UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 000-23177
================================================================================
PREVIEW TRAVEL, INC.
DELAWARE 94-2965892
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
747 FRONT STREET, SAN FRANCISCO, CA 94111
(415) 439-1200
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of June 30, 1998, there were 13,422,997 shares of the registrant's
Common Stock outstanding.
<PAGE>
INDEX
-----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed consolidated balance sheets at June 30, 1998
and December 31, 1997
Condensed consolidated statements of operations for the
three and six months ended June 30, 1998 and 1997
Condensed consolidated statements of cash flows for the
six months ended June 30, 1998 and 1997
Notes to condensed consolidated financial statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................... $40,004 $27,912
Marketable securities.............................. 30,489 750
Accounts receivable, net........................... 3,435 1,990
Other assets....................................... 5,618 6,087
----------- -----------
Total current assets............................. 79,546 36,739
Film library, net.................................. 2,159 2,402
Property and equipment, net........................ 4,237 3,644
----------- -----------
Total assets..................................... $85,942 $42,785
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................... $996 $2,189
Accrued liabilities................................ 3,469 2,480
Deferred revenues.................................. 234 255
Current portion of capital lease obligations....... 1,119 882
----------- -----------
Total current liabilities........................ 5,818 5,806
Capital lease obligations, less current portion.... 1,657 1,614
----------- -----------
Total liabilities................................ 7,475 7,420
Stockholders' equity:
Common stock..................................... 13 11
Additional paid-in capital....................... 114,328 61,676
Other stockholders' equity....................... (438) (539)
Accumulated deficit.............................. (35,436) (25,783)
----------- -----------
Total stockholders' equity....................... 78,467 35,365
----------- -----------
Total liabilities and stockholders' equity......... $85,942 $42,785
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Online................................ $3,147 $1,174 $5,479 $2,670
Television............................ 1,667 2,033 3,350 4,056
--------- --------- --------- ---------
Total revenues................... 4,814 3,207 8,829 6,726
--------- --------- --------- ---------
Cost of revenues:
Online................................ 1,446 853 2,647 1,763
Television............................ 1,394 1,503 2,636 2,889
--------- --------- --------- ---------
Total cost of revenues........... 2,840 2,356 5,283 4,652
--------- --------- --------- ---------
Gross profit............................ 1,974 851 3,546 2,074
--------- --------- --------- ---------
Operating expenses:
Marketing and sales................... 5,162 1,181 9,555 2,516
Research and development.............. 844 296 1,582 701
General and administrative............ 1,566 914 2,966 1,923
--------- --------- --------- ---------
Total operating expenses......... 7,572 2,391 14,103 5,140
--------- --------- --------- ---------
Loss from operations.................. (5,598) (1,540) (10,557) (3,066)
Interest income (expense), net.......... 647 (1) 925 20
--------- --------- --------- ---------
Loss before income taxes.............. (4,951) (1,541) (9,632) (3,046)
Taxes................................... (14) (1) (21) (1)
--------- --------- --------- ---------
Net loss................................ ($4,965) ($1,542) ($9,653) ($3,047)
========= ========= ========= =========
Basic and diluted net loss per share.... ($0.39) ($0.90) ($0.80) ($1.79)
========= ========= ========= =========
Weighted average shares outstanding
used in per share calculations........ 12,742 1,712 12,047 1,707
========= ========= ========= =========
SUPPLEMENTAL INFORMATION (UNAUDITED)
Gross bookings.......................... $49,512 $17,816 $85,402 $31,933
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ ($9,653) ($3,047)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 827 434
Amortization of film library........................... 548 642
Unearned compensation.................................. 72 --
Changes in operating assets and liabilities............ (652) (945)
---------- ----------
Net cash provided by (used
in) operating activities............................ (8,858) (2,916)
---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment................... (1,129) (590)
Purchase of marketable securities....................... (29,739) --
Additions to film library............................... (305) (327)
---------- ----------
Net cash used in investing
activities.......................................... (31,173) (917)
---------- ----------
Cash flows from financing activities:
Proceeds from borrowings on long-term debt.............. -- 850
Payment of long-term debt............................... -- (2,000)
Payments on equipment note.............................. -- (68)
Payments on obligations under capital leases............ (561) (250)
Proceeds from repayment of shareholder notes............ 88 --
Proceeds from issuance of common stock.................. 216 309
Proceeds from issuance of common stock-IPO, net......... (39) --
Proceeds from issuance of common stock-secondary, net... 52,419 --
Proceeds from issuance of preferred stock............... -- 85
Proceeds from stock warrant exercises................... -- 27
---------- ----------
Net cash provided by (used
in) financing activities............................ 52,123 (1,047)
---------- ----------
Net increase (decrease) in cash..................... 12,092 (4,880)
Cash and cash equivalents, beginning of the period....... 27,912 6,016
---------- ----------
Cash and cash equivalents, end of the period............. $40,004 $1,136
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PREVIEW TRAVEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - The Company and Basis of Presentation
Preview Travel, Inc. (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. (City.Net) and with Lycos,
Inc. Through its News Travel Network, Inc. subsidiary, the Company
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, discount and promotional
fares, travel news and destination content, including content licensed
from Fodor's Travel Publications, Inc. Preview Travel, Inc. (formerly
Preview Media, Inc.) was incorporated in California in March 1985 and was
reincorporated in Delaware in November 1997.
The accompanying unaudited condensed consolidated financial
statements reflect all adjustments which, in the opinion of management,
are necessary for a fair presentation of the results for the period
shown. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any
future period.
These financial statements should be read in conjunction with the
financial statements and related notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Note 2 - Recent Accounting Pronouncements
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. This statement requires the disclosure of comprehensive
income and its components in a full set of general-purpose financial
statements. Comprehensive income is defined as net income plus revenues,
expenses, gains and losses that, under generally accepted accounting
principles, are excluded from net income. The components of comprehensive
income, which are excluded from net income, are not significant
individually or in the aggregate, and therefore, no separate statement of
comprehensive income has been presented.
In June, 1997, the Financial Accounting Standards Board issued
Statement of Financial Standards No. 131, "Disclosure About Segments of
an Enterprise and Required Information," which is effective for the year
ending December 31, 1998. The Company is considering additional
disclosures, if any, which will be required by this pronouncement.
Note 3 - Commitments
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 has made aggregate
payments to AOL and Excite totaling $9.0 million as of June 30, 1998, and
is obligated to make additional aggregate payments to AOL and Excite
totaling $3.1 million in 1998, $10.9 million in 1999, $12.4 million in
2000 and 2001 and $8.2 million in 2002. The Company is also obligated to
pay a percentage of commissions earned by the Company in excess of
certain thresholds. To retain the right to be the primary provider of
travel services on AOL, the Company 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 pay minimum amounts totaling $4.3 million, of
which $1.1 million has been paid as of June 30, 1998, as well as a
portion of commissions earned by the Company in excess of certain
thresholds under the agreement. In addition, the Company has committed to
purchase approximately $500,000 in advertising on Lycos' sites, which the
Company may resell to third parties.
In addition, the Company has entered into distribution and
licensing agreements with other third parties requiring the Company to
make payments in the aggregate of $2.7 million during the term of such
agreements, of which $364,000 has been paid as of June 30, 1998.
Note 4 - Net Income (Loss) Per Share
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 Six Months Ended
------------------- -------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator--Basic and diluted EPS
Net loss................................ ($4,965) ($1,542) ($9,653) ($3,047)
========= ========= ========= =========
Denominator--Basic and diluted EPS
Weighted average common stock
outstanding............................ 12,742 1,712 12,047 1,707
========= ========= ========= =========
Basic and diluted earnings per share.... ($0.39) ($0.90) ($0.80) ($1.79)
========= ========= ========= =========
</TABLE>
Note 5 - Secondary Offering
In May 1998, the Company completed a secondary offering of
3,519,000 shares of common stock to the public at a price of $28.50 per
share. Of these shares, 1,959,000 shares were sold by the Company and the
remaining 1,560,000 shares were sold by certain selling stockholders. The
Company received approximately $52.5 million in cash, net of the
underwriting discount and offering expenses.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Management's Discussion and Analysis of Financial Condition
and Results of Operations and other parts of this Form 10-Q contain
forward-looking statements that involve risks and uncertainties. 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 Form 10-Q. Readers are cautioned
not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company
assumes no obligation to update these forward-looking statements to
reflect actual results or changes in factors or assumptions affecting
such forward-looking statements.
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 America Online ("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
serves as the exclusive multiservice provider of travel reservation
services for Lycos' Travel Web Guide and Travel Network. In July 1998,
the Company began offering real-time bookings of vacation and cruise
packages through strategic partnerships with American Airlines Vacations
and Royal Caribbean Cruises Ltd.
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 six months ended June 30, 1998, the Company's
television operations accounted for approximately 94%, 79%, 56% and 38%
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
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 6% of the Company's total television revenues for the year ended
December 31, 1997 and the six months ended June 30, 1998, respectively.
Because the Company does not expect to receive any additional revenues
from MCI for television sponsorships, the Company expects revenues
attributable to MCI in 1998 to decrease significantly from that in 1997.
The Company currently anticipates that Best Buy Co., Inc. ("Best Buy")
will account for a significant percentage of the Company's television
advertising revenues in future periods. Revenues attributable to Best
Buy, which began advertising with the Company in March 1998, comprised
20% of the Company's total television revenues for the six months ended
June 30, 1998. 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 in the first
six months of 1998 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 in the first six months of 1998 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" or
"overrides." 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. In July 1998, the Company began offering real-
time bookings of vacation and cruise packages through strategic
partnerships with American Airlines Vacations and Royal Caribbean Cruises
Ltd. 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 $49.5
million in the second quarter of 1998, which resulted in online revenues,
including advertising revenue, of approximately $424,000 and $3.1
million, respectively, for the corresponding periods. The commission
rates paid by travel suppliers, in addition to overrides, are determined
by individual travel suppliers and are subject to change. Historically,
typical standard base commission rates paid by travel suppliers have been
approximately 10% for hotel reservations, 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. These
reductions were followed by similar reductions made by other smaller
airlines. 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 67%,
62%, 52% and 38% of the Company's gross bookings for the three months
ended September 30, 1997, December 31, 1997, March 31, 1998 and June 30,
1998 respectively. The decline in the percentage of gross bookings sold
through the AOL network is due to faster growth in gross bookings sold
through Excite, Lycos and the Company's own Web site. Travel services
sold through Excite accounted for 13%, 15%, 16% and 18% of the Company's
gross bookings for the three months ended September 30, 1997, December
31, 1997, March 31, 1998 and June 30, 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 June 30, 1998, had an accumulated deficit of $35.4
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. As the Company increases its investments in product
development, advertising, international expansion, customer service and
facilities, the Company expects to continue to incur significant
operating losses on a quarterly and annual basis for the foreseeable
future, and the rate at which such losses will be incurred is expected to
increase significantly from current levels, resulting in corresponding
decreases in working capital, total assets and 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 and other
strategic partners 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 condensed
consolidated statement of operations to total revenues, except as
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Online................................ 65.4% 36.6% 62.1% 39.7%
Television............................ 34.6% 63.4% 37.9% 60.3%
--------- --------- --------- ---------
Total revenues................... 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
Cost of revenues:
Online................................ 30.0% 26.6% 30.0% 26.2%
Television............................ 29.0% 46.9% 29.8% 43.0%
--------- --------- --------- ---------
Total cost of revenues........... 59.0% 73.5% 59.8% 69.2%
--------- --------- --------- ---------
Gross profit............................ 41.0% 26.5% 40.2% 30.8%
--------- --------- --------- ---------
Operating expenses:
Marketing and sales................... 107.2% 36.8% 108.2% 37.4%
Research and development.............. 17.5% 9.2% 17.9% 10.4%
General and administrative............ 32.6% 28.5% 33.7% 28.6%
--------- --------- --------- ---------
Total operating expenses......... 157.3% 74.5% 159.8% 76.4%
--------- --------- --------- ---------
Loss from operations.................. -116.3% -48.0% -119.6% -45.6%
Interest income (expense), net.......... 13.5% -0.1% 10.5% 0.3%
--------- --------- --------- ---------
Loss before income taxes.............. -102.8% -48.1% -109.1% -45.3%
Taxes................................... 0.3% 0.0% 0.2% 0.0%
--------- --------- --------- ---------
Net loss................................ -103.1% -48.1% -109.3% -45.3%
========= ========= ========= =========
AS A PERCENTAGE OF RELATED REVENUES:
Cost of online revenues................. 45.9% 72.7% 48.3% 66.0%
Cost of television revenues............. 83.6% 73.9% 78.7% 71.2%
</TABLE>
<PAGE>
Comparison of Three Months and Six Months Ended June 30, 1998 and 1997
Revenues
Online Revenues. Online revenues were $3.1 million and $5.5 million
for the second quarter and first half of 1998, respectively, which
represent increases of 168% and 105% when compared to the corresponding
periods in 1997. The increases were 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 commissions paid to online
travel services by certain airlines. As a result of the recent reductions
in commissions paid on online sales of tickets by certain airlines, the
Company anticipates that the average commissions paid to the Company for
airline tickets as a percentage of gross bookings will decline in future
periods. Online advertising revenues were $550,000 and $834,000 for the
second quarter and first half of 1998, respectively, which represent
increases of 571% and 379% when compared to the corresponding periods in
1997. Gross bookings were $49.5 million and $85.4 million for the second
quarter and first half of 1998, respectively, which represent increases
of 178% and 167% when compared to the corresponding periods in 1997. The
increases in gross bookings were due primarily to 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 were 22.0 million and 40.9 million for the second
quarter and first half of 1998, respectively, which represent increases
of 346% and 365% when compared to the corresponding periods in 1997.
During the second quarter of 1998, the percentage of online revenues
derived from airline commissions, nonairline commissions and the sale of
advertising on the Company's online sites was 63%, 20% and 17%,
respectively, as compared to 78%, 9% and 7%, respectively, during the
second quarter of 1997. In addition, during the first quarter of 1997, 6%
of online revenues were derived from fees paid by AOL to the Company for
AOL connect time. Fees for AOL connect time were not paid to the Company
after the Company entered into a new distribution agreement with AOL in
the third quarter of 1997. During the first half of 1998, the percentage
of online revenues derived from airline commissions, nonairline
commissions and the sale of advertising on the Company's online sites was
65%, 20% and 15%, respectively, as compared to 79%, 7% and 6%,
respectively, during the first half of 1997. In addition, during the
first half of 1997, 8% 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 1.6 million profiles as of June
30, 1997 to over 4.4 million profiles as of June 30, 1998.
In 1996, the Company marketed its travel services primarily through
AOL. The Company expanded its online presence beyond AOL by marketing its
own Web site and by entering into a strategic relationship with Excite in
1997 and with Lycos in March 1998. The Company's gross bookings from
Excite, Lycos and the Web comprised approximately 62% and 56% of the
Company's total gross bookings for the second quarter and first half of
1998, respectively.
Television Revenues. Television revenues were $1.7 million and $3.4
million for the second quarter and first half of 1998, respectively,
which represent decreases of 18% and 17% when compared to the
corresponding periods in 1997, due primarily to the phase-out of MCI as
an advertising sponsor for the Company's television programming in 1997.
the Company expects television revenues to continue to decline in the
third and fourth quarters of 1998 compared to the same periods in 1997.
Advertising revenues constitute a majority of the Company's television
revenues and comprised 68% of television revenues in the second quarters
of 1998 and 1997, and 67% and 66% of television revenues in the first
half of 1998 and 1997, 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 were $1.4 million and $2.6 million
for the second quarter and first half of 1998, respectively, which
represent increases of 70% and 50% when compared to the corresponding
periods in 1997, primarily due to the increased volume of transactions in
the second quarter and first half of 1998. As a percentage of online
revenues, cost of online revenues decreased from 72.7% in the second
quarter of 1997 to 45.9% in the second quarter of 1998 and from 66.0% in
the first half of 1997 to 48.3% in the first half of 1998. The Company's
average cost per transaction declined from approximately $15.90 in the
second quarter of 1997 to approximately $8.50 in the second quarter of
1998, due to economies of scale resulting from increased transaction
volumes, an increase in the number of electronic air tickets issued,
which have a lower per transaction fulfillment cost than regular air
tickets, and an increase in the number of car and hotel reservations,
both of which have lower per transaction fulfillment costs than 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 were $1.4 million and $2.6 million for the second quarter and
first half of 1998, respectively, which represent decreases of 7% and 9%
when compared to the corresponding periods in 1997. These decreases were
due primarily to reduced production activity and cost reductions
implemented at the end of 1997. As a percentage of television revenues,
cost of television revenues increased from 73.9% in the second quarter of
1997 to 83.6% in the second quarter of 1998 and from 71.2% in the first
half of 1997 to 78.7% in the first half of 1998 due to the allocation of
fixed costs over a smaller revenue base. Film library amortization was
$274,000 and $321,000 in the second quarter of 1998 and 1997,
respectively, and $548,000 and $642,000 in the first six months of 1998
and 1997, respectively.
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 were $5.2 million and $9.6
million for the second quarter and first half of 1998, respectively,
which represent increases of 337% and 280% when compared to the
corresponding periods in 1997. As a percentage of total revenues,
marketing and sales expenses increased from 36.8% in the second quarter
of 1997 to 107.2% in the second quarter of 1998 and from 37.4% in the
first half of 1997 to 108.2% in the first half 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, Excite and Lycos
and increased advertising expenditures. 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
and online vacations booking capability, 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 were
$844,000 and $1.6 million for the second quarter and first half of 1998,
respectively, which represent increases of 185% and 126% when compared to
the corresponding periods in 1997. As a percentage of total revenues,
research and development expenses rose from 9.2% in the second quarter of
1997 to 17.5% in the second quarter of 1998 and from 10.4% in the first
half of 1997 to 17.9% in the first half of 1998. The increase in research
and development expenses was 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 were $1.6 million
and $3.0 million for the second quarter and first half of 1998,
respectively, which represent increases of 71% and 54% when compared to
the corresponding periods in 1997. As a percentage of total revenues,
general and administrative expenses rose from 28.5% in the second quarter
of 1997 to 32.6% in the second quarter of 1998 and from 28.6% in the
first half of 1997 to 33.7% to the first half of 1998. The increase in
general and administrative expenses was 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 six 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 second quarter and first
half of 1998 for options granted was $36,000 and $72,000, respectively.
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 half 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.
Interest Income (Expense)
Interest income, net of interest expense, was $647,000 and $925,000
for the second quarter and first half of 1998, respectively, compared to
net interest expense of $1,000 and net interest income of $20,000 for the
corresponding periods in 1997. 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 and
marketable securities balances in the first half of 1998, primarily from
an equity financing completed in September 1997 and net proceeds from the
Company's initial public offering in November 1997 and secondary public
offering in May 1998.
Income Taxes
The provision for income taxes recorded in the second quarter and
first six months of 1998 represents minimum state tax expense and
Delaware franchise taxes. The Company expects to incur a net loss for
1998; therefore, no provision for federal income taxes has been recorded
for the first half of 1998.
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. Additionally, in May 1998, the Company
completed a secondary public offering of its common stock, resulting in
net proceeds to the Company of approximately $52.5 million. Prior to the
two public offerings, 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 June 30, 1998, the Company also had a $2.0 million
line of credit, of which approximately $1.5 million was available, based
on 80% of the Company's qualifying accounts receivable.
Cash used in operating activities was $8.9 million in the first
half of 1998, attributable primarily to a net loss of $9.7 million, an
increase in accounts receivable and decreases in accounts payable and
accrued liabilities, partially offset by depreciation of $827,000 and
film library amortization of $548,000, as well as a decrease in other
assets. Cash used in investing activities in the first half of 1998
consisted primarily of $29.7 million for the purchase of marketable
securities and $1.1 million for the acquisition of property and
equipment. Cash provided by financing activities in the first half of
1998 of $52.1 million consisted primarily of proceeds from the Company's
secondary stock offering.
As of June 30, 1998, the Company had $40.0 million of cash and cash
equivalents and $30.4 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 other strategic partners
and under its lease obligations. 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, of which $7.5 million had been
paid as of June 30, 1998, and to 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, of which $1.5 million had been paid as of
June 30, 1998, and to 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 $4.3
million, of which $1.1 million had been paid as of June 30, 1998 and to
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 is 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" and "-Risk of Termination of Distribution Agreement with AOL."
The Company believes that its current cash, cash equivalents and
marketable securities together with the net proceeds of the secondary
offering completed in May 1998, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures
through the end of 1999. However, the Company could be required, or
could elect, to seek to raise additional financing during such period or
thereafter, through the sale of equity or debt securities or by obtaining
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, Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," was issued and was effective
for the Company's year ended 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, SFAS No. 130, "Reporting
Comprehensive Income," was issued and was adopted by the Company
effective January 1, 1998. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial
position or cash flows. In June 1997, the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise." The Company is required
to adopt this statement effective for 1998. The Company is considering
additional disclosures, if any, which will be required by this
pronouncement.
Risk Factors
In addition to the other information in this Report, the following
factors should be considered carefully in evaluating the Company's
business and prospects:
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 $9.7 million in 1995, 1996
and 1997 and the six months ended June 30, 1998, respectively. As of June
30, 1998, the Company had an accumulated deficit of approximately $35.4
million. The Company's television programming operations, which
represented 56% and 38% of its total revenues in 1997 and the six months
ended June 30, 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.
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 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.
Dependence on the Travel Industry. The Company derives a
significant portion of its revenues directly or indirectly from the
travel industry, and the Company's future growth is dependent on the
travel industry. The travel industry, especially leisure travel, which is
dependent on personal discretionary spending levels, is sensitive to
changes in economic conditions and tends to decline during general
economic downturns and recessions. The travel industry is also highly
susceptible to unforeseen events, such as political instability, regional
hostilities, fuel price escalation, travel-related accidents, unusual
weather patterns or other adverse occurrences. Any event that results in
decreased travel generally would likely have a material adverse effect on
the Company's business, operating results and financial condition.
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 other strategic partners, 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.
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 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 67%, 62%, 52%
and 38% of the Company's gross bookings for the three months ended
September 30, 1997, December 31, 1997, March 31, 1998, and June 30, 1998,
respectively. Travel services sold through Excite accounted for 13%, 15%,
16% and 18% of the Company's gross bookings for the three months ended
September 30, 1997, December 31, 1997, March 31, 1998 and June 30, 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.
Risk of Termination of Distribution Agreement with America Online.
The Company's future success depends in part upon its ability to maintain
its distribution agreement with AOL. The Company's distribution agreement
with AOL may be terminated by AOL in the event that the Company fails to
make certain minimum payments to AOL, fails to achieve specified levels
of travel services bookings or breaches its database services agreement
with AOL pursuant to which the Company is required to develop and manage
a travel-related destinations database for AOL. In particular, the
Company must achieve specified annual levels of travel services bookings,
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.
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 in 1997 and the six months ended June 30, 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. These reductions were followed by
similar reductions made by other smaller airlines. 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 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.
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 agreement with ANS Communications is
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."
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. Additionally, Priceline.com LLC
operates a Web site that allows users to bid on air tickets.
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.
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.
Risks Associated with Advertising Revenues. During 1996 and 1997
and the six months ended June 30, 1998, approximately 58%, 39% and 35%,
respectively, of the Company's total revenues were 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 may 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 a significant
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.
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.
Dependence on Attraction and Retention of Key Employees. The
Company's performance is substantially dependent on the continued
services and on the performance of its senior management and certain
other key personnel. The loss of the services of any of its executive
officers or other key employees could have a material adverse effect on
the Company's business, operating results and financial condition. The
Company does not have long-term employment agreements with any of its key
personnel. The Company's future success also depends on its ability to
identify, attract, hire, train, retain and motivate other highly skilled
technical, managerial, editorial, marketing and customer service
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to successfully attract,
assimilate or retain sufficiently qualified personnel. In particular, the
Company may encounter difficulties in attracting a sufficient number of
qualified software developers for its online services and transaction-
processing systems, and there can be no assurance that the Company will
be able to retain and attract such developers. The failure to retain and
attract necessary technical, managerial, editorial, merchandising,
marketing and customer service personnel could have a material adverse
effect on the Company's business, operating results and financial
condition.
Although none of the Company's employees is represented by a labor
union, it is common for employees in the television industry to belong to
a union, and there can be no assurance that the Company's employees will
not join or form a labor union or that the Company, for certain purposes,
will not be required to become a union signatory.
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.
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. 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.
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 in the first half of 1998 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 6% of
the Company's total television revenues for 1997 and the six months ended
June 30, 1998, respectively. Because the Company does not expect to
receive any additional revenues from MCI for television sponsorships, the
Company expects revenues attributable to MCI in 1998 to decrease
significantly from that in 1997. 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 a significant percentage of the
Company's television advertising revenues in future periods. Revenues
attributable to Best Buy, which began advertising with the Company in
March 1998, comprised 20% of the Company's total television revenues for
the six months ended June 30, 1998. 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.
Rapid Technological Change. The Internet and the online commerce
industry are characterized by rapid technological change, changes in user
and customer requirements and preferences, frequent new product and
service introductions embodying new technologies and the emergence of new
industry standards and practices that could render the Company's existing
online sites and proprietary technology and systems obsolete. The
emerging nature of these products and services and their rapid evolution
will require that the Company continually improve the performance,
features and reliability of its online services, particularly in response
to competitive offerings. The Company's success will depend, in part, on
its ability to enhance its existing services, to develop new services and
technology that address the increasingly sophisticated and varied needs
of its prospective customers and to respond to technological advances and
emerging industry standards and practices on a cost-effective and timely
basis. The development of online sites and other proprietary technology
entails significant technical and business risks and requires substantial
expenditures and lead time. There can be no assurance that the Company
will successfully use new technologies effectively or adapt its online
sites, proprietary technology and transaction-processing systems to
customer requirements or emerging industry standards. If the Company is
unable, for technical, legal, financial or other reasons, to adapt in a
timely manner in response to changing market conditions or customer
requirements, its business, operating results and financial condition
could be materially adversely affected.
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.
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 its initial public offering and secondary 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 its initial public offering and secondary offering, together
with its existing capital resources, will be sufficient to meet the
Company's capital requirements through the end of 1999, although the
Company could be required, or could elect, to seek to raise additional
financing during such period or thereafter, in part to fund its financial
obligations to AOL, Excite and Lycos, or for other purposes. There can be
no assurance that such financing will be available in sufficient amounts
or on terms acceptable to the Company, if at all.
Risks Associated with Offering New Services. The Company plans to
introduce new and expanded services and to enter into new relationships
with third parties in order to generate additional revenues, attract more
consumers and respond to competition. For example, the Company may offer
travel insurance, travel financing services and travel-related
merchandise. There can be no assurance that the Company would be able to
offer such services in a cost-effective or timely manner or that any such
efforts would be successful. Furthermore, any new service launched by
the Company that is not favorably received by consumers could damage the
Company's reputation or its brand name. Expansion of the Company's
services in this manner would also require significant additional
expenses and development and may strain the Company's management,
financial and operational resources. The Company's inability to generate
revenues from such expanded services or products sufficient to offset
their cost could have a material adverse effect on the Company's
business, operating results and financial condition.
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.
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 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.
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.
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. 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 market price of the Common Stock of
the Company 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.
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, 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company is subject to legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property rights. The
Company currently is not aware of any legal proceedings or claims that it
believes will have, individually or in the aggregate, a material adverse
effect on the its business, operating results and financial condition.
Item 2. Changes in Securities and Use of Proceeds.
On November 19, 1997, in connection with the Company's initial
public offering, a Registration Statement on Form S-1 (No. 333-37183) was
declared effective by the Securities and Exchange Commission, pursuant to
which 2,500,000 shares of the Company's Common Stock were offered and
sold for the account of the Company at a price of $11.00 per share,
generating gross offering proceeds of $27.5 million. The managing
underwriters were Hambrecht & Quist LLC and NationsBanc Montgomery
Securities, Inc. After deducting approximately $1.9 million in
underwriting discounts and $1.0 million in other related expenses, the
net proceeds of the offering were approximately $24.6 million. The
Company has used $6.4 million of the net proceeds of the offering for a
payment to AOL under the distribution agreement with AOL, $1.5 million
for payments to Excite under the distribution agreement with Excite and
$1.1 million for a payment to Lycos under the distribution agreement with
Lycos. The remaining $15.6 million has been invested in investment grade,
interest bearing securities. The Company intends to use such remaining
proceeds for capital expenditures, including the acquisition of redundant
computer and communication systems, for payment of its obligations to
AOL, Excite and Lycos pursuant to its agreements with AOL, Excite and
Lycos, and for general corporate purposes, including working capital to
fund anticipated operating losses.
Item 3. Defaults Upon Senior Securities - Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on May
27, 1998, at the Park Hyatt Hotel, located at 333 Battery
Street, San Francisco, California, where the following
matters were submitted to a vote of the stockholders, with
the results set forth below:
1. Election of eight directors to serve until the 1999
Annual Meeting of Stockholders or until their
respective successors are duly qualified and elected:
Withheld or
In Favor Abstained
Thomas W. Cardy 8,839,223 12,000
Thomas A. Cullen 8,839,223 12,000
James J. Hornthal 8,834,423 16,800
Theodore J. Leonsis 8,834,423 16,800
Douglas J. Mackenzie 8,834,423 16,800
James E. Noyes 8,834,423 16,800
Kenneth J. Orton 8,834,023 17,200
David S. Pottruck 8,839,223 12,000
2. Ratification of the appointment of
PricewaterhouseCoopers LLP (formerly Coopers & Lybrand
L.L.P.) as independent accountants of the Company for
the fiscal year ended December 31, 1998:
In Favor Opposed Abstained
8,848,465 100 2,658
Item 5. Other Information.
The Securities and Exchange Commission has recently
amended Rule 14a-4(c)(1) promulgated under the Securities
Exchange Act of 1934, as amended. As amended, Rule 14a-
4(c)(1) provides that a proxy may confer discretionary
authority to vote on a matter for an annual meeting of
stockholders if the proponent fails to notify the Company at
least 45 days prior to the month and day of mailing of the
prior year's proxy statement. The proxy statement for the
Company's 1998 Annual Meeting of Stockholders was mailed to
stockholders on April 27, 1998. Accordingly, if a proponent
does not notify the Company on or before March 12, 1999 of a
proposal for the 1999 Annual Meeting of Stockholders,
management may use its discretionary voting authority to vote
on such proposal, even if the matter is not discussed in the
proxy statement for the 1999 Annual Meeting of Stockholders.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREVIEW TRAVEL, INC.
By: /s/ KENNETH R. PELOWSKI
--------------------------------------
Kenneth R. Pelowski
Executive Vice President, Finance and
Administration, and Chief Financial Officer
(Principal Financial Officer)
By: /s/ BRUCE CARMEDELLE
--------------------------------------
Bruce Carmedelle
Vice President and Corporate Controller
(Principal Accounting Officer)
Date: August 13, 1998
<PAGE>
EXHIBIT INDEX
-------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM BALANCE SHEET AT JUNE 30, 1998 AND STATEMENT
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 40,004
<SECURITIES> 30,489
<RECEIVABLES> 3,435
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 79,546
<PP&E> 4,237
<DEPRECIATION> 0
<TOTAL-ASSETS> 85,942
<CURRENT-LIABILITIES> 5,818
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 78,454
<TOTAL-LIABILITY-AND-EQUITY> 85,942
<SALES> 8,829
<TOTAL-REVENUES> 8,829
<CGS> 5,283
<TOTAL-COSTS> 5,283
<OTHER-EXPENSES> 14,103
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,632)
<INCOME-TAX> 21
<INCOME-CONTINUING> (9,653)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,653)
<EPS-PRIMARY> ($0.80)
<EPS-DILUTED> ($0.80)
</TABLE>
