such licenses extend more than
three (3) years beyond the expiration of the Term of this Agreement unless
approved by PREVIEW TRAVEL, and no extensions or renewals thereof by PREVIEW
TRAVEL shall count towards Gross Receipts hereunder. Notwithstanding the
foregoing, with respect to the New NTN Programs only, the term of the foregoing
appointment is for the duration of the copyright to the New NTN Programs,
provided, that all New NTN Programs must be created during the Term or any
Renewal Term. RFW agrees to submit to PREVIEW TRAVEL a copy of each fully
executed license agreement within five (5) business days after complete
execution thereof, and, on a monthly basis, within ten (10) days of the end of
each month, a written report summarizing existing licenses for Existing NTN
Programs, Existing Non-NTN Programs and New NTN Programs and the status of
prospective licenses for Existing NTN Programs, Existing Non-NTN Programs and
New NTN Programs. All Program licenses negotiated and executed by RFW on behalf
of, and as agent for, PREVIEW TRAVEL are deemed herein the "RFW Program
Licenses," and may also be referred to herein as the "RFW NTN Program License,"
the "RFW Non-NTN Program Licenses," and the "RFW New NTN Program Licenses."
2. Gross Receipts. For purposes of this Agreement, the term "Gross
--------------
Receipts" with respect to the Programs or the New NTN Programs, as applicable,
shall be deemed to mean the aggregate of the sums actually received by PREVIEW
TRAVEL from all RFW Program Licenses as set forth in this Agreement. Gross
Receipts shall not include adjustments, credits, allowances, rebates and refunds
actually made to third parties as mutually agreed upon by PREVIEW TRAVEL and
RFW, nor shall Gross Receipts include any sums withheld by any licensee until
actually paid to and received by PREVIEW TRAVEL.
3. Commissions.
-----------
1
<PAGE>
(a) Existing NTN Program Commissions. In full and complete consideration
--------------------------------
for the services performed by RFW in connection with the Existing NTN Programs,
RFW shall receive as consideration for his representation of the Existing NTN
Programs hereunder Commissions in amounts equal to the following:
(i) Fifty Percent (50%) of the Gross Receipts received from the RFW
NTN Program Licenses during Q1 1998;
(ii) Forty Percent (40%) of the Gross Receipts received from the RFW
NTN Program Licenses during Q2-4 1998 and until total Gross Receipts received
from all RFW Program Licenses equals $400,000;
(iii) Sixty Percent (60%) of the Gross Receipts received from RFW NTN
Program Licenses thereafter as set forth in this Agreement.
(b) Existing Non-NTN Programs. In full and complete consideration for
-------------------------
the services performed by RFW in connection with the existing Non-NTN Programs,
RFW shall receive as consideration for his representation of the Non-NTN
Programs Commissions in an amount equal to Fifty Percent (50%) of the Adjusted
Gross Receipts for Existing Non-NTN Programs. Adjusted Gross Receipts are
defined as Gross Receipts less the amounts due to sales representatives and to
the copyright owners of the Existing Non-NTN Programs.
(c) New NTN Programs Commissions. In full and complete consideration for
----------------------------
the services performed by RFW in connection with the New NTN Programs, RFW shall
receive as consideration for its production and representation services of the
New NTN Programs a Commission in the amount equal to Ninety Percent (90%) of the
Gross Receipts received from the RFW New NTN Program Licenses.
(d) Advance on Commissions. PREVIEW TRAVEL shall pay to RFW a non-
----------------------
refundable advance against RFW's Commission in the amount equal to One Hundred
Thousand Dollars ($100,000), payable as follows: (i) $40,000 upon execution of
this Agreement, (ii) $60,000, payable in twenty equal monthly installments of
$3,000, with the initial installment payable on May 1, 1998. Until such time as
the Advance is recouped from RFW's Commission, RFW shall receive no Commissions
under this Agreement; provided that New NTN Program Commissions shall not be
subject to recoupment from the Advance.
4. Use of Production Facilities. During the Term and any Renewal Term RFW
shall be entitled to use the PREVIEW TRAVEL production facilities at discounted
rates as specified in Appendix D.
5. New NTN Programs. RFW shall be entitled to use the existing PREVIEW
TRAVEL library of video footage to create New NTN Programs. As used herein "New
NTN Programs" means any television programming episodes based on existing
PREVIEW TRAVEL footage but not repurposing more than fifty percent (50%) of
existing PREVIEW TRAVEL segments or programming or using any existing PREVIEW
TRAVEL program titles or any PREVIEW TRAVEL
2
<PAGE>
trademarks or trade names, unless approved by PREVIEW TRAVEL. RFW warrants that
all New NTN Programs shall be consistent if character and quality with Existing
NTN Programs. All Foreign Language Versions, if any, of Existing NTN Programs
created pursuant to Section 7 below shall not constitute New NTN Programs
hereunder. RFW shall bear all costs and expenses in connection with the
production of the New NTN Programs. All ownership rights of RFW to the New NTN
Programs are subject to PREVIEW TRAVEL's underlying rights to the PREVIEW TRAVEL
library of video footage licensed hereunder.
6. Delivery. The delivery of the Existing NTN Programs, Existing Non-NTN
---------
Programs and footage for New NTN Programs shall consist of the delivery to RFW
or the applicable licensor of all delivery materials as reasonably required for
the applicable distribution or production agreements.
7. Foreign Language Versions. RFW shall be entitled to render production
services to dub, subtitle, translate or have such additional changes made to
Existing NTN Programs or Existing Non-NTN Programs for localization, censorship,
time-editing or similar purposes to meet the requirements of Program licensors.
RFW shall be entitled to reimbursement for the reasonable out-of-pocket costs
for such dubbing, subtitling, translating or similar work, provided that PREVIEW
TRAVEL pre-approves such costs and is provided reasonable substantiation of such
costs in the form of invoices or other documentation. The dubbed, subtitled,
translated or localized programs created pursuant to this Section 7 shall be
deemed the "Foreign Language Versions" and shall be the sole property of PREVIEW
TRAVEL as a work-made-for-hire specially ordered or commissioned by PREVIEW
TRAVEL, with PREVIEW TRAVEL being deemed the sole author thereof and RFW hereby
transfers and assigns all rights, title and interest therein, including all
copyrights. RFW hereby waives and agrees never to assert any so-called moral
rights therein and thereto and to execute all further documents reasonably
requested by PREVIEW TRAVEL to further evidence, confirm or set of record
PREVIEW TRAVEL's rights to the Foreign Language Versions of Existing NTN
Programs or Existing Non-NTN Programs. RFW shall furnish broadcast-quality
copies of the Foreign Language Versions to PREVIEW TRAVEL upon request at
PREVIEW TRAVEL's expense for delivery and duplication.
8. Accounting. PREVIEW TRAVEL shall keep accurate and true books and
records concerning the RFW Program Licenses, and RFW shall have the right, at
its sole cost and expense and no more than annually, to examine the books of
account and records to be kept by PREVIEW TRAVEL with respect to the Gross
Receipts derived from the RFW Program Licenses or to cause the same to be
examined or audited upon seven (7) days prior written notice. PREVIEW TRAVEL
shall furnish to RFW thirty (30) days after the end of each calendar quarter,
statements itemizing Gross Receipts received during the period in question, for
as long as PREVIEW TRAVEL is required to pay the Commissions to RFW from the RFW
Program Licenses. Each statement shall be accompanied by PREVIEW TRAVEL's
remittance in U.S. Dollars.
9. Marketing. RFW may market the Existing NTN Programs, the Existing Non-
NTN Programs and the New NTN Programs directly or cause said Programs to be
represented through subagents throughout the world. RFW warrants that subagents
will be the same as or comparable in competence, quality and experience as
subagents retained by News Travel Network at the time of
3
<PAGE>
execution of this Agreement. RFW further warrants that licenses for Existing NTN
Programs, Existing Non-NTN Programs and New NTN Programs executing during the
Term of this Agreement will either be (i) comparable to or better than the
licenses in effect for Existing NTN Programs and Existing Non-NTN Programs at
the time of execution of this Agreement, or (ii) no worse than standard and
customary license fees and terms existing at the time of the execution of new
licenses for Existing NTN Programs, Existing Non-NTN Programs and new NTN
Programs.
Except as provided in the immediate preceding paragraph, nothing in this
Agreement shall be construed to prevent or restrict PREVIEW TRAVEL, in any way
or at any time or place, from producing, distributing, exhibiting or otherwise
marketing other programs of any kind, including those produced by other persons
or companies, and whether or not competitive to the Programs and New NTN
Programs distributed hereunder, it being agreed that, other than as expressly
provided herein, PREVIEW TRAVEL is not to be prevented or restricted because of
this Agreement from doing any act or thing which it might have had the right to
do had this Agreement not been entered into.
10. Facilities Support. During the Term and any Renewal Term, PREVIEW
------------------
TRAVEL shall provide RFW with (i) office space at PREVIEW TRAVEL-supplied
facilities (minimum of two private offices and one support space), (ii)
reasonable access to office services on a non-dedicated basis at no charge,
(iii) the Macintosh computers as assigned to RFW and Penny DeVries at the time
of this Agreement, plus a third Macintosh computer of comparable value, and one
printer, and one setup for same, and (iv) travel barter on Northwest Airlines
equal to eight (8) roundtrip business class tickets to Europe in 1998 and the
same amount of travel barter in 1999. Any Northwest travel barter unused at the
end of 1998 shall be added to the amount of Northwest travel barter available
for use in 1999. The foregoing office space, equipment and services (other than
pursuant to subpart [iv]), shall be provided (i) from April 1, 1998 until
December 30, 1998 at no charge, (ii) from January 1, 1999 until June 30, 1999 at
the rate of $10 per square foot of such office space, and (iii) thereafter at
the rate of $20 per square foot of such office space, provided that this
Agreement is still in force and effect during such periods. PREVIEW TRAVEL
shall invoice RFW for the foregoing fees, and any other fees payable under this
Agreement, which shall be payable on a net 30 basis, and shall be subject to
off-set by PREVIEW TRAVEL from Commissions payable to RFW hereunder if not paid
on such basis. In addition, PREVIEW TRAVEL shall provide RFW with access at no
charge to scripts, tapes, VHS copies of Consumer Travel Reports programming and
scripts as they are completed, fulfillment coordination as currently supplied by
NTN Syndication Services, and reasonable quantities of VHS dubs as need to
support RFW efforts to develop the New NTN Programs out of the PREVIEW TRAVEL
film library.
4
<PAGE>
11. PREVIEW TRAVEL Warranties. PREVIEW TRAVEL represents and warrants as
-------------------------
follows:
(a) that PREVIEW TRAVEL is the sole owner of all right, title and interest
in and to the Programs and the footage and/or segments provided for use within
the New NTN Programs and all rights, licenses and privilege herein conveyed and
has full right and authority to enter into and perform this Agreement and to
convey the said rights;
(b) that the Programs and the footage and/or segments provided for use
within the New NTN Programs are not in the public domain and have been or will
be validly copyrighted in the United States during the Term and likewise may be
protected elsewhere, so far as the laws of other countries provide for such
protections;
(c) that there are no claims or litigation pending or threatened adversely
affecting any of the rights, licenses and privilege herein conveyed;
(d) that the performing rights in the music contained in the Programs or
the footage and/or segments provided for use within the New NTN Programs are and
will be controlled by BMI, ASCAP, SESAC or any other performing rights society
having jurisdiction, are in the public domain, or are and will be controlled by
PREVIEW TRAVEL to the extent necessary to permit RFW's use of the Programs and
the footage and/or segments provided for use within the New NTN Programs under
this Agreement.
RFW hereby makes reciprocal representations and warranties, and agrees to a
reciprocal indemnification of PREVIEW TRAVEL pursuant to the terms of Section 12
below, with respect to all elements of the New NTN Programs other than the
PREVIEW TRAVEL elements.
12. Indemnity. PREVIEW TRAVEL agrees and guarantees to defend, indemnify
---------
and hold RFW, its successors, licensees, officers, agents and/or associates,
harmless from and against all charges, damages, costs, expenses (including
reasonable attorney's fees), judgments, penalties, liabilities, claims or losses
of any kind or nature whatsoever which may be sustained or suffered by or
secured against or imposed upon each or any of them by reason of the breach by
PREVIEW TRAVEL of any of its representations and warranties contained herein.
RFW shall similarly indemnify and hold PREVIEW TRAVEL, its successors,
licensees, officers, agents and/or associates, harmless from and against all
charges, damages, costs, expenses (including reasonable attorney's fees),
judgments, penalties, liabilities, claims or losses of any kind or nature
whatsoever which may be sustained or suffered by or secured against or imposed
upon each or any of them by reason of RFW's breach of any of its representations
or warranties hereunder. Each party shall give prompt notice and reasonable
assistance to the other party in connection with any claim for which it may seek
indemnification hereunder.
13. RFW Obligations. RFW agrees, in good faith, to conduct its business
---------------
activities in a reputable manner in accordance with the reasonable business
policies and practices of PREVIEW TRAVEL. Each party acknowledges that neither
party makes nor has made any representation or
5
<PAGE>
warranty as to the amount of Gross Receipts to be derived, or that any Gross
Receipts will be derived from RFW's pursuant to this Agreement.
14. Term of Agreement. The term of this Agreement shall be for twelve
------------------
(12) months commencing as of January 1, 1998 and ending December 31, 1998 (the
"Term"). The Agreement shall be subject to automatic renewal for an additional
twelve (12) month period if the sum of Gross Revenues earned during the twelve
months of 1998 from the RFW Program Licenses, plus an amount equal to twenty
percent (20%) of any production fees paid by RFW pursuant to Section Four,
equals or exceeds Three Hundred Thousand Dollars ($300,000). Gross Revenues
earned are defined as licenses from Existing NTN Programs, Existing Non-NTN
Programs and New NTN Programs in which the license term has commenced and all
materials required by the license agreement have been delivered.
Notwithstanding the foregoing, in the event that such sum does not equal or
exceed $300,000, RFW shall have the right, in his sole discretion, to make
payment of the difference between such sum and $300,000 (the "Deficit Amount")
on or before December 31, 1998, in which event the Term shall be automatically
renewed for the above-referenced additional twelve (12) month period. The
Deficit Amount shall not be subject to recoupment against Commissions or any
other amounts payable to RFW hereunder and shall not be repayable to RFW for any
reason. After the Renewal Term, if any, this Agreement shall be subject to
renewal for additional 12-month periods upon the mutual written agreement of the
parties. Notwithstanding the foregoing, either party shall have the right to
terminate this agreement (i) upon thirty (30) days advance written notice in the
event of any breach or default hereof that remains uncured after such thirty-day
period, and (ii) immediately upon written notice in the event of the voluntary
or involuntary bankruptcy or similar proceedings for the settlement of the other
party's debts.
15. Assignment. This Agreement is personal in nature and entered into by
----------
PREVIEW TRAVEL based on RFW's unique reputation and expertise, and may not be
assigned by RFW without the prior written approval of PREVIEW TRAVEL.
Notwithstanding the foregoing, PREVIEW TRAVEL acknowledges that RFW intends to
incorporate and do business as Lightbridge Inc., or whatever similar name is
approved by the incorporation regulators and that this incorporation will not
diminish or adversely affect in any way the rights granted RFW under this
Agreement and RFW may assign this Agreement to such corporation or other
business entity that is wholly-owned by RFW upon written notice to PREVIEW
TRAVEL. Subject to the foregoing, this Agreement shall inure to the benefit of
the parties and their successors and assigns.
16. Notices. All notices under this Agreement shall be given in writing
-------
and delivered in person or deposited, air mail postage pre-paid and addressed as
follows in the United States mail or delivered toll pre-paid to a telegraph or
cable company, or overnight mail services, addressed as first set forth above,
or such other address as either party may hereafter designate in writing to the
other. The date of the telegraphing of such notice or the personal delivery
thereof, one (1) day after transmittal by overnight mail service, or seven (7)
days after transmittal by air mail, shall be deemed to be the effective date of
the giving of such notice. All payments required to be made hereunder to RFW by
PREVIEW TRAVEL shall be sent to the above designated address of RFW or such
other address as RFW shall notify PREVIEW TRAVEL in writing.
6
<PAGE>
17. Remedies. RFW acknowledges and agrees that its rights and remedies in
--------
the event of any breach by PREVIEW TRAVEL or any of its successors, assigns or
licensees shall be strictly limited to the right, if any, to recover the maximum
amount of One Hundred Fifty Thousand Dollars ($150,000) in an action at law.
PREVIEW TRAVEL shall be entitled to all rights and remedies without exception
now or hereafter available to it in law or in equity. Except as otherwise
expressly limited hereunder, all of the rights and remedies of the parties
specified within this Agreement shall be cumulative and without limitation of
any other rights or remedies at law or in equity.
18. Force Majeure. Except for payment obligations hereunder,
-------------
notwithstanding anything else in this Agreement, no default, delay or failure to
perform on the part of either party shall be considered a breach of this
Agreement if such default, delay or failure to perform is shown to be due
entirely to causes beyond reasonable control of the party charged with a
default, including, but not limited to, causes such as strikes, lockouts or
other labor disputes, riots, civil disturbances, actions or inactions of
governmental authorities or suppliers, epidemics, war, embargoes, severe
weather, fire, earthquakes, acts of God or the public enemy, nuclear disasters,
or default of a common carrier; provided that no event of force majeure shall
extend the term of this Agreement or of any license hereunder..
19. Relationship of the Parties. The parties hereto are independent
---------------------------
contractors. Nothing contained in this Agreement shall create any partnership
or joint venture between the parties. Neither party may pledge the credit of
the other or make binding commitments on the part of the other, except as
otherwise specifically agreed hereunder.
20. Limitation of Liability. IN NO EVENT SHALL PREVIEW TRAVEL'S
-----------------------
AGGREGATE LIABILITY UNDER THIS AGREEMENT EXCEED ONE HUNDRED FIFTY THOUSAND
DOLLARS ($150,000). IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR
CONSEQUENTIAL, INCIDENTAL, SPECIAL, INDIRECT OR RELIANCE DAMAGES, ARISING OUT
OF OR RELATING TO THIS AGREEMENT OR THE TERMINATION THEREOF, INCLUDING WITHOUT
LIMITATION LOST PROFITS, LOST BUSINESS OPPORTUNITY OR OTHERWISE, REGARDLESS OF
WHETHER SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND
NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. THE
PARTIES AGREE THAT THE FOREGOING ALLOCATION RISK IS A MATERIAL TERM OF THIS
AGREEMENT REFLECTED IN THE COMPENSATION PAYABLE UNDER THIS AGREEMENT.
21. Arbitration and Equitable Relief.
---------------------------------
(a) The parties hereto agree that any dispute or controversy arising
out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof shall be settled by arbitration to be held in San Francisco County,
California, in accordance with the Commercial Rules then in effect of the
American Arbitration Association (the "Rules"). The arbitrator may grant
injunctions or other relief in such dispute or controversy. The decision of the
arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgment may be entered on the arbitrator's decision in any court
having jurisdiction.
7
<PAGE>
(b) The arbitrator shall apply California law to the merits of any
dispute or claim, without reference to rules of conflict of law. The
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law. The parties hereto hereby
expressly consent to the personal jurisdiction of the state and federal courts
located in the Northern District of California for any action or proceeding
arising from or relating to this Agreement and/or relating to any arbitration in
which the parties are participants.
(c) The parties shall each pay one-half of the costs and expenses of
such arbitration, and shall each separately pay its counsel fees and expenses.
(d) THE PARTIES HERETO HAVE READ AND UNDERSTAND THIS SECTION 21, WHICH
DISCUSSES ARBITRATION. THE PARTIES HERETO UNDERSTAND THAT BY SIGNING THIS
AGREEMENT, THEY AGREE TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO,
OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY,
CONSTRUCTION, PERFORMANCE, BREACH, OR TERMINATION THEREOF TO BINDING
ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF THEIR
RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO
ALL ASPECTS OF TO THE SUBJECT MATTER OF THIS AGREEMENT. NOTWITHSTANDING THE
FOREGOING, PREVIEW TRAVEL RESERVES THE RIGHT TO SEEK INJUNCTIVE OR OTHER
EQUITABLE RELIEF IN ANY COURT OF COMPETENT JURISDICTION, WITHOUT RESORT TO
ARBITRATION, IN THE EVENT OF ANY BREACH OR THREATENED BREACH OF THIS AGREEMENT
THAT WOULD CONSTITUTE A VIOLATION OF PREVIEW TRAVEL'S INTELLECTUAL PROPERTY
RIGHTS.
22. Miscellaneous. No waiver by either party hereto of any breach of this
-------------
Agreement shall be deemed to be a waiver of any preceding or succeeding breach
of the same or any other provision hereof, nor shall the exercise of any right
granted to either party hereunder be deemed to operate as a waiver. This
Agreement is being executed and delivered and shall be construed and enforced in
accordance with the laws of the State of California. If any provisions of this
Agreement shall be determined by a court of other tribunal of competent
jurisdiction to be void or unenforceable, all other provisions of this Agreement
shall nevertheless continue in full force and effect. This Agreement expresses
the entire understandings, whether written or oral, relating in any way to the
subject matter hereof. No modification, amendment or supplement to this
Agreement shall be effective unless in writing executed by each of the parties
hereto. Each of the parties hereto acknowledges that it is entering into this
Agreement without reliance in any way on any statement, representation, action
or other matter not specifically set forth herein.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Roy F. Walkenhorst PREVIEW TRAVEL, INC:
By: /s/ Roy F. Walkenhorst By: /s/ Kenneth R. Pelowski
---------------------- -----------------------
Its: Its: EVP and CFO
----------------------- -----------------------
9
<PAGE>
APPENDIX A - THE EXISTING NTN PROGRAMS
1. Globe . Trotter
2. World's Weirdest Places
3. Bon Voyage
4. Bon Voyage (Canadian version)
5. Travel Shorts
6. Earth Journeys With Christopher Reeve
7. The e Report
8. Environmental Shorts
9. Holiday USA
10. Lead Poisoning: What Everyone Needs to Know
11. Southeast Asia Today (Altschul)
12. Asia Today (Adler)
13. Travel Update (International rights only - no U.S.)
14. Civil War River Journey
15. Exploring America's Rivers and Lakes
16. Library Footage
-10-
<PAGE>
APPENDIX B - THE EXISTING NON-NTN
PROGRAMS
1. Dr. Dean
2. Jack Hanna's Animal Tales (international rights only, no U.S.)
3. c/net Tech Reports (international rights only, no U.S.)
-11-
<PAGE>
APPENDIX C -
EXCLUSIVE RFW TERRITORY FOR THE EXISTING NTN PROGRAMS,
THE EXISTING NON-NTN PROGRAMS, AND NEW NTN PROGRAMS
Licensed Territory: Worldwide.
- ------------------
Licensed Media: Subject to the rights reserved to PREVIEW TRAVEL below, all
- --------------
broadcast, cable, MMDS, satellite and other similar linear (non-interactive)
television distribution systems, and home video distribution of linear non-
interactive programming in tangible media.
Rights Reserved to PREVIEW TRAVEL: The Travel Channel, The Discovery Channel,
- ---------------------------------
The Learning Channel, Animal Planet, MSNBC, CNBC, CNBC Asia, CNBC Europe, NBC
Europe and NBC Asia, all networks involved in the sale of products or services
to consumers, including QVC, HSN, etc., and all other means of distribution,
including, but not limited to, @Home, WebTV, and all interactive, online media,
Internet, DVD, CD-ROM and other microcomputer based multimedia and other now and
hereafter devised methods and media of distribution.
-12-
<PAGE>
APPENDIX D - PRODUCTION
FACILITY RATES
<TABLE>
<CAPTION>
LINEAR EDITING WITH EDITOR RFW RATES*
D2 ONLINE RATE CARD ROOM TIME
- -----------------------------------------------------------
<S> <C> <C> <C>
Edit 1 and Edit 2 $220-$225 $ 60 After 5 PM and Weekends
$150 8 AM to 5 PM Rates
Beta to Beta
Edit 3 and Edit 4 $125 $ 38 After 5 PM and Weekends
$ 75 8 AM to 5 PM Rates
ImMix Cube $106 $ 30 After 5 PM and Weekends
$ 60 8 AM to 5 PM Rates
Graphics - SGI $200 $ 75 After 5 PM and Weekends
$150 8 AM to 5 PM Rates
Studio $200 $ 55 After 6 PM and Weekends
$110 8 AM to 5 PM Rates
Editors - Drow or Millar $ 50/Hour $ 35/Hour Any time
Graphic Artist $125/Hour $ 36/Hour Any time
</TABLE>
* ROOM ONLY
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-49631) of our report dated January 28, 1998, on our audits of the
consolidated financial statements of Preview Travel, Inc. and Subsidiaries. We
also consent to the references to our firm under the captions "Experts" and
"Selected Financial Data."
COOPERS & LYBRAND L.L.P.
San Francisco, California
April 16, 1998
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kenneth J. Orton and Kenneth Pelowski,
and each one of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective
amendments), and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof. This
Power of Attorney may be signed in several counterparts.
/s/ David S. Pottruck Director April 8, 1998
- --------------------------------
(David S. Pottruck)
/s/ Theodore J. Leonsis Director April 8, 1998
- --------------------------------
(Theodore J. Leonsis)
/s/ William R. Hearst, III Director April 8, 1998
- --------------------------------
(William R. Hearst, III)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
BALANCE SHEET AT MARCH 31, 1998 AND STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> MAR-31-1997 MAR-31-1998
<CASH> 0<F1> 12,477
<SECURITIES> 0<F1> 11,407
<RECEIVABLES> 0<F1> 2,740
<ALLOWANCES> 0<F1> (40)
<INVENTORY> 0<F1> 0
<CURRENT-ASSETS> 0<F1> 32,462
<PP&E> 0<F1> 6,074
<DEPRECIATION> 0<F1> (2,423)
<TOTAL-ASSETS> 0<F1> 38,404
<CURRENT-LIABILITIES> 0<F1> 5,845
<BONDS> 0<F1> 0
0<F1> 0
0<F1> 0
<COMMON> 0<F1> 11
<OTHER-SE> 0<F1> 30,690
<TOTAL-LIABILITY-AND-EQUITY> 0<F1> 38,404
<SALES> 3,519 4,015
<TOTAL-REVENUES> 3,519 4,015
<CGS> 2,296 2,443
<TOTAL-COSTS> 2,749 6,531
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21 278
<INCOME-PRETAX> (1,505) (4,681)
<INCOME-TAX> 0 (7)
<INCOME-CONTINUING> (1,505) (4,688)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,505) (4,688)
<EPS-PRIMARY> (0.88) (0.41)
<EPS-DILUTED> (0.88) (0.41)
<FN>
<F1>*BALANCE SHEET INFORMATION FOR MARCH 31, 1997 IS NOT INCLUDED IN THIS FILING AS
IT IS NOT REQUIRED.
</FN>
</TABLE>
