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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999 Commission file number 000-23177
============================================================================
PREVIEW TRAVEL, INC.
Delaware 94-2965892
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
747 Front Street, San Francisco, CA 94111
(Address of principal executive offices, including zip code)
(415) 439-1200
(Registrant's telephone number, including area code)
============================================================================
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 September 30, 1999, there were 13,938,792 shares of the registrant's
Common Stock outstanding.
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INDEX
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PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 3
SIGNATURES 27
2
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Part I
Financial Information
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 That
May Affect Future Results" 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. From its inception in 1985 until December
1998, when it sold substantially all of the assets of its television business,
the Company operated as a producer of travel related programming for broadcast
television stations and cable networks around the world. The Company shifted its
business focus and resources to online travel services and launched its online
service on AOL in January 1995 and on the Web in December 1995, providing users
with access to travel information and the ability to book travel services by
telephone. In May 1996, the Company launched its online airline reservation
service and, in the first half of 1997, enhanced its online reservation service
to include hotels and car rentals. In April 1997, the Company launched its co-
branded Web site for Excite's Travel Channel. 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 Travel Publications, Inc. 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 major travel
suppliers and currently offers over 1,900 packages to over 217 destinations.
Proposed Merger. In October 1999, the Company signed an agreement to merge
with and into Travelocity.com Inc., subject to certain conditions, including the
approval of the common stockholders of the Company and the expiration or early
termination of the waiting period pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. The waiting period expired on November
11, 1999. As a result of the planned merger, the Company has incurred, and
expects to continue to incur, incremental costs associated with the merger.
Sale of Television Business. On December 31, 1998, the Company completed a
transaction with NewsNet Central, Inc. ("NNC"), pursuant to which substantially
all of the assets of the Company's television business, as operated by the
Company's wholly owned subsidiary, News Travel Network, Inc. ("NTN"), were
transferred to NNC (referred to as the "TV Disposition"). Upon the closing of
the TV Disposition, the Company contributed certain assets to NNC, including the
following: (a) cash in the amount of $88,000, (b) certain assets related to
NTN's business, including a library of travel video content, and (c) assignment
of the Company's rights and obligations under certain contracts related to NTN's
business.
In consideration of the transfer of the assets of NTN to NNC, the Company
received from NNC the following: (a) a convertible promissory note in the
principal amount of $250,000 (the "Note"), (b) a subordinated promissory note in
the principal amount of $1,000,000 (the "Subordinated Note"), which will bear
interest at the rate of 6% per annum and will be secured by certain portions of
the assets of NNC, including its fixed assets and the video library, and (c) a
warrant to purchase up to 2,275,445 shares of
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Common Stock of NNC at an exercise price of $0.45 per share (the "Warrant"). In
March 1999, the Note was automatically converted into shares of Series A
Preferred Stock of NNC at a conversion price of $4.50 per share upon the
occurrence of certain conditions.
In addition, the Company and NNC entered into a Services Agreement that
provides for, among other things, the following: (a) the sublease to NNC of the
Company's facilities at One Beach Street in San Francisco, (b) the Company's
right to act as the co-exclusive advertising sales representative for NTN's
Travel Update programs, (c) a perpetual, non-exclusive, royalty-free license to
use NTN's travel video library (including any enhancements thereto), and (d) the
continued branding of NTN's "Travel News" and "Travel Update" programs with
"Preview Travel" marks. NNC has also agreed not to provide online travel
services for a period of five years following the termination of the Services
Agreement.
As the historical operations of the Company's television business were not
profitable, and due to the significant risks inherent in the independent
television business, the Company has attributed no value to the Subordinated
Note and the Warrant. The net value of the Company's investment in NNC was
recorded at $250,000. As of the closing of the TV Disposition, substantially all
of the Company's employees engaged in NTN's business became employees of NNC.
Upon the completion of the TV Disposition, the Company incurred a one-time
loss of approximately $4.2 million related to the sale of the television assets.
Overview of Continuing Operations. The Company's 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 its GDS supplier
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 major travel suppliers. 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 $106.5 million in the third quarter of 1999, which resulted in
revenues, including advertising revenue, of approximately $424,000 and $9.0
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 a continuation of this trend, in the
first half of 1998, two major airlines reduced their fixed rate commission for
online roundtrip ticket sales to ten dollars. These reductions were followed by
similar reductions made by other airlines. As a result, the weighted average
commission on online transaction revenue has declined as a result of these
reductions. Currently, the Company earns an average commission of approximately
4% on the sale of airline tickets. During the first quarter of 1998, one hotel
chain eliminated commissions paid to the Company and other online travel service
providers for online bookings. In response, the Company discontinued offering
bookings for that hotel chain. In addition, a large hotel chain advised the
Company that beginning in January 1999, they would pay a flat commission of two
dollars per completed hotel stay. As a result, the Company expects that its
commission rate from hotels will decline significantly. There can be no
assurance that other hotel chains or other travel suppliers will not also reduce
commission rates paid to the Company or eliminate such
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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 That May Affect Future Results--Reliance
on Travel Suppliers; Potential Adverse Changes in Commission Payments."
Advertising revenue has accounted for an increasing portion of the Company's
revenues, representing 9%, 10%, 24%, and 36%, of total revenues for 1996, 1997
and 1998, and the nine months ended September 30, 1999, respectively. The
Company currently expects that future growth, if any, of advertising revenue may
be adversely affected by seasonality in advertising expenditures in certain
quarters by advertisers and the uncertainty of the acceptance by the advertisers
of the Company's Web sites as an advertising medium. See "Risk Factors That May
Affect Future Results--Risks Associated with Advertising Revenues."
Travel services sold through the AOL network (including the primary AOL
service and AOL.COM) accounted for 28%, 33%, 33% and 34% of the Company's gross
bookings for the three months ended December 31, 1998, March 31, 1999, June 30,
1999 and September 30, 1999, respectively. Travel services sold through Excite
accounted for 16%, 13%, 12% and 11% of the Company's gross bookings for the
three months ended December 31, 1998, March 31, 1999, June 30, 1999 and
September 30, 1999, respectively. The Company's arrangements with AOL and Excite
are expected to continue to represent significant distribution channels for the
Company's travel services. Any termination of either or both of the Company's
agreement with AOL or amended agreement with Excite 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 agreements with AOL and Excite require minimum
aggregate payments of approximately $49.5 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 and
Excite. Further, there can be no assurance that the Company will satisfy the
minimum levels of travel services bookings, or provide satisfactory content on
the specified time schedule, required to maintain the AOL 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 That May Affect Future Results--Reliance on Distribution
Agreements with America Online and Excite."
Overview of Discontinued Operations. From inception through 1994, the Company
derived all of its revenues from its television operations. The Company has
restated its previously reported financial statements to reflect the results of
television operations as discontinued operations. Television revenues were
derived primarily from fees associated with sales of advertising time and the
licensing of travel related news and entertainment programming. Program license
revenues were recognized when all of the following conditions were met: (i) the
license period began, (ii) the license fee and the production costs were known
and (iii) the program had been accepted by the licensee and was available for
telecast. Advertising revenues were recognized when all the terms of the
advertising agreement were met, and advertising was shown on various media as
designated by the agreement.
The Company produced travel related news inserts and news and entertainment
programs that were syndicated in exchange for either cash or commercial
advertising time. The Company also syndicated third party news inserts. The
local commercial advertising time earned for providing these programs was
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 purchased commercial advertising time for resale in selected
markets. In addition, the Company produced in-flight programs, primarily for
Northwest Airlines.
Gross Margins. Gross margins may be impacted by a number of different factors,
including the mix of transaction revenues versus advertising revenues, the mix
of travel services sold, the mix of advertising 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 transaction
revenues, higher commissions on vacation packages than hotel rooms and car
rentals, higher commissions on hotel rooms from certain
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suppliers and car rentals than airline tickets, higher gross margins on
advertising revenues from its own Web site than through AOL, Excite or Lycos and
higher commissions from certain airlines than others. 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. In June 1999, the Company
entered into an agreement with its GDS supplier, Galileo, that increased the
Company's segment fee revenue and decreased GDS expenses included in cost of
revenues retroactive to the beginning of 1999. As a result, the Company expects
its segment fee revenue to increase significantly in future periods. In August
1999, the Company added a second reservations call center. This call center is
expected to increase cost of revenues and likely lower gross margins in the near
term. See "Risk Factors That May Affect Future Results--Unpredictability of
Future Revenues; Fluctuations in Quarterly Results."
Anticipated Losses. The Company has incurred significant operating losses and,
as of September 30, 1999, had an accumulated deficit of $77.1 million. The
Company believes that its success will to a large part depend on its ability to
increase the number of registered users and customers and to increase sales
volume to realize economies of scale. As the Company increases its spending for
product development, advertising, customer service, facilities, international
expansion and general and administrative expenses, 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 have increased, and are
expected to continue increasing, in 1999 as compared to 1998, primarily due to
scheduled increases in the Company's payment obligations to strategic partners
and advertising 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 That
May Affect Future Results--Limited Operating History of Online Business; History
of Net Operating Losses; Accumulated Deficit" and "--Anticipated Losses and
Negative Cash Flow."
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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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Transaction revenue 60.0% 75.4% 64.4% 80.9%
Advertising revenue 40.0% 24.6% 35.6% 19.1%
------------- ------------- -------------- -------------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 34.4% 41.6% 34.7% 45.5%
------------- ------------- -------------- -------------
Gross profit 65.6% 58.4% 65.3% 54.5%
Operating expenses:
Marketing and sales 147.2% 134.9% 134.3% 148.6%
Technology operations and development 15.0% 26.2% 17.1% 27.8%
General and administrative 25.8% 36.8% 26.2% 42.1%
Stock based compensation expense 4.2% 0.9% 4.9% 1.1%
Merger expense 5.3% 0.0% 2.2% 0.0%
------------- ------------- -------------- -------------
Total operating expenses 197.5% 198.8% 184.7% 219.6%
Loss from continuing operations before
interest and income tax
Expense (131.9)% (140.4)% (119.4)% (165.1)%
Interest income (expense), net 6.1% 22.7% 8.7% 19.3%
------------- ------------- -------------- -------------
Loss from continuing operations
before income tax expense (125.8)% (117.7)% (110.7)% (145.8)%
Income tax expense (0.3)% (0.4)% (0.3)% (0.4)%
------------- ------------- -------------- -------------
Loss from continuing operations (126.1)% (118.1)% (111.0)% (146.2)%
Discontinued operations:
Loss from discontinued operations 0.0% (2.7)% 0.0% (6.8)%
------------- ------------- -------------- -------------
Net loss (126.1)% (120.8)% (111.0)% (153.0)%
============= ============= ============== =============
</TABLE>
7
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Comparison of Three Months and Nine Months Ended September 30, 1999 and 1998
Revenues
<TABLE>
<CAPTION>
Transaction Revenue
($ in thousands) 1999 1998 Change %
---------- ---------- ---------- --------
Three-month period:
<S> <C> <C> <C> <C>
Transaction Revenue $ 5,423 2,984 $2,439 82%
============ ============ ============ =========
Nine-month period:
Transaction Revenue $14,106 $7,629 $6,477 85%
============ ============ ============ =========
</TABLE>
Transaction revenue increased from the third quarter and the first nine months
of 1999 when compared with the corresponding periods of 1998 primarily due to
corresponding increases in the Company's gross bookings and customer base. Gross
bookings were $106.5 million and $273.2 million for the third quarter and the
first nine months of 1999, respectively, which represent increases of 85% and
91% compared with the corresponding periods of 1998. The increase in gross
bookings was attributable to the expansion of the Company's travel service
offerings, strategic relationships, repeat purchases by existing customers, and
certain promotional offers. Visits to the Company's online areas for the third
quarter and the first nine months of 1999 were 31.1 million and 90.1 million,
respectively, which represent increases of 40% and 41% when compared with the
corresponding periods of 1998.
<TABLE>
<CAPTION>
Advertising Revenue
($ in thousands) 1999 1998 Change %
--------- ---------- ---------- ---------
Three-month period:
<S> <C> <C> <C> <C>
Advertising Revenue $3,616 $ 972 $2,644 272%
=========== ============ ============ ==========
Nine-month period:
Advertising Revenue $7,795 $1,806 $5,989 332%
=========== ============ ============ ==========
</TABLE>
Online advertising revenue substantially increased from the third quarter and
the first nine months of 1999 when compared with the corresponding periods of
1998 primarily due to the number of advertisers on the Company's Web site, an
increase in the average revenue generated per advertiser and revenue recognized
from the Company's database services agreement with AOL. In addition, certain
marketing fees were earned and included in advertising revenue for the first
nine months of 1999 that did not exist in the corresponding period in 1998.
Cost of Revenues
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 Change %
--------- ---------- ---------- --------
Three-month period:
<S> <C> <C> <C> <C>
Cost of Revenues $3,112 $1,646 $1,466 89%
=========== ============ ============ =========
Nine-month period:
Cost of Revenues $7,594 $4,293 $3,301 77%
=========== ============ ============ =========
</TABLE>
Cost of revenues includes equipment and staffing costs associated with
operating the Company's transaction system and customer reservation center, GDS
charges, telecommunications, printing and delivery costs for tickets and costs
associated with errors in ticket fulfillment. Cost of revenues increased from
1998 to 1999 primarily due to the increased volume of transactions, in addition
to the opening of a
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second reservations call center in August, 1999. As a percentage of revenue,
cost of revenues decreased from 41.6% in the third quarter of 1998 to 34.4% in
the third quarter of 1999 and from 45.5% in the first nine months of 1998 to
34.7% in the first nine months of 1999 primarily due to economies of scale
resulting from increased transaction volume and an increase in advertising
revenue, which has higher gross margins. The Company's average cost per
transaction decreased from approximately $8.10 in the third quarter of 1998 to
approximately $7.60 in the third quarter of 1999. The average cost per
transaction increased approximately $0.30 from the second quarter of 1999 to the
third quarter of 1999. This increase was primarily due to the start-up costs of
the new reservations call center. The Company expects that the average cost per
transaction will increase slightly in the near-term due to the short-term costs
associated with the start-up costs of the new reservations call center.
Operating Expenses
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 Change %
---------- ---------- ----------- ----------
Three-month period:
<S> <C> <C> <C> <C>
Operating Expenses $17,848 $ 7,865 $ 9,983 127%
============ ============ ============= ============
Nine-month period:
Operating Expenses $40,445 $20,719 $19,726 95%
============ ============ ============= ============
</TABLE>
Marketing and Sales. Marketing and sales expenses consist primarily of payroll
and related expenses, consulting fees, advertising, public relations,
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 $13.3 million and $29.4 million for the third quarter and first
nine months of 1999, respectively, which represent increases of 149% and 110%
when compared to the corresponding periods in 1998. As a percentage of total
revenues, marketing and sales expenses increased from 135% in the third quarter
of 1998 to 147% in the third quarter of 1999 and decreased from 149% for the
first nine months of 1998 to 134% in the first nine months of 1999. The overall
increase in marketing and sales was attributable primarily to an extensive
marketing campaign, expenses associated with the hiring of additional personnel
for development of online content and expenditures related to the Company's
agreements with AOL, Excite and others. The Company continues to pursue an
aggressive branding and marketing campaign and will continue to incur
significant advertising expenditures. In addition, the Company is obligated to
make minimum payments totaling $49.5 million to AOL and Excite over the term of
its agreements with AOL and Excite, and $4.3 million to Lycos over the two and a
half year term of its agreement with Lycos, which payments will be accounted for
as marketing and sales expense. As a result of the foregoing, the Company
expects marketing and sales expenses to increase significantly in absolute
dollars in future periods.
Technology Operations and Development. Technology operations 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 and costs associated with network operations, systems
and telecommunications infrastructure. Technology operations and development
expenses were $1.4 million and $3.7 million for the third quarter and first nine
months of 1999, respectively, which represent increases of 31% and 43% when
compared to the corresponding periods in 1998. As a percentage of total
revenues, technology operations and development expenses decreased from 26% in
the third quarter of 1998 to 15% in the third quarter of 1999 and from 28% in
the first nine months of 1998 to 17% in the first half of 1999. The increase in
technology operations and development expenses was attributable primarily to
increased staffing and consulting fees, increased costs related to enhancing the
capacity, features, content and functionality of the Company's online services
and increased costs related to enhancing or updating the Company's transaction-
processing systems. The Company believes that continued investment in technology
operations and development is critical to attaining the Company's strategic
objectives and, as a result, expects technology operations 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,
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facilities, director and officer insurance, investor relations and other general
corporate expenses. General and administrative expenses were $2.3 million and
$5.7 million for the third quarter and first nine months of 1999, respectively,
which represent increases of 60% and 44% when compared to the corresponding
periods in 1998. As a percentage of total revenues, general and administrative
expenses decreased from 37% in the third quarter of 1998 to 26% in the third
quarter of 1999 and from 42% in the first nine months of 1998 to 26% in the
first nine months of 1999. 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 operations. The Company
expects general and administrative expenses to increase in absolute dollars in
future periods as the Company expands its staff and incurs additional costs
related to the growth of its business.
Stock based Compensation. Stock based compensation primarily reflects the
charge to earnings for directors' and consultants' stock options that vest
during the period. Stock based compensation expenses rose from $36,000 in the
third quarter of 1998 to $379,000 in the third quarter of 1999 and from $108,000
in the first nine months of 1998 to $1.1 million in the first nine months of
1999. The overall increase in stock based compensation expense was due primarily
to an increase in the number of options granted to consultants. The Company's
calculation of stock based compensation expense was made by using the Black-
Scholes option-pricing model for option grants. The amount of expense to be
recorded in future periods will depend on the number of options vesting, the
price of the common stock at the time of vesting and other variables.
Merger Expense. In October 1999, the Company signed an agreement to merge with
and into Travelocity.com Inc., subject to certain conditions, including the
approval of the common stockholders of the Company and the expiration or early
termination of the waiting period pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. The waiting period expired on November 11,
1999. The Company incurred $476,000 of merger related costs during the third
quarter of 1999. These costs are composed of legal fees and other costs in
connection with the merger. There were no corresponding charges in 1998.
Interest Income (Expense)
Interest income, net of interest expense, was approximately $550,000 and $1.9
million for the third quarter and first nine months of 1999, respectively,
compared to net interest income of $897,000 and $1.8 million for the
corresponding periods in 1998. The decrease in net interest income for the
third quarter of 1999 was attributable primarily to the Company's decreasing
cash and marketable securities balances resulting in decreasing interest income.
Interest expense is composed primarily of interest on capital lease obligations.
Income Taxes
The provision for income taxes recorded in the third quarter and first nine
months of 1999 represents Delaware franchise tax and California minimum state
tax expense. The Company expects to incur a net loss for 1999; therefore, no
provision for federal income taxes has been recorded for the first nine months
of 1999.
Discontinued Operations.
Loss from discontinued operations includes the results of the Company's
television operations prior to the TV Disposition on December 31, 1998. Loss
from discontinued operations for the third quarter and the nine months ended in
1998 was $106,000 and $641,000, respectively. The loss for the third quarter of
1998 was comprised of television revenues of $1.6 million less the cost of
television revenues of $1.2 million and operating expenses of $510,000. The
loss for the first nine months of 1998 was comprised of television revenues of
$5.0 million less the cost of television revenues of $3.9 million and operating
expenses of $1.7 million.
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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 $52.4 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.
Cash used in operating activities in the first nine months of 1999 of $21.8
million was attributable to a net loss of $24.3 million, offset primarily by
depreciation and amortization of $1.7 million and stock based compensation of
$1.1 million. Cash used in operations for the first nine months of 1998 of $11.4
million was attributable to a net loss of $14.4 million, offset primarily by a
decrease in other assets of $2.9 million.
Cash provided by investing activities in the first nine months of 1999 of $1.2
million was attributable primarily to net sales proceeds and purchases of
marketable securities of $3.8 million offset by acquisitions of property and
equipment of $2.6 million. Cash used in investing activities in the first nine
months of 1998 of $42.1 million was comprised of net sales proceeds and
purchases of marketable securities of $41.1 million and acquisitions of property
and equipment of $1.0 million.
Cash provided by financing activities in the first nine months of 1999 of
$616,000 was attributable to net proceeds from issuance of common stock of $1.7
million offset by payments on obligations under capital leases of $1.1 million.
Cash provided by financing activities in the first nine months of 1998 of $52.7
million consisted primarily of proceeds from the issuance of common stock
through the Company's secondary stock offering of $52.4 million offset by
payments on obligations under capital leases of $860,000.
As of September 30, 1999, the Company had $37.8 million of cash, cash
equivalents and marketable securities. As of that date, the Company's principal
commitments consisted of obligations outstanding under the agreements with AOL,
Excite, Lycos and others and 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. In addition, pursuant to its
arrangement with AOL, the Company is obligated to make minimum payments totaling
$32.0 million, of which $13.9 million had been paid as of September 30, 1999,
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 $17.5 million, of which $5.5 million
had been paid as of September 30, 1999, 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 $3.2 million had been paid as of September 30,
1999 and to pay a percentage of commissions earned by the Company in excess of
certain thresholds. In addition, the Company is required to continue 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 continue to receive
significant revenues from such payments. See "Risk Factors That May Affect
Future Results--Reliance on Distribution Agreements with America Online and
Excite."
The Company believes that its current cash, cash equivalents and marketable
securities will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures through the end of September 2000. 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 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 That May Affect Future Results--Need for Additional Capital."
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Year 2000
The Year 2000 issue relates to computer systems that have time and date-
sensitive programs that may not properly recognize the Year 2000. If a computer
system or software application used by the Company or a third party dealing with
the Company fails because of the inability of the system or application to
properly read the year "2000," the results could include, among other things,
the inability to process transactions or conduct normal business activities and
could have a material adverse effect on the Company. In addition, to the extent
consumers' computer systems are not Year 2000 compliant, they may be precluded
from accessing the Company's online sites or utilizing the Company's on-line
booking services, which may adversely impact the Company's revenues.
The Company has a formal Year 2000 compliance plan. That plan includes
assessment, testing, remediation and contingency planning components. We have
executed the assessment, testing, remediation and contingency planning phases of
the Company's Year 2000 compliance plan with respect to our proprietary
information technology systems. With respect to information technology systems
provided by outside suppliers, we have sought assurances from such suppliers
that their technology is or will be Year 2000 compliant in a timely manner. All
of our material information technology system suppliers have either replied in
writing to inquiry letters sent by us or have made information publicly
available regarding the status of their Year 2000 compliance status. We have
also evaluated our non-information technology systems for Year 2000 compliance
consistent with the Company's Year 2000 compliance plan. We have taken steps
which we believe have remediated presently known, material Year 2000 issues with
respect to our information and non-information technology systems. With respect
to all material information and non-information technology systems, we continue
to monitor and review such systems for any Year 2000 issue.
The Company has made contact with key outside suppliers whose computer
systems' functionality could impact the Company's ability to conduct business.
The Company is dependent upon certain service providers including, without
limitation, the Apollo GDS system, AOL, Excite, Level 3 Communications (the
Company's Internet service provider), AT&T, other telecommunications providers,
Pacific Gas and Electric, Pegasus, Hotel Reservations Network, Inc. and major
travel suppliers. Any failure of a material service supplier to be Year 2000
compliant could be disruptive to the Company's business and could have a
material adverse effect on the Company's business, operating results and
financial condition. In particular, the Company is substantially dependent on
the Year 2000 compliance of the Apollo GDS system, the failure of which could,
in the worst case, prevent the Company's customers from being able to reserve
airline tickets, car rentals and other travel services, which would have a
material adverse effect on the Company's business, operating results and
financial condition, the impact of which can not be reasonably estimated. In
addition, the Company believes it could take up to six months and require
substantial expenditures to fully transition the Company's travel services to an
alternative GDS System. Similarly, the failure by Pegasus or Hotel Reservations
Network, Inc. to be Year 2000 compliant could prevent the Company's customers
from being able to reserve hotel rooms, which could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company has developed contingency plans to address the most reasonably
likely worst case scenarios arising from a Year 2000 issue. Our contingency
plans include:
. maintaining dedicated staff and equipment both on site and to be
available at crucial dates and times to remedy unforeseen problems;
. reducing or suspending certain non-critical aspects of our services or
operations during crucial dates and times.
. performing certain processes manually; and
. implementing replacement systems.
Upon the implementation of our contingency plan, we believe the worst case
scenario for Year 2000 issues to be a system failure or failures beyond our
control. Such failures could include prolonged or intermittent
telecommunications, Internet, Apollo GDS or electrical failure. Such a failure
could affect our business by:
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. preventing us from operating our business;
. preventing users from accessing our online sites;
. preventing users from purchasing goods and services on our online sites;
and
. changing the behavior of advertisers or persons accessing our online
sites.
If such a failure were to happen, we believe that the primary business risks
arising from a Year 2000 issue would include any or all of the following:
. lost sales;
. increased operating costs;
. loss of customers or persons accessing our online sites;
. business interruptions of a material nature; and
. claims of mismanagement, misrepresentation or breach of contract.
Any of these business risks could have a material adverse affect on our
business, results of operations and financial condition.
Through September 30, 1999, the Company spent $50,000 and expects to spend a
total of approximately $400,000 for contractors, consultants and software in
connection with its Year 2000 compliance plan. In addition, the Company has
utilized significant internal resources and personnel in connection with its
Year 2000 compliance plan.
The foregoing assessment of the impact of the Year 2000 issue on the Company
is based on management's best estimates at the present time. The assessment is
based upon numerous assumptions as to future events. There can be no guarantee
that these estimates will prove accurate, and actual results could differ from
those estimated if these assumptions prove inaccurate.
Recently Issued Accounting Standards
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), " Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 provides guidance on
accounting for certain costs in connection with obtaining or developing computer
software for internal use and requires that entities capitalize such costs once
certain criteria are met. The Company was required to adopt SOP 98-1 as of
January 1, 1999. Management does not believe that adoption of this SOP has had
or will have a material, adverse impact on the Company's financial condition or
results of operations.
In April 1998, the Accounting Standards Executive Committee released Statement
of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of start-up Activities".
SOP 98-5 is effective for the fiscal years beginning after December 15, 1998 and
requires companies to expense all cost incurred or unamortized in connection
with Start-up activities. The new standard is effective for the Company's fiscal
year ending December 31, 1999 and has not had and is not expected in the future
to have a material effect on the financial statements, as the Company has not
capitalized such costs to date.
Risk Factors That May Affect Future Results
In addition to the other information in this Report, the following factors
should be considered carefully in evaluating the Company's business and
prospects:
Risks Relating to the Merger with Travelocity.com. On October 3, 1999, the
Company signed an agreement to merge with and into Travelocity.com Inc., subject
to certain conditions, including the
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approval of the common stockholders of the Company and the expiration or early
termination of the waiting period pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. The waiting period expired on November 11,
1999. There are numerous risks associated with the transaction, including the
following:
. Upon completion of the merger, each share of the Company's Common Stock will
be exchanged for one share of Common Stock of Travelocity.com. The terms of
the transaction do not provide for any adjustment for changes in the market
price of the Company's Common Stock, and the Company is not permitted to
terminate the agreement or resolicit the vote of its stockholders solely
because of changes in the market price of its Common Stock. Accordingly, the
specific dollar value of Travelocity.com Common Stock to be received by the
Company's stockholders upon completion of the merger will depend on the
market value of Travelocity.com Common Stock at the time of completion of the
merger.
. Achieving the anticipated benefits of the merger will depend in part on the
integration of the technology, operations, and personnel of the two companies
in a timely and efficient manner so as to minimize the risk that the merger
will result in the loss of customers or key employees or the continued
diversion of the attention of management. If the Company and Travelocity.com
are not able to integrate successfully, the combined entity may not be able
to realize the anticipated benefits of the merger.
. If the merger is not completed for certain reasons, the Company may be
subject to a number of material risks. For example, the public announcement
of the merger may have had an adverse effect on the Company's sales and
operating results, its ability to attract and retain key management,
marketing, and technical personnel, progress of certain development projects.
Costs related to the merger, such as legal, accounting, and financial advisor
fees must be paid even if the merger is not completed. In addition, the
Company may be obligated to pay up to $10 million under certain conditions
set forth in the merger agreement.
. If the merger is terminated and the Company's Board of Directors determines
to seek another merger or business combination, there can be no assurance
that it will be able to find equivalent or better consideration or terms than
in the merger. In addition, while the merger agreement is in effect, the
Company is prohibited, subject to certain limited exceptions, from
soliciting, initiating, knowingly encouraging, or entering into certain
extraordinary transactions such as a merger, sale of assets, or other
business combination with any third party.
Limited Operating History of Online Business; History of Net Operating Losses;
Accumulated Deficit. The Company incurred net losses of $5.6 million, $10.2
million, $27.0 million and $24.3 million in 1996, 1997, 1998 and the nine months
ended September 30, 1999, respectively. As of September 30, 1999, the Company
had an accumulated deficit of approximately $77.1 million. 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 reservations
operations in 1994, first recognized revenues from its reservations 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 attract
and retain registered users, 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
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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 first and 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. 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 transaction revenues versus advertising revenues, the mix of travel
services sold, the mix of advertising revenues from AOL, Excite, Lycos and the
Company's Web site, the mix of airline ticket commissions (which vary from
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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, increases 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, as well as 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 and Excite. The
Company has entered into agreements with AOL and Excite establishing the Company
as the primary and preferred provider of travel services on AOL and the
exclusive provider of travel reservations services on Excite's Travel Channel
until September 2002. Under these agreements, as amended, AOL and Excite are
obligated to promote the Company and to deliver minimum numbers of annual page
views or impressions to the online areas
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featuring the Company's travel services. In addition, the Company is eligible to
receive payments from Excite representing a share of advertising revenues
received by Excite in connection with the online areas featuring the Company's
travel services; however, there can be no assurance that such payments, if any,
will be significant. During the terms of these agreements, the Company is
obligated to make minimum payments totaling $49.5 million to AOL and Excite as
well as pay to AOL and Excite a percentage of certain commissions earned by the
Company in excess of specified thresholds. The Company is also obligated to
share certain advertising revenues with each of AOL and Excite, as specified in
their respective agreements. Moreover, the Company's agreement with AOL is
conditioned upon the Company achieving specified levels of travel services
bookings, which will require the Company to significantly increase such bookings
from current levels. There can be no assurance that the Company will achieve
sufficient online traffic, travel bookings or commissions to realize economies
of scale that justify the Company's significant fixed financial obligations to
AOL and Excite or that the Company will satisfy the minimum levels of travel
services bookings required to maintain the AOL agreement, and failure to do so
would likely have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the agreements with AOL and Excite
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 and Excite
relationships is based on the continued positive market presence, reputation and
anticipated growth of AOL and Excite, as well as the commitment by each of AOL
and Excite to deliver specified numbers of annual page views or impressions. Any
decline in the significant market presence, business or reputation of AOL or
Excite, or the failure of AOL or Excite to deliver the specified numbers of
annual page views, will reduce the value of these strategic agreements to the
Company and will likely have a material adverse effect on the business,
operating results and financial condition of the Company. In addition, while the
Company and Excite have agreed to cooperate on advertising, AOL and the Company
have the right to separately pursue and sell advertising in the Company's
content areas distributed through AOL. There can be no assurance that the
Company and AOL will not compete for limited travel supplier advertising
revenues. Travel services sold through the AOL network (including the primary
AOL service and AOL.com) accounted for 28%, 33%, 33% and 34% of the Company's
gross bookings for the three months ended December 31, 1998, March 31, June 30,
1999 and September 30, 1999, respectively. Travel services sold through Excite
accounted for 16%, 13%, 12% and 11% of the Company's gross bookings for the
three months ended December 31, 1998, March 31, 1999, June 30, 1999 and
September 30, 1999, respectively. The Company's arrangements with AOL and Excite
are expected to continue to represent significant distribution channels for the
Company's travel services. Any termination of either or both of the Company's
agreements with AOL or Excite would likely have a material adverse effect on the
Company's business, operating results and financial condition.
Except for its arrangements with AOL and Excite, the Company has no other
significant 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
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relationships with AOL or Excite, or if the Company is unable to develop and
maintain satisfactory relationships with additional third parties on acceptable
commercial terms, or if the Company's competitors are better able to leverage
such relationships, the Company's business, operating results and financial
condition could be materially adversely affected.
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 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. In addition, a large hotel chain advised the Company that beginning in
January 1999, they would pay a flat commission of two dollars per completed
hotel stay. As a result, the Company expects that its average commission rate
received from hotels will decline. 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%, and again from 8% to 5% in October 1999.
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 addition, in
the first half of 1998 two major airlines reduced their fixed rate commission
for online roundtrip ticket sales to ten dollars. These reductions were followed
by similar reductions made by other airlines. The Company's weighted average
commission on online transaction revenue has declined 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.
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Reliance on Third Party Systems. The Company is dependent upon certain third
party service providers, including, without limitation, the following: AOL and
Level 3 Communications, the Company's Internet service provider which provides
the Company with a T3 data communication line; 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 six months 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, Excite, Level 3 Communications (the Company's Internet service provider)
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 Galileo 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. 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
Management's Discussion and Analysis of Financial Condition and Results of
Operations "Year 2000."
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
SABRE Group Holdings Inc., a majority owned subsidiary of American Airlines),
TravelWeb (operated by Pegasus), Getthere.com, Biztravel.com, Cheap Tickets 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, companies such as Priceline.com operate Web sites that allow users
to bid on air tickets and hotel rooms.
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. Most major airlines, car rental companies and hotel chains
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
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future. There can be no assurance that the Company's online operations will
compete successfully with any current or future competitors.
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. 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, 1997, 1998 and the
nine months ended September 30, 1999 approximately 9%, 10%, 24% and 36%,
respectively, of the Company's total revenues were derived from the sale of
advertising on its online sites. The Company's advertising customers may
terminate their advertising commitments at any time without penalty.
Consequently, the Company's advertising customers may move their advertising to
competing online sites or 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. 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.
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, including its current President and Chief Executive
Officer in July 1999, 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
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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. In July 1999, the Company appointed Christopher E. Clouser
to serve as its new President and Chief Executive Officer. Other than Mr.
Clouser, 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,
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
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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. The majority 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.
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
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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 three 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 September 2000, 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. 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 Content. As a publisher and distributor of online
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.
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The Company also intends to continue to strategically license certain content
for its online sites from third parties, 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 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 component of the Company's
strategy is to evaluate expanding its operations into international markets. The
Company may expend significant financial and management resources to establish
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
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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 potential 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.
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 and internet 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; Stockholder Rights Plan.
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.
In October 1998, the Company's Board of Directors adopted a stockholder rights
plan. This plan provides stockholders with special purchase rights under certain
circumstances, including if any person or group acquires 20 percent or more of
the Company's common stock. This plan could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, or of making the Company less attractive to a potential
acquirer of, a majority of the outstanding voting stock of the Company, and may
complicate or discourage a takeover of the Company.
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On October 3, 1999, in accordance with the terms of the merger agreement with
Travelocity.com, the Company's Board of Directors authorized an amendment to the
stockholder rights plan in order to render the rights issued thereunder
inapplicable to the transactions contemplated under the merger agreement.
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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/ BRUCE E. CARMEDELLE
--------------------------
Bruce E. Carmedelle
Sr. Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: December 29, 1999
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