<PAGE>
As filed with the Securities and Exchange Commission on August 3, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------
CHEAP TICKETS, INC.
(Exact Name of Registrant as Specified in Its Charter)
--------------
<TABLE>
<S> <C> <C>
Delaware 561599 99-0338363
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1440 Kapiolani Boulevard, Honolulu, Hawaii 96814
(808) 945-7439
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Michael J. Hartley
Chairman of the Board, Chief Executive Officer and President
Cheap Tickets, Inc.
1440 Kapiolani Boulevard, Honolulu, Hawaii 96814
(808) 945-7439
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications to be sent to:
<TABLE>
<S> <C>
Henry M. Fields, Esq. Arthur J. Simon, Esq.
Victor H. Sim, Esq. Mark L. Dosier, Esq.
Theodore S. Kim, Esq. Diane Bono, Esq.
Maile Y.C. Yang, Esq. Kerry Branch, Esq.
MORRISON & FOERSTER LLP SONNENSCHEIN NATH & ROSENTHAL
555 West Fifth Street, 8000 Sears Tower,
Los Angeles, California 90013-1024 Chicago, Illinois 60606
(213) 892-5200 (312) 876-8000
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Proposed Proposed
Amount maximum maximum Amount of
Title of each class of to be offering price aggregate registration
securities to be registered registered(1) per share(2) offering price(2) fee(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001........ 5,750,000 $48.375 $278,156,250 $77,328
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes 750,000 shares which the underwriters have options to purchase to
cover, if any, over-allotments and 21,000 shares subject to an option to be
exercised by a selling stockholder in connection with this offering.
(2) Estimated solely for purpose of calculating the amount of the registration
fee. This estimate is made in accordance with Rule 457(c) under the
Securities Act of 1933, as amended, based on the average of the high and
low sale prices of the registrant's common stock on the Nasdaq National
Market on July 27, 1999.
--------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This Prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 3, 1999
PROSPECTUS
5,000,000 Shares
[LOGO OF CHEAP TICKETS INC. APPEARS HERE]
www.cheaptickets.com
Common Stock
Cheap Tickets, Inc. is offering 2,500,000 shares of its common stock, and the
selling stockholders are offering 2,500,000 shares of common stock. We will not
receive any of the proceeds from the selling stockholders' sale of their
shares.
Our common stock is traded on the Nasdaq National Market under the symbol
"CTIX." On August 2, 1999, the last reported price of our common stock was
$51.50 per share.
Investing in our stock involves risks. See "Risk Factors" beginning on page
8.
-------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Per Share Total
- --------------------------------------------------------------------------------------
<S> <C> <C>
Public Offering Price........................................ $ $
Underwriting Discount........................................ $ $
Proceeds to Cheap Tickets, Inc............................... $ $
Proceeds to the Selling Stockholders......................... $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The underwriters may also purchase, from certain of the selling stockholders,
up to an additional 750,000 shares at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments.
William Blair & Company
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
CIBC World Markets
Volpe Brown Whelan & Company
The date of this prospectus is , 1999
<PAGE>
[IFC Pictures]
[PICTURE OF CHEAP TICKETS' INTERNET HOME PAGE]
Cheap Tickets' Web Site serves the discount travel needs of consumers for
airfare, hotels and car rentals. The User-Friendly, secure Internet site sold
over 229,000 tickets in the first six months of 1999.
[PICTURE OF CHEAP TICKETS' INTERNET REQUEST PAGE]
In addition to calling any of our nearly 400 sales agents at our four call
centers, the customer can easily schedule domestic and international travel on
the web site.
[PICTURE OF CHEAP TICKETS' INTERNET FARES PAGE]
The customer is presented with a broad array of fare possibilities, including
proprietary "non-published" fares representing excess airline capacity. Cheap
Tickets buys these fares from over 35 domestic and international airlines.
Also, a full menu of regularly published fares through the SABRE reservations
system is available.
Information contained on our web site does not constitute part of this
prospectus.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Cheap Tickets' actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors." Except as otherwise indicated, all information in this prospectus
assumes no exercise of the underwriters' over-allotment option.
CHEAP TICKETS, INC.
We are a leading retail seller of discount tickets for domestic leisure air
travel. During the first six months of 1999, we sold approximately 840,000
airline tickets primarily through call centers and our Internet site at
"www.cheaptickets.com." We believe we are the leading seller of non-published
fares for regularly scheduled domestic routes. Non-published fares are tickets
representing excess capacity that we buy from airlines and resell to consumers
at significant discounts off published fares. Sales of non-published fares
accounted for approximately 59% of our airline gross bookings in 1998 and 68%
for the first six months of 1999. We have rights to buy these fares under
contracts from over 35 airline carriers, including America West, American,
Continental, Northwest, TWA, United and US Airways. Our airline contracts
typically run for a term of 1 1/2 years or less and can be cancelled on short
notice. In addition, they do not require the airlines to deal with us
exclusively or to provide a specific quantity of tickets. Under our contracts,
we purchase tickets only when we resell them to customers, so that we do not
have inventory carrying costs. We also offer a full complement of regularly
published fares, affording customers a breadth of choice of leisure travel
tickets at attractive prices that we believe is unmatched in the industry. In
addition, we sell cruise tickets, auto rentals and hotel reservations.
We began selling tickets over the Internet in October 1997. During the first
six months of 1999, we sold approximately 229,000 tickets through our website,
generating approximately $59 million in gross bookings. Internet sales
represented approximately 9% of our gross bookings in 1998 and 26% for the
first six months of 1999. At June 30, 1999, we had over 1.2 million registered
online users, with more than 783,000 registering since December 1998.
Since 1986, we have provided an efficient distribution channel for airlines
to sell excess capacity without eroding their published fare structures.
Domestic airlines had average excess system capacity of 31.9% from 1995 through
1998, with excess system capacity of 29.8% in 1998. We seek to match excess
capacity with consumer demand for the lowest price available. Currently, we
offer approximately 425,000 non-published fares at any given time, covering
most major domestic and international routes. We set prices on these fares
lower than those available on published fares to meet the demands of leisure
travelers. These fares contain restrictions typically making them unattractive
for full fare passengers, who seek the convenience of tickets that can be
exchanged or cancelled and that do not have advance purchase or minimum stay
requirements. We believe our track record of selling excess capacity without
compromising the airlines' fare structures provides a strong incentive for
airlines to continue to use us for the sale of domestic non-published fares.
3
<PAGE>
We also offer to customers a full menu of regularly published fares in
addition to non-published fares. In 1994, we became the first non-airline to
file our non-published fares through the Airline Tariff Publishing Corporation.
This allows us to integrate our non-published fares with published fares in a
special area of the SABRE reservations system to which only we have access.
This system automatically sorts through millions of fares, including our non-
published fares, to identify the lowest fares available for the desired
itinerary. These fares are then posted in ascending price order for use by our
reservation agents and Internet customers.
Consumers in the United States spent $126 billion on travel through travel
agencies in 1997, up from $101 billion in 1995. Airline travel continues to be
the largest segment of the industry with $70.5 billion, or 56%, of total travel
booked through travel agencies in 1997. Increasingly, the Internet has become
an attractive method to sell travel tickets directly to the public. Currently,
travel represents the second largest online retail category sold over the
Internet. Online airline travel bookings were $1.6 billion in 1998 and are
estimated to grow at a compounded annual growth rate of 46%, reaching $10.6
billion in 2003.
Our growth strategy is to expand our customer base through the following
initiatives. First, we plan to aggressively expand our brand recognition. We
intend to enhance our successful print media advertising, launch a national
television and radio media campaign and increase advertising on leading
websites and in other media. Second, we plan to capitalize on our market
position as a leading seller of non-published fares to rapidly increase our
Internet ticket business. Third, we intend to expand existing and establish new
strategic relationships with airlines to increase sales of their excess
capacity. Fourth, we plan to increase our call center capacity, focusing on
improved productivity. Fifth, we plan to continue to introduce complementary
travel products that require minimal incremental resources to distribute.
Sixth, we plan to expand internationally. And finally, we plan to consider the
acquisition of complementary businesses to add to our customer base, product
lines, strategic relationships or distribution capabilities.
Our executive offices are located at 1440 Kapiolani Boulevard, Honolulu,
Hawaii 96814; our telephone number is (808) 945-7439 and our facsimile number
is (808) 946-3844. We were incorporated in Hawaii in 1986 and reincorporated in
Delaware on February 1, 1999.
"Cheap Tickets," "America's Travel Store" and the Cheap Tickets, Inc. logo
are our registered United States trademarks. All brand names and trademarks
appearing in this prospectus are the property of their respective holders.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Cheap Tickets, Inc............. 2,500,000 shares
Common stock offered by the selling stockholders....... 2,500,000 shares
Common stock outstanding after this offering........... 24,004,171 shares(1)
Use of proceeds........................................ For advertising and brand
development; development of
technological infrastructure;
international expansion; possible
acquisitions; and general
corporate purposes. For a more
detailed discussion of the use of
proceeds, please refer to "Use of
Proceeds."
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1999. Includes
21,000 shares subject to an option to be exercised by a selling
stockholder in connection with this offering. Excludes (1) 689,280 shares
subject to outstanding options with a weighted average exercise price of
$2.20 per share; and (2) 1,221,000 shares available for future grants
under our 1999 Stock Incentive Plan as of June 30, 1999. For a more
detailed discussion of our capital stock and stock option plans, please
refer to notes 6 and 12 to the financial statements, "Management--Stock
Plans" and "Description of Capital Stock."
----------------
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(in thousands, except per share and operating data)
The summary financial data of Cheap Tickets for the annual periods indicated
have been derived from Cheap Tickets' audited financial statements. The summary
financial data for the six-month periods and the operating data have not been
audited. The summary financial data should be read in conjunction with Cheap
Tickets' financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Non-published fares............. $ 58,982 $ 96,379 $159,846 $ 76,171 $153,379
Commissions..................... 5,614 6,470 11,268 4,440 9,720
-------- -------- -------- -------- --------
Net revenues(1)............... 64,596 102,849 171,114 80,611 163,099
Gross profit.................... 15,428 21,479 35,047 15,636 32,219
Selling, general and
administrative expenses(2)..... 14,352 23,091 33,411 14,558 25,896
-------- -------- -------- -------- --------
Net operating income (loss)... 1,076 (1,612) 1,636 1,078 6,323
Net earnings (loss)............. $ 674 $ (1,009) $ 1,065 $ 670 $ 4,209
Basic earnings (loss) per
share(3)....................... $ 0.05 $ (0.09) $ 0.04 $ 0.03 $ 0.19
Shares used in computing basic
earnings (loss) per share(3)... 14,249 14,847 14,567 14,661 18,217
Diluted earnings (loss)
per share(3)................... $ 0.05 $ (0.09) $ 0.03 $ 0.02 $ 0.17
Shares used in computing diluted
earnings (loss) per share(3)... 14,249 14,847 17,921 17,649 20,294
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
----------------------
Actual As Adjusted(4)
------- --------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Net working capital ..................................... $56,887 $
Total assets............................................. 82,733
Long-term debt........................................... 2,292 2,292
Stockholders' equity..................................... 59,889
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Operating Data (unaudited):
Gross bookings (in thousands)(5)
Non-published fares........... $ 58,982 $ 96,379 $159,846 $ 76,171 $ 153,379
Published fares............... 46,962 57,295 110,287 47,014 71,658
-------- -------- -------- -------- ----------
Total gross bookings......... $105,944 $153,674 $270,133 $123,185 $ 225,037
======== ======== ======== ======== ==========
Airline tickets sold:........... 357,551 554,403 960,879 415,559 842,566
Call centers.................. 357,551 551,973 865,015 390,381 613,207
Internet...................... -- 2,430 95,864 25,178 229,359
Registered Internet users....... -- 18,891 420,023 120,893 1,203,188
</TABLE>
- --------
(1) Net revenues consist of sales of non-published fares and commissions. Net
revenues from sales of non-published fares represent revenues from the sale
of tickets purchased from the airlines. Cost of sales consists of the net
fare cost paid to carriers to purchase non-published fares. Commissions,
including incentive overrides, are earned primarily on published fares sold
and include certain other payments based on the volume of transactions.
6
<PAGE>
(2) In 1998, Cheap Tickets issued stock options to employees to acquire an
aggregate of 728,000 shares of Cheap Tickets' common stock of which 660,800
have an exercise price of $0.18 per share and 67,200 have an exercise price
of $1.57 per share. Total compensation associated with these options
amounted to $722,600 of which $26,325 has been charged to operations in
1998. The remainder will be charged over the remaining five-year vesting
period of the options, with the exception of $1,062. Stock compensation
expense included in selling, general and administrative expenses was $500
for the six months ended June 30, 1998 and $43,903 for the six months ended
June 30, 1999.
(3) Please refer to notes 1 and 6 to the financial statements for the
calculation of earnings per share, including an explanation of the number
of shares used in computing the amount of basic and diluted earnings per
share.
(4) As adjusted to reflect the receipt of net proceeds of this offering.
(5) Gross bookings represent the aggregate retail value of tickets sold under
non-published fares and published fares. The difference between gross
bookings and revenues as reported in Cheap Tickets' statement of operations
derives solely from the difference in revenue treatment accorded to sales
of published fares. With respect to published fares, Cheap Tickets records
as revenue in its statement of operations only the commissions earned by
Cheap Tickets on the sale of such fares. Gross bookings represents the
retail value of the sales of published fares. With respect to non-published
fares, revenues as reported in Cheap Tickets statement of operations is
equivalent to gross bookings, which is the retail value of such fares.
Management uses gross bookings as a key indicator of general business
activity, success of promotional efforts, capacity to handle customer
demand and efficiency of reservation agents. In addition, management
believes that gross bookings provide a useful comparison between historical
periods, and year-to-year changes in such information provide a useful
measure of market acceptance of Cheap Tickets products.
7
<PAGE>
RISK FACTORS
In addition to the other information we provide in this prospectus, you
should carefully consider the following risks before deciding whether to invest
in our common stock. These are not the only risks we face. Some risks are not
yet known to us and there are others we do not currently believe are material
but could later turn out to be so. All of these could hurt our business. The
trading price of our common stock could decline because of general market
conditions or if any or all of these risks came to pass, and you could lose all
or part of your investment. In evaluating the risks of investing in us, you
should also evaluate the other information set forth in this prospectus,
including our financial statements.
For access to non-published fares, we depend on travel suppliers with which we
have no long-term or exclusive contracts.
For the first six months of 1999, approximately 99% of our gross bookings
came from the sale of airline tickets. Non-published fares represented about
68% of our airline gross bookings and 94% of our net revenues, and we believe
that our continuing ability to obtain non-published fares is key to our
success. Our business could be hurt by:
. refusals by airlines to renew contracts for supply of non-published
fares;
. lack of available excess capacity for an extended time period;
. renewals of the contracts on less favorable terms; or
. cancellation of contracts.
Non-published fares are tickets we acquire from the airlines and resell to
consumers at substantial discounts off published fares. The airlines sell us
tickets at these non-published fares primarily to dispose of excess capacity
without eroding published fare structures. We have contracts with more than
35 airlines that permit us to acquire non-published fares on routes designated
in the contracts at specified prices. These contracts do not require airlines
to provide a specific quantity of tickets or to deal with us exclusively.
Although the terms vary, the typical contract is for a period from one to one
and a half years, and many are cancelable on 30 days' notice or less. We have a
consistent record of renewing these contracts, but airlines may decide not to
do business with us or to dispose of excess capacity themselves or through
others. At times in the past, airlines have renewed contracts with us on less
favorable terms and this may continue to occur in the future. In addition,
there may be times when they have less excess capacity to sell.
A large percentage of our sales of non-published fares currently comes from a
limited number of suppliers.
For the first six months of 1999, approximately 60% of our sales of non-
published fares came from tickets we bought from three airlines: Continental
represented approximately 28%, TWA represented approximately 22%, and America
West, 10%. In 1998, these same three airlines represented 49% of our sales of
non-published fares. If one or more of these carriers were to discontinue to
supply non-published fares to us, our business could be hurt.
The percentages of non-published fare sales represented by our leading
carriers are likely to change from year to year depending upon a variety of
factors, including the availability of excess capacity from each carrier and
the breadth of routes on which non-published fares are available. We typically
engage in ongoing discussions with existing carriers about increasing the
routes available for sale of non-published fares. From time to time, we also
discuss potential new relationships for the supply of non-published fares with
carriers with whom we currently do not have contracts.
8
<PAGE>
Our travel suppliers may be acquired and then not continue to deal with us.
We believe that our continued ability to obtain non-published fares is key
to our success. Because many of our contracts are short-term and can be
cancelled on short notice, we depend on our relationships with our suppliers
for a continued supply of non-published fares. We also depend on continuation
of our suppliers' policy of selling excess capacity through non-published
fares. The acquisition of one of our suppliers could hurt our relationship with
that supplier and/or could change that supplier's policy of dealing with excess
capacity.
In 1999, Reno Air was acquired by American Airlines. For the first six
months of 1999, Reno Air accounted for approximately 8% of our sales of non-
published fares. Although American Airlines provides us with non-published
fares on other routes, American Airlines has advised us that it does not intend
to make the former Reno Air routes available to us for the sale of non-
published fares.
A decline in airline commission rates or the elimination of commissions could
hurt our business.
We earned approximately 30% of our gross profit for the six months ended
June 30, 1999 from commissions, including incentive overrides, paid by
airlines. However, the airlines are not required to pay any particular
commission rates or any commissions at all. If air carriers reduce, restrict or
eliminate altogether commissions or impose surcharges for tickets not sold by
them at any time, it could hurt our business. In recent years, airlines have
reduced rates and capped per-ticket commissions. In addition, they have further
reduced rates and capped commissions for online reservations.
Potential fluctuations in our financial results makes financial forecasting
difficult.
Our annual or quarterly results of operations may be below the expectations
of public market analysts and investors. This could result in a decline in the
value of our common stock.
Our business is seasonal due to customers' leisure travel patterns and
changes in the availability of non-published fares. We typically have higher
sales and gross profit in the second and third quarters and lower sales and
gross profit in the fourth quarter, and historically we have experienced losses
in net income in the fourth quarter. During periods of high-volume air travel,
such as occur in the fourth quarter of each year, we historically have had
access to fewer non-published fares, and such fares on certain major routes may
be unavailable. Online gross bookings may also tend to be seasonal and may
decline or grow less rapidly in the summer months. The seasonal sales cycle is
fairly predictable, but the cycle may shift year-to-year, corresponding to
changes in the economy or other factors affecting the market such as price
wars. This could lead to unusual volatility in revenues and earnings.
Gross profit may be impacted by a number of different factors, including:
. the number of fares sold;
. the percentage of gross bookings represented by non-published fare
sales;
. the gross margin percentages on non-published fare sales. These
percentages in turn can be impacted by the sales mix of airlines,
whose net fare prices to us vary, and by competitive factors on
various routes and the possible elimination of profitable routes;
.rates of commissions on published fare sales; and
.the amount of volume bonuses.
9
<PAGE>
Any change in these factors could materially affect our gross margins and
operating results in future periods. Other events outside our control,
including those set forth in other risk factors, may cause us to experience
significant fluctuations in revenues and earnings.
We intend to increase operating expenses in anticipation of future sales. If
these increased sales do not occur or occur only in subsequent periods, we may
experience downward fluctuations in our earnings.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources.
A decline in leisure travel or disruptions in travel generally could hurt our
business.
We earn almost all our revenues from the travel industry, particularly from
leisure travel. Leisure travel is highly sensitive to personal discretionary
spending levels and thus tends to decline during general economic downturns. In
addition, other adverse trends or events that tend to reduce leisure travel are
likely to hurt our business. These may include:
.political instability;
.regional hostilities;
.terrorism;
.fuel price escalation;
.travel-related accidents;
.bad weather; or
.airline or other travel related strikes.
A number of airlines are currently in various stages of negotiation with
unions representing their employees. If those negotiations fail and the unions
elect to strike or effect a slowdown, our business could be harmed.
We face actual and potential competition from many sources.
We compete in ticket sales against travel wholesalers, consolidators, online
travel companies, airlines and travel agents based on price and the quality of
service to the customer. In the leisure travel market, we also compete against
frequent flyer awards and charter flights. Increased competition may result in
reduced operating margins, loss of market share and decreased brand
recognition. Ultimately, we may not be able to compete successfully against
current and future competitors.
Among other factors, our success depends heavily on our access to non-
published fares, on our brand recognition and on the ability of our systems to
integrate our non-published fares with published fares to offer customers a
broad choice. Some of our competitors, including the air carriers themselves,
have longer histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do.
These competitors may be able to replicate the factors that make us successful.
They may also enter into strategic or commercial
10
<PAGE>
relationships with larger, established and well-financed companies. Some of our
competitors have agreements to buy non-published fares from our major
suppliers. For example, Priceline.com, Inc. recently signed an agreement to
purchase non-published tickets from Continental and, as it has in deals with
other airlines, granted warrants to purchase Priceline.com common stock to
Continental, our largest supplier. Our competitors may be able to induce one or
more of our suppliers of non-published fares, through pricing, equity or other
incentives, to cease doing business with us, or to do business with us on less
favorable terms. They might also be able to build strong brand recognition in
the leisure travel market, through widespread advertising and other marketing
efforts. Certain of our competitors may be able to devote greater resources to
marketing and promotional campaigns on the Internet. Competitors may also
devote substantially more resources to website and systems development than we
do. Any or all of these developments could bring heavy competitive pressures to
bear on us.
We also face the prospect of competition from potential competitors not yet
in the leisure travel market. We believe that potential competitors are likely
to be large, well-financed companies with existing brand name recognition and
proven retail distribution ability. For a more complete description of the
competitive environment in which we operate, please refer to "Business--
Competition."
The success of our business will depend on continued growth of online commerce
and Internet infrastructure.
Our future revenues and profits depend, to a certain degree, upon the
widespread acceptance and use of the Internet and online services as a medium
for commerce by customers and sellers. If acceptance and growth of Internet use
does not continue, it will hurt our business.
Rapid growth in the use of the Internet and online services is a recent
phenomenon. This growth may not continue. A sufficiently broad base of
customers may not accept, or continue to use, the Internet as a medium of
commerce. Demand for and market acceptance of recently introduced products and
services over the Internet are subject to a high level of uncertainty. There
are few proven products and services. For us to achieve significant growth,
customers who have historically used traditional means of commerce will instead
need to elect to purchase products and services online, and sellers of products
and services will need to accept or expand use of the Internet as a channel of
distribution. Our revenues and profits depend on customers visiting our website
and actually purchasing tickets. Customers could potentially use the site for
route information and choose to purchase tickets directly from the airlines or
elsewhere.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a
reliable network backbone with the necessary speed, data capacity and security,
and the timely development of complementary products, such as high-speed
modems, for providing reliable Internet access and services.
Major online service providers and the Internet itself have experienced
outages and other delays as a result of software and hardware failures and
could face such outages and delays in the future. Outages and delays are likely
to affect the level of Internet usage and the processing of transactions on the
Cheap Tickets website. It is unlikely that we could make up for the level of
orders lost in those circumstances by increased phone orders. In addition, the
Internet could lose its viability by reason of delays in the development or
adoption of new standards to handle increased levels of activity or of
increased government regulation. The adoption of new standards or government
regulation may require us to incur substantial compliance costs.
11
<PAGE>
Our brand may not achieve the broad recognition necessary to succeed.
We believe that we must maintain and enhance the Cheap Tickets brand to
continue to attract and expand business. Failure to maintain and enhance our
brand could hurt our business.
The success of the Cheap Tickets brand will depend to a certain extent on
our ability to enhance our advertising programs. The number of Internet sites
that offer competing services increases the importance of establishing and
maintaining our brand name recognition. Many online sites already have well-
established brands in online services or the travel industry generally. We
intend to expand significantly our advertising expense, including national
television and radio promotions, but these expenditures may not result in
increased business activity or the desired enhancement of brand recognition.
This could adversely affect our results of operations.
We may be unable to manage our rapid growth effectively.
We have rapidly and significantly expanded our operations and anticipate
further significant expansion. Our inability to manage growth effectively could
hurt our business.
We have recently added a number of key managerial and technical employees,
and we expect to add additional key personnel in the future. This expansion has
placed, and we expect it will continue to place, a significant strain on our
management, operational and financial resources. To manage the expected growth
of our operations and personnel, we plan to:
.improve and upgrade transaction-processing, operational, customer
service and financial systems, procedures and controls;
.maintain and expand our relationships with various travel service
suppliers, Internet portals and other travel-related website
companies and other third parties necessary to our business;
.expand our finance, administrative and operations staff;
.continue to attract, train and manage our employee base; and
.implement a disaster recovery program.
Our current and planned personnel, systems, procedures and controls may be
inadequate to support our planned growth, and our management may not be able to
identify, manage and exploit existing and potential market opportunities
successfully.
We may not be able to keep up with the industry's rapid technological and other
changes.
The industry in which we compete is characterized by:
.rapid technological change;
.changes in user and customer requirements and preferences;
.frequent new product and service introductions embodying new
technologies;
.the emergence of new industry standards and practices; and
.the emerging importance of the Internet and the proliferation of
companies offering Internet-based products and services.
These developments could render our existing online sites and proprietary
technology and systems quickly obsolete. Our inability to modify or adapt our
infrastructure in a timely manner or the expenses incurred in making such
adaptions could hurt our business.
12
<PAGE>
As a result, we will be required to continually improve the performance,
features and reliability of our services, particularly in response to
competitive offerings. Our success will depend, in part, on our ability to
enhance our existing services and develop new services in a cost-effective and
timely manner. The development of proprietary technology entails significant
technical and business risks and requires substantial expenditures and lead
time. We may not be able to adapt successfully to customer requirements or
emerging industry standards. In addition, the widespread adoption of Internet,
networking or telecommunications technologies or other technologies could
require us to incur substantial expenditures to modify or adapt our services or
infrastructure.
Our computer and communications systems are vulnerable to business
interruptions.
Our ability to receive and fill orders through our call centers or online
and provide high-quality customer service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware systems.
The occurence of interruptions, delays, loss of data or the inability to accept
and confirm customer reservations could hurt our business.
Our online servers are located in Sunnyvale, California and Herndon,
Virginia; The SABRE Group's computers are located in Tulsa, Oklahoma; our
communication systems are located at four call centers; and our accounting
systems' computers are located in Hawaii. These systems and operations are
vulnerable to damage or interruption from power loss, telecommunications
failure, break-ins, natural disasters and similar events.
We currently do not carry adequate business interruption insurance. Although
we have adopted network security measures, our servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions.
These kinds of events 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 hurt our business.
Interruptions in service from third parties could hurt our business.
We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the
airline and hotel industries to make airline ticket and hotel room
reservations. Any interruption in these third-party services or a deterioration
in their performance could hurt our business. If our arrangement with any of
these third parties is terminated, we may not find an alternative source of
systems support on a timely basis or on commercially reasonable terms.
We rely on third parties to print our airline tickets and arrange for their
delivery. We rely on third parties to host our online system's infrastructure,
web and database servers.
We currently rely on SABRE for our general reservations system, including
customer profiling, making reservations and credit card verification and
confirmations. Currently, over 90% of our computing transactions are processed
through the SABRE systems. Our technology relationship with SABRE for Internet
operations will further increase our dependency. If we or SABRE ever elect to
terminate the existing relationship, we would be forced to convert to another
provider. This conversion could require a substantial commitment of time and
resources and hurt our business.
Our current reservation systems may not be able to handle all calls adequately.
Our call centers have not been able to answer all calls or service all
inquiries adequately. Our systems' lack of capacity to handle the demands of
our customers can cause unanticipated system
13
<PAGE>
disruptions, slower response times, poor customer service, impaired quality and
speed of reservations and confirmations and delays in reporting accurate
financial information. These problems could hurt our business.
If we experience a substantial increase in our web traffic or in
reservations beyond expected levels, we may need to expand and upgrade our
technology, transaction-processing systems and network infrastructure beyond
planned levels of improvement. If we fail to expand and upgrade in a timely
manner, our business could be hurt. In addition, we may not be able to:
.project accurately the rate or timing of increases in demand;
.upgrade our systems and infrastructure to accommodate future traffic
levels;
.integrate successfully any newly developed or purchased technology
with our existing systems; or
.upgrade and expand our systems in a timely or efficient manner.
Online security breaches could hurt our business.
In our business, secured transmission of confidential information over
public networks is essential to maintain consumer and supplier confidence. If
any compromise of our security were to occur, it could hurt our business.
Concerns over the security of transactions conducted on the Internet and the
potential compromise of customer privacy may inhibit the growth of commercial
online services as a means of conducting commercial transactions. We have
expended significant resources to protect against security breaches and to
alleviate problems caused by such breaches, and we may need to make further
expenditures for this purpose in the future. We rely on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to transmit securely confidential information,
such as customer credit card numbers. In addition, we maintain an extensive
confidential database of customer profiles and transaction information. Our
current security measures may not be adequate and advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the methods we use to
protect customer transaction and personal data. A party who can circumvent our
security might be able to misappropriate proprietary information or cause
interruptions in our operations. Security breaches could also expose us to a
risk of loss or litigation and possible liability for failing to secure
confidential customer information.
If we lose our key personnel or cannot recruit additional personnel, our
business may suffer.
We depend substantially on the continued services and performance of our
senior management, particularly Michael J. Hartley, the Chairman of the Board,
Chief Executive Officer and President, and certain other key personnel. The
loss of the services of any of these executive officers or other key employees
could hurt our business.
We do not have employment agreements with any of our key personnel. In
addition, most members of our senior management group have been recruited and
hired over the past 20 months. These individuals may not be able to fulfill
their responsibilities adequately and may not remain with us.
14
<PAGE>
Our future success also depends on our ability to identify, attract, hire,
train, retain and motivate other highly skilled technical, managerial,
marketing and customer service personnel. Competition for such personnel is
intense. The location of our headquarters in Hawaii may also make it more
difficult to attract qualified personnel from the mainland. We may not be able
to attract, assimilate or retain sufficiently qualified personnel. In
particular, we may encounter difficulties in attracting a sufficient number of
qualified software developers for our online services and transaction-
processing systems. The failure to retain and attract necessary technical,
managerial, marketing and customer service personnel could hurt our business
and impair our growth strategy.
Although none of our employees is represented by a labor union, our
employees may join or form a labor union. For a more detailed description of
our management and key employees, please refer to "Management."
Our business could be hurt if we do not offer new services successfully.
We plan to introduce new and expanded services. Our inability to generate
revenues from such expanded services or products sufficient to offset their
development or offering cost could hurt our business. Our alternative products,
including cruises, auto rentals and hotel room reservations, represented less
than 1% of our gross bookings for the first six months of 1999. Our business
strategy is to increase the percentage of such alternate travel offerings as a
percentage of our revenues. We may not be able to offer such services in a
cost-effective or timely manner and our efforts may not be successful. Further,
any new service that is not favorably received by customers could damage our
reputation or brand name. Expansion of our services could also require
significant additional expenses and may strain our management, financial and
operational resources. If we cannot obtain alternate travel offerings in the
future, we may not be able to benefit fully from our growth strategy.
Our business could be hurt if we make acquisitions that are not successful.
We may in the future broaden the scope and content of our business through
the acquisition of existing complementary businesses. We may not be successful
in overcoming problems encountered in connection with such acquisitions, and
our inability to do so could hurt our business.
We may consider the acquisition of companies providing similar services in
international markets or in other sectors of the travel industry in the future.
Future acquisitions would expose us to increased risks. These include risks
associated with:
. the assimilation of new operations, sites and personnel;
. the diversion of resources from our 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 integration of new businesses.
Acquisitions may also result in additional expenses associated with
amortization of acquired intangible assets or potential businesses.
15
<PAGE>
Our business could be hurt if our international expansion is not successful.
One component of our growth strategy is to expand internationally.
International expansions will present us with special problems of adapting to
foreign business customs and regulations and of managing staff effectively from
a distance. If we do not address these problems adequately, our international
expansion may not produce desired results. This could hurt our business. We may
expend significant financial and management resources to establish local
offices overseas, create localized user interfaces and comply with local
customs and regulations. If the revenues generated by these international
operations are insufficient to offset the expense of establishing and
maintaining them, our business could be hurt. To date, we have no experience in
developing localized versions of our online sites or offshore call centers and
only limited experience in marketing and distributing our travel services
internationally. We may not be able to expand our operations successfully in
such markets. Conducting business on an international level also involves
certain inherent risks, 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.
We may be unable to meet our future capital requirements.
We may not be able to fund our expansion, develop or enhance our products or
services or respond to competitive pressures if we lack adequate funds. This
could hurt our business. Based on our current operating plan, we anticipate
that the net proceeds of this offering, together with our available funds, will
be sufficient to satisfy our anticipated needs for working capital, capital
expenditures and business expansion for the foreseeable future. After that
time, we may need additional capital. Alternatively, we may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new
or enhanced services, or to respond to competitive pressures. If we raise
additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be diluted. Further, any new
securities could have rights, preferences and privileges senior to those of the
common stock.
We currently do not have any commitments for additional financing. We cannot
be certain that additional financing will be available in the future to the
extent required or that, if available, it will be on acceptable terms. For more
information on how the proceeds from this offering are intended to be used,
please refer to "Use of Proceeds" and for more information on management's view
of liquidity and capital resources, please refer to "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Year 2000 risks may harm our business.
The risks posed by Year 2000 issues could hurt our business in a number of
significant ways. Our information technology system could be substantially
impaired or cease to operate due to Year 2000 problems. Additionally, we rely
on information technology supplied by third parties, and our participating
sellers are also heavily dependent on information technology systems and on
their own third party vendors' systems. The main supplier of our reservations
system is SABRE. Currently, over 90% of our transactions are processed through
SABRE. Year 2000 problems experienced by us or any such third parties could
hurt our business. Additionally, the Internet could face serious disruptions
arising from the Year 2000 problem.
We are evaluating our internal information technology systems and contacting
our information technology suppliers and participating sellers to ascertain
their Year 2000 status. However, our own
16
<PAGE>
systems may not be Year 2000 compliant in a timely manner, any of our
participating sellers or other website vendors may not be Year 2000 compliant
in a timely manner, and there may be significant interoperability problems
among information technology systems. Consumers may not be able to visit our
website without serious disruptions arising from the Year 2000 problem. Given
the pervasive nature of the Year 2000 problem, disruptions in other industries
and market segments may hurt our business. Moreover, the costs related to Year
2000 compliance could be significant.
Finally, Year 2000 issues may impact other entities with which we do
business, including, for example, those responsible for maintaining telephone
and Internet communications. Accordingly, we cannot predict the effect of the
Year 2000 problem on such entities. If these other entities fail to take
preventive or corrective actions in a timely manner, the Year 2000 issue could
hurt our business. For more information on management's view of the Year 2000
risks, please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
Our success depends on our ability to protect our intellectual property.
Trademarks, copyrights and trade secrets
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success. Claims, infringement
or misappropriation by third parties may hurt our business. We rely on a
combination of laws and contractual restrictions, including trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to establish and
protect our proprietary rights. However, laws and contractual restrictions may
not be sufficient to prevent misappropriation of our technology or deter others
from developing similar technologies. We pursue the registration of certain of
our key trademarks and service marks in the United States. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which our products and services are made available. The steps
we have taken to protect our proprietary rights may not be adequate, third
parties may infringe or misappropriate our copyrights, trademarks, trade dress
and similar proprietary rights, and we may be required to incur significant
expenses preserving our rights. In addition, other parties may assert
infringement claims against us. We may be subject to legal proceedings and
claims from time to time in the ordinary course of our business, including
claims of alleged infringement of the trademarks and other intellectual
property rights of third parties by us. Such claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources.
Domain names
We currently hold the Internet domain name "www.cheaptickets.com," as well
as various other related names. Third parties may acquire domain names that
infringe or otherwise decrease the value of our trademarks and other
proprietary rights which may hurt our business. Domain names generally are
regulated by Internet regulatory bodies. The regulation of domain names in the
United States and in foreign countries is subject to change. Regulatory bodies
could establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. The
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. As a result, we may not
acquire or maintain the "www.cheaptickets.com" domain name in all of the
countries in which we conduct business.
17
<PAGE>
Regulatory and legal uncertainties could harm our business.
Certain segments of the travel industry are heavily regulated by the United
States and other governments. Accordingly, certain services offered by us are
affected by such regulations. New legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
Internet and commercial online services could hurt our business.
We are subject to federal regulations prohibiting unfair and deceptive
practices. In addition, federal regulations concerning the display and
presentation of information currently applicable to airline booking services
could be extended to us in the future, as well as other laws and regulations
aimed at protecting customers accessing online or other travel services. In
California, Hawaii and certain other states, we are required to register as a
seller of travel, comply with certain disclosure requirements and participate
in the state's restitution fund.
We are also subject to regulations applicable to businesses generally and
laws or regulations applicable to online commerce. Currently, few laws and
regulations directly apply to the Internet and commercial online services.
However, it is possible that 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. Further, the growth and
development of the market for online commerce may prompt calls for more
stringent consumer protection laws. Such laws would likely impose additional
burdens on companies conducting business online. The adoption of any additional
laws or regulations may decrease the growth of the Internet or commercial
online services. In turn, this could decrease the demand for our products and
services and increase our cost of doing business, or otherwise hurt our
business.
Moreover, in many states, there is currently great uncertainty whether or
how existing laws governing issues such as property ownership, sales and other
taxes, libel and personal privacy apply to the Internet and commercial online
services. These issues may take years to resolve. For example, tax authorities
in a number of states, as well as a Congressional advisory commission, are
currently reviewing the appropriate tax treatment of companies engaged in
online commerce, and new state tax regulations may subject us to additional
state sales and income taxes.
Federal legislation imposing certain limitations on the ability of states to
impose taxes on Internet-based sales was enacted in 1998. The Internet Tax
Freedom Act, as this legislation is known, imposes on electronic commerce a
three-year moratorium on state and local taxes imposed after October 1, 1998
but only where such taxes are discriminatory on Internet access. It is possible
that the legislation could not be renewed when it terminates in October 2001.
Failure to renew the legislation could allow state and local government to
impose taxes on Internet-based sales, and such taxes could hurt our business.
Our business could be hurt if management uses the proceeds of this offering
inappropriately.
The net proceeds of this offering will be approximately $ based on the
public offering price of $ per share, after deducting the underwriting
discount and estimated offering expenses. Our management will retain broad
discretion as to the allocation of the proceeds of this offering. For more
information on our use of proceeds from this offering, please refer to "Use of
Proceeds."
18
<PAGE>
Our stock price is likely to be volatile.
The market price of the common stock is likely to be volatile and could be
subject to significant fluctuations in response to factors such as the
following, some of which are beyond our control:
.quarterly variations in our operating results;
.operating results that vary from the expectations of securities
analysts and investors;
.changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
.changes in market valuations of other travel, Internet or online
service companies;
.announcements of technological innovations or new services by us or
our competitors;
.announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
.loss of one or more major travel suppliers;
.additions or departures of key personnel;
.future sales of our common stock; and
.stock market price and volume fluctuations.
Domestic and international stock markets often experience extreme price and
volume fluctuations. These fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations, may adversely affect the market price of our common stock. The
market prices for stocks of Internet-related and technology companies
frequently reach levels that bear no relationship to the operating performance
of these companies. These market prices often are not sustainable and are
subject to wide variations. In the past, securities class action litigation has
often been brought against a company following periods of volatility in the
market price of its securities. We may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and divert
management's attention and resources.
The market price of our stock could be adversely affected because a significant
portion of our stock is closely controlled.
Upon consummation of this offering, Michael J. Hartley, Chairman of the
Board, Chief Executive Officer and President of Cheap Tickets, and Sandra T.
Hartley, Vice President, Employee Relations and Director and wife of Michael J.
Hartley, together with their respective affiliates, will beneficially own
approximately 50.9% of our outstanding common stock, subject to certain
adjustments. If the underwriters' over-allotment option is exercised in full,
Michael J. Hartley and Sandra T. Hartley will beneficially own approximately
49.3% of our outstanding common stock. Such ownership could discourage others
from initiating potential merger, takeover or other change of control
transactions. As a result, the market price of our common stock could be
adversely affected. If they act together, they will effectively have the
ability to control the outcome on all matters requiring stockholder approval,
including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of our assets, and to control our
management and affairs. For more information on beneficial ownership of stock,
please refer to "Principal and Selling Stockholders."
19
<PAGE>
Anti-takeover provisions affecting us could prevent or delay a change of
control.
Our Board of Directors has the authority to issue up to 10,000,000 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. This could have an adverse impact on the market
price of our common stock. We have no present plans to issue any shares of
preferred stock, but we may do so. The rights of the holders of common stock
may be subject to, and adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. Moreover, the issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of Cheap Tickets without further action by the stockholders
and may adversely affect the voting and other rights of the holders of common
stock. Further, certain provisions of our charter documents, including
provisions permitting stockholders to take action by written consent with a
two-thirds vote 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 Cheap Tickets. These
governance provisions also could hurt the market price of our common stock. For
more information on our capital stock, please refer to "Description of Capital
Stock."
Substantial sales of our common stock could adversely affect our stock price.
Sales of substantial amounts of our common stock in the public market after
this offering could adversely affect the prevailing market price of the common
stock. Currently, 4,025,000 shares of our common stock are freely tradable
without restriction under the Securities Act of 1933 by persons other than our
"affiliates" as that term is defined in Rule 144 under the Securities Act.
Immediately upon the effectiveness of this offering, an additional 5,000,000
shares will be freely tradable without restriction under the Securities Act by
persons other than our "affiliates" as that term is defined in Rule 144 under
the Securities Act. Commencing on September 16, 1999 (the 181st day after the
initial public offering of our common stock), an additional 383,166 shares and
an additional 40,600 shares subject to vested options will become freely
tradable upon the expiration of agreements not to sell such shares, subject to
compliance with Rule 144 promulgated under the Securities Act. Commencing 90
days following the date of this offering, an additional 14,639,005 shares and
an additional 164,920 shares subject to vested options will become freely
tradable upon the expiration of agreements not to sell such shares, subject to
compliance with Rule 144 promulgated under the Securities Act, and with respect
to shares held by our officers, directors and employees, in compliance with our
policies regarding transactions in our common stock by such persons. William
Blair & Company may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to these agreements. Sales
of common stock by stockholders upon expiration of the lock-up agreements may
adversely affect the market price of the common stock. For more information
regarding the terms upon which our common stock will be underwritten, please
refer to "Underwriting."
20
<PAGE>
As of the effective date of the registration statement, holders of 1,782,750
shares of common stock will be entitled to registration rights with respect to
their shares.
You may experience immediate and substantial dilution.
The public offering price will be substantially higher than the net tangible
book value per share of common stock. If we sell 2,500,000 shares in the
offering at a public offering price of $ per share, our net tangible book
value per share will be $ , which is $ below the per share public offering
price. If we issue additional common stock in the future, or outstanding
options or warrants to purchase our common stock are exercised, there will be
further dilution.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor anyone else
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the
date of this prospectus.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to Cheap Tickets from the offering, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by Cheap Tickets, are estimated to be $ million at the public offering price
of $ per share. If the underwriters exercise their over-allotment option in
full, the net proceeds are estimated to be $ million. During the remainder of
1999, Cheap Tickets intends to use approximately $10 million of the proceeds
for advertising and brand development expenditures and approximately $5 million
for continuing development of Cheap Tickets' technological infrastructure. The
balance of the proceeds will be used for international expansion, possible
acquisitions and general corporate purposes, including working capital. Cheap
Tickets has no agreements or understandings with respect to any acquisition.
Pending application, the net proceeds will be invested in short-term,
investment grade, interest-bearing obligations.
DIVIDEND POLICY
Cheap Tickets has never declared or paid dividends on its common stock and
anticipates for the foreseeable future that all earnings will be retained for
use in its business. The payment of any future dividends will be at the
discretion of the Board of Directors.
PRICE RANGE OF OUR COMMON STOCK
Our common stock trades on Nasdaq National Market under the symbol "CTIX."
The following table sets forth the range of high and low closing sales prices
of our common stock for the periods indicated:
<TABLE>
<CAPTION>
Fiscal 1999 High Low
----------- ------ ------
<S> <C> <C>
First Quarter (from March 19, 1999)........................... $33.63 $25.88
Second Quarter................................................ $45.00 $27.31
Third Quarter (through August 2, 1999)........................ $61.50 $36.44
</TABLE>
On August 2, 1999, the last reported sale price for our common stock on the
Nasdaq National Market was $51.50 per share. The market price for our stock is
highly volatile and fluctuates in response to a wide variety of factors. Please
refer to "Risk Factors--Our price is likely to be volatile."
22
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of Cheap Tickets
as of June 30, 1999, and as adjusted to give effect to the sale of 2,500,000
shares of common stock offered by Cheap Tickets and the application of net
proceeds therefrom. For more information on the anticipated use of proceeds of
this offering, please refer to "Use of Proceeds." The table should be read in
conjunction with the financial statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------
Actual As Adjusted(1)
------- --------------
(in thousands)
<S> <C> <C>
Long-term debt, excluding current installments...... $ 528 $ 528
Capital lease obligations, excluding current
installments....................................... 1,764 1,764
------- ------
Total debt(2)..................................... 2,292 2,292
------- ------
Stockholders' equity:
Preferred stock, $.01 par value--authorized
10,000,000 shares; none issued or outstanding (as
adjusted)........................................ -- --
Common stock, $.001 par value; 70,000,000 shares
authorized, 21,483,171 shares issued and
outstanding (actual); 24,004,171 shares issued
and outstanding (as adjusted)(3)................. 22
Additional paid-in capital........................ 55,969
Unearned compensation............................. (433)
Retained earnings................................. 4,331
------- ------
Total stockholders' equity........................ 59,889
------- ------
Total capitalization............................ $62,181 $
======= ======
</TABLE>
- --------
(1) As adjusted to reflect the receipt of the net proceeds of this offering of
$ .
(2) Total debt excludes Cheap Tickets' current installments of long-term debt
of $321,104 and current installments of capital lease obligations of
$910,595.
(3) As of June 30, 1999, on an actual basis, excludes (1) 710,200 shares
subject to outstanding options with a weighted average exercise price of
$2.14 per share; and (2) 1,221,000 shares available for future grants under
our 1999 Stock Incentive Plan. As of June 30, 1999, on an as adjusted
basis, includes 21,000 shares subject to an option to be exercised by a
selling stockholder in connection with this offering and excludes
(1) 689,280 shares subject to outstanding options with a weighted average
exercise price of $2.20 per share; and (2) 1,221,000 shares available for
future grants under our 1999 Stock Incentive Plan.
23
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
(in thousands, except per share and operating data)
The following selected financial data for the years ended December 31, 1996,
1997 and 1998 and as of December 31, 1997 and 1998 have been derived from Cheap
Tickets' financial statements included elsewhere in this prospectus which have
been audited by PricewaterhouseCoopers LLP, independent public accountants. The
following selected financial data for the years ended December 31, 1994 and
1995 and as of December 31, 1994, 1995 and 1996 have been derived from the
audited financial statements of Cheap Tickets not included in this prospectus.
The operating data and the results of operations for each of the six-month
periods ended June 30, 1998 and 1999 and the balance sheet data at June 30,
1998 and 1999, are derived from information compiled by Cheap Tickets and are
unaudited. The unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, that Cheap Tickets considers necessary for a fair
presentation of its results of operations and financial position at such dates
and for such periods. The results for the six months ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999 or for future periods. The following information is
qualified by reference to, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements included elsewhere in the prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations:
Non-published fares..... $ -- (2) $66,340 $58,982 $96,379 $159,846 $76,171 $153,379
Commissions............. -- (2) 2,738 5,614 6,470 11,268 4,440 9,720
------- ------- ------- ------- -------- ------- --------
Net revenues(1)....... -- (2) 69,078 64,596 102,849 171,114 80,611 163,099
Cost of sales(1)........ -- (2) 56,424 49,168 81,370 136,067 64,975 130,880
------- ------- ------- ------- -------- ------- --------
Gross profit............ 8,128 12,654 15,428 21,479 35,047 15,636 32,219
Selling, general and
administrative
expenses(3)............ 7,947 11,921 14,352 23,091 33,411 14,558 25,896
------- ------- ------- ------- -------- ------- --------
Net operating income
(loss)................. 181 733 1,076 (1,612) 1,636 1,078 6,323
Other income
(deductions)........... 31 (709) 37 (3) 169 57 811
------- ------- ------- ------- -------- ------- --------
Earnings (loss) before
income taxes........... 212 24 1,113 (1,615) 1,805 1,135 7,134
Income taxes............ 60 7 439 (606) 740 465 2,925
------- ------- ------- ------- -------- ------- --------
Net earnings (loss)..... $ 152 $ 17 $ 674 $(1,009) $ 1,065 $ 670 $ 4,209
======= ======= ======= ======= ======== ======= ========
Basic earnings (loss)
per share(4)........... $ 0.01 $ 0.00 $ 0.05 $ (0.09) $ 0.04 $ 0.03 $ 0.19
Shares used in computing
basic earnings (loss)
per share(4)........... 14,100 14,100 14,249 14,847 14,567 14,661 18,217
Diluted earnings (loss)
per share(4) . $ 0.01 $ 0.00 $ 0.05 $ (0.09) $ 0.03 $ 0.02 $ 0.17
Shares used in computing
diluted earnings (loss)
per share(4)........... 14,100 14,100 14,249 14,847 17,921 17,649 20,294
Balance Sheet Data:
Net working capital..... $ 451 $ 182 $ 466 $ 2,356 $ 3,473 $ 2,628 $ 56,887
Total assets............ 2,954 3,740 5,999 11,204 13,226 17,605 82,733
Long-term debt.......... 653 537 1,715 948 1,238 970 2,292
Mandatorily redeemable
preferred stock(5)..... -- -- -- 3,622 4,136 3,879 --
Stockholders' equity.... 849 866 1,544 812 1,385 1,243 59,889
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
(unaudited):
Gross bookings (in
thousands)(6)
Non-published fares... $ -- (2) $ 66,340 $ 58,982 $ 96,379 $159,846 $ 76,171 $ 153,379
Published fares....... -- (2) 25,654 46,962 57,295 110,287 47,014 71,658
-------- -------- -------- -------- -------- -------- ----------
Total gross
bookings........... $ 52,951(2) $ 91,994 $105,944 $153,674 $270,133 $123,185 $ 225,037
======== ======== ======== ======== ======== ======== ==========
Airline tickets sold:... 180,656 313,863 357,551 554,403 960,879 415,559 842,566
Call centers.......... 180,656 313,863 357,551 551,973 865,015 390,381 613,207
Internet.............. -- -- -- 2,430 95,864 25,178 229,359
Registered Internet
users.................. -- -- -- 18,891 420,023 120,893 1,203,188
</TABLE>
- -------
(1) Net revenues consist of sales of non-published fares and commissions. Net
revenues from sales of non-published fares represent revenues from the sale
of tickets purchased from the airlines. Cost of sales consists of the net
fare cost paid to carriers to purchase non-published fares. Commissions,
including incentive overrides, are earned primarily on published fares sold
and include certain other payments based on the volume of transactions.
(2) Net revenues for 1994 were not separately identified from gross bookings
and are not available. In addition, cost of sales for 1994 was previously
accounted for on a gross bookings basis and is not available on a GAAP
basis.
(3) In 1998, Cheap Tickets issued stock options to employees to acquire an
aggregate of 728,000 shares of Cheap Tickets' common stock of which 660,800
have an exercise price of $0.18 per share and 67,200 have an exercise price
of $1.57 per share. Total compensation associated with these options
amounted to $722,600 of which $26,325 has been charged to operations. The
remainder will be charged over the remaining five-year vesting period of
the options, with the exception of $1,062. Stock compensation expense
included in selling, general and administrative expenses was $500 for the
six months ended June 30, 1998 and $43,903 for the six months ended June
30, 1999.
(4) Please refer to notes 1 and 6 to the financial statements for the
calculation of earnings per share, including an explanation of the number
of shares used in computing the amount of basic and diluted earnings per
share.
(5) The mandatorily redeemable preferred stock was redeemed on March 24, 1999.
The redemption price was approximately $4.8 million, including accrued
dividends.
(6) Gross bookings represent the aggregate retail value of tickets sold under
non-published fares and published fares. The difference between gross
bookings and revenues as reported in Cheap Tickets' statement of operations
derives solely from the difference in revenue treatment accorded to sales
of published fares. With respect to published fares, Cheap Tickets records
as revenue in its statement of operations only the commissions earned by
Cheap Tickets on the sale of such fares. Gross bookings represents the
retail value of the sales of published fares. With respect to non-published
fares, revenues as reported in Cheap Tickets statement of operations is
equivalent to gross bookings, which is the retail value of such fares.
Management uses gross bookings as a key indicator of general business
activity, success of promotional efforts, capacity to handle customer
demand and efficiency of reservation agents. In addition, management
believes that gross bookings provide a useful comparison between historical
periods, and year-to-year changes in such information provide a useful
measure of market acceptance of Cheap Tickets products.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the financial
statements of Cheap Tickets. In evaluating the risks of investing in Cheap
Tickets, prospective investors should also evaluate the other information set
forth in this prospectus, including the Risk Factors.
Overview
Cheap Tickets is principally engaged in the sale of discount tickets for
domestic leisure air travel. A majority of its gross bookings have historically
come from the sale of non-published fares, which Cheap Tickets acquires from
airlines and resells to the public at a profit. Cheap Tickets purchases non-
published fares only when it resells them to customers, so that it has no
inventory carrying costs. On these fares, Cheap Tickets sets its resale prices
to meet the demands of leisure travelers who are looking for the lowest price.
Cheap Tickets also sells published fares for which it receives commissions from
the airlines. Sales of non-published fares generally carry higher margins as a
percentage of gross bookings than commissions on published fare bookings.
Cheap Tickets' revenues historically have been generated by ticket sales
through Cheap Tickets' four call centers and, to a lesser extent, through 12
walk-in retail stores. In October 1997, Cheap Tickets broadened its ticket
distribution by offering online booking at "www.cheaptickets.com." Internet
bookings accounted for approximately 9% of total gross bookings in 1998,
approximately 22% in the first three months of 1999, approximately 28% in the
second three months of 1999 and approximately 26% during the first six months
of 1999. At June 30, 1999, Cheap Tickets had over 1.2 million registered online
users, with 783,000 registering in the first six months of 1999. Cheap Tickets
expects online gross bookings and online net revenues to represent an
increasing portion of gross bookings and net revenues in future periods.
Gross bookings represent the aggregate retail value of tickets sold under
non-published fares and published fares. The difference between gross bookings
and revenues as reported in Cheap Tickets' statement of operations derives
solely from the difference in revenue treatment accorded to sales of published
fares. With respect to published fares, Cheap Tickets records as revenue in its
statement of operations only the commissions earned by Cheap Tickets on the
sale of such fares. Gross bookings represents the retail value of the sales of
published fares. With respect to non-published fares, revenues as reported in
Cheap Tickets statement of operations is equivalent to gross bookings, which is
the retail value of such fares. Gross bookings are not required by generally
accepted accounting principles and should not be considered in isolation or as
a substitute for other information prepared in accordance with GAAP. Management
uses gross bookings as a key indicator of general business activity, success of
promotional efforts, capacity to handle customer demand and efficiency of
reservation agents. In addition, management believes that gross bookings
provide a useful comparison between historical periods, and year-to-year
changes in such information provide a useful measure of market acceptance of
Cheap Tickets products.
Net revenues consist of sales of non-published fares and commissions. Net
revenues from sales of non-published fares represent revenues from the sale of
tickets purchased from the airlines. Cheap Tickets' cost of sales consists of
the net fare cost paid to carriers to purchase non-published fares.
Commissions, including incentive overrides, are earned primarily on published
air fares sold and include certain other payments based on the volume of
transactions.
26
<PAGE>
Substantially all of Cheap Tickets' gross bookings represent sales of
airline tickets. For the year ended December 31, 1998 and the six-months ended
June 30, 1999, approximately 98% and 99%, respectively, of gross bookings arose
from airline ticket sales. The remaining gross bookings arose from sales of
cruise tickets, auto rentals, hotel reservations and other travel related
products. Cheap Tickets expects gross bookings from sources other than airline
ticket sales to increase in future periods.
Cheap Tickets' selling, general and administrative expenses include all
operating and corporate overhead. Major expense categories include
compensation, advertising, communications, credit card bank fees, occupancy and
delivery costs. Selling, general and administrative expenses also include
compensation charges related to the issuance of stock options.
Results of Operations
The following table sets forth, for the years ended December 31, 1995, 1996,
1997 and 1998 and the six-month ended June 30, 1998 and 1999, information
derived from the statement of operations of Cheap Tickets expressed as a
percentage of net revenues, and the percentage change in such items and in
gross bookings for the years ended December 31, 1996, 1997 and 1998 compared
with the prior period and the six months ended June 30, 1999 compared with the
six months ended June 30, 1998. Any trends illustrated in the following table
are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Percentage Increase (Decrease)
As a Percentage of Net Revenues Over Prior Periods
---------------------------------------- ------------------------------------
Six Months Six Months
Ended Ended June
Year Ended December 31, June 30, Year Ended December 31, 30,
-------------------------- ------------ ------------------------- ----------
1995 to 1996 to 1997 to 1998 to
1995 1996 1997 1998 1998 1999 1996 1997 1998 1999
----- ----- ----- ----- ----- ----- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Results of Operations:
Non-published fares..... 96.0% 91.3% 93.7% 93.4% 94.5% 94.0% (11.1)% 63.4% 65.9% 101.4%
Commissions............. 4.0 8.7 6.3 6.6 5.5 6.0 105.0 15.2 74.2 118.9
----- ----- ----- ----- ----- -----
Net revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 (6.5) 59.2 66.4 102.3
Gross profit............ 18.3 23.9 20.9 20.5 19.4 19.8 21.9 39.2 63.2 106.1
Selling, general and
administrative
expenses............... 17.2 22.2 22.5 19.5 18.1 15.9 20.4 60.9 44.7 77.9
----- ----- ----- ----- ----- -----
Earnings (loss) from
operations........... 1.1 1.7 (1.6) 1.0 1.3 3.9 46.8 (249.8) 201.5 486.7
Net earnings (loss)..... 0.0 1.0 (1.0) 0.6 0.8 2.6 *nm (249.7) 205.6 528.9
Operating Data
(unaudited):
Gross bookings.......... -- -- -- -- -- -- 15.2% 45.1% 75.8% 82.7%
</TABLE>
- --------
*nm--not meaningful
Six Months Ended June 30, 1999 and June 30, 1998
Net Revenues. Net revenues for the six months ended June 30, 1999 increased
$82.5 million, or 102.3%, to $163.1 million. Non-published fare sales increased
$77.2 million, or 101.4%, to $153.4 million. The increase in non-published fare
sales reflected a significant increase in the number of non-published tickets
sold. Commissions increased $5.3 million, or 118.9%, to $9.7 million and
increased from 5.5% to 6.0% of net revenues. The $5.3 million increase in
commissions reflected three factors: first, an increase in the number of
published fares sold; second, an improvement in bonus overrides as a percentage
of net revenues; and, third, an increase in commission rates. Gross bookings of
published fares decreased from 38.0% to 32.0% of total gross bookings.
27
<PAGE>
The increase in net revenues benefited from accelerating usage of Internet
commerce, growth in the leisure travel market and improving recognition of the
Cheap Tickets brand name, particularly following Cheap Tickets' initial public
offering in March 1999.
Net revenues through call centers and retail operations increased $48.0
million, or 64.2%, to $122.8 million. Of this $48.0 million increase, $23.7
million reflected the effect of six full months of operations in 1999 of a new
call center that opened in late May 1998. Increased productivity from the
remainder of the call centers largely accounted for the rest of the increase.
Net revenues from Internet sales increased $35.5 million, to $38.9 million
for the six months ended June 30, 1999. Net revenues through the Internet
represented 23.9% of net revenues in 1999 compared with 4.2% for the same
period last year.
Gross Profit. Gross profit for the six months ended June 30, 1999 increased
$16.6 million, or 106.1%, to $32.2 million. As a percentage of net revenues,
gross profit increased from 19.4% to 19.8%. The percentage increase was
primarily attributable to commissions, which increased from 5.5% to 6.0% of net
revenues. In addition, in the 1999 period, Cheap Tickets did not benefit from
the unusually high margins on non-published fares enjoyed from a large supplier
in 1998. This negative effect on gross profit was offset by improved margins
from better yield management on all fares for the six months ended June 30,
1999.
Selling, General and Administrative Expenses. For the six months ended June
30, 1999, selling, general and administrative expenses increased $11.3 million,
or 77.9%, to $25.9 million, and decreased as a percentage of net revenues from
18.1% to 15.9%. The decrease in selling, general and administrative expenses as
a percentage of net revenues was primarily attributable to decreases in
compensation, telephone and rent expense as a percentage of net revenues. These
decreases were partially offset by increases, as a percentage of net revenues,
in credit card charges, delivery expense and other general and administrative
expense. In addition, advertising expenses increased by $2.8 million,
representing an increase from 1.7% to 2.6% of net revenues. Advertising
expenses targeted to increase Internet sales were $1.6 million higher for the
first six months of 1999, and overall brand advertising, primarily through
print media, increased by $1.2 million.
Net Earnings. For the six months ended June 30, 1999, net earnings increased
$3.5 million, or 528.9%, to $4.2 million. The increase reflected higher net
revenues, increased gross profit as a percentage of net revenues, and lower
selling, general and administrative expenses as a percentage of net revenues as
a result of more favorable operating leverage.
Years Ended December 31, 1998 and December 31, 1997
Net Revenues. Net revenues for the year ended December 31, 1998 increased
$68.3 million, or 66.4%, to $171.1 million. By category of net revenue, non-
published fare sales increased $63.5 million, or 65.9%, to $159.8 million, and
commissions increased $4.8 million, or 74.2%, to $11.3 million. The increase in
commissions reflected an increase of $53.0 million, or 92.5%, to $110.3 million
in gross bookings of published fares, partially offset by a decrease in
commission rates from an average of 9.0% in 1997 to 7.8% in 1998.
The increase in net revenues benefited overall from industry-wide growth in
the leisure travel market and improving recognition of the Cheap Tickets brand
name from marketing and advertising efforts and word of mouth. Net revenues at
call centers also benefited from better productivity by call center reservation
agents and the opening of a fourth call center in Colorado Springs in May of
1998.
28
<PAGE>
Cheap Tickets' net revenues through call centers and retail operations
(including incentive bonuses) increased $56.4 million, or 54.9%, to $159.2
million. Net revenues through the Internet were $11.9 million in 1998 compared
with $176,000 in 1997. Net revenues through the Internet represented 7.0% of
net revenues for the year ended December 31, 1998 and 17.2% of the total
increase in net revenues from 1997 to 1998. Internet net revenues for the four
quarters of operations grew as follows: first quarter 1998, $1.2 million;
second quarter 1998, $2.3 million; third quarter 1998, $3.8 million, and fourth
quarter 1998, $4.7 million.
Gross Profit. Gross profit increased $13.6 million, or 63.2%, to $35.0
million, consistent with the rate of increase of gross bookings. As a
percentage of net revenues, gross profit decreased from 20.9% to 20.5%. This
decrease was primarily attributable to a decrease in gross margins of
0.7 percentage points on non-published fares. The decrease in non-published
fare margins was primarily attributable to a contract renewal with one carrier
at a less favorable rate. A decline in the proportion of non-published fares
sold, partially offset by increased volume bonuses, also contributed to the
reduction in gross profit.
Selling, General and Administrative Expenses. For the year ended December
31, 1998, selling, general and administrative expenses increased $10.3 million,
or 44.7%, to $33.4 million, and decreased as a percentage of net revenues from
22.5% to 19.5%. The major components of these increases were compensation,
credit card and bank fees, and advertising costs. The increase in advertising
costs was primarily attributable to Cheap Tickets' website launch in October
1997, including promotions on Yahoo, Travelocity and other websites. Internet
marketing costs can be expected to increase significantly in future periods to
promote Internet sales. Credit card fees increased as a result of volume and
rate increases charged by Cheap Tickets' charge card associations. The decrease
in selling, general and administrative expenses as a percentage of net revenues
was primarily attributable to the leverage from increased sales.
In 1998, Cheap Tickets issued stock options to employees to acquire an
aggregate of 728,000 shares of Cheap Tickets' common stock of which 660,800
have an exercise price of $0.18 per share and 67,200 have an exercise price of
$1.57 per share. Total compensation associated with these options amounted to
$722,600, of which $26,325 has been charged to operations for the year ended
December 31, 1998. The remainder will be charged over the remaining five-year
vesting period of the options, with the exception of $1,062, which was charged
at the closing of Cheap Tickets' initial public offering in March 1999, at
which time 140,000 options vested by their terms.
Net Earnings (Loss). Cheap Tickets had net earnings of $1.1 million for the
year ended December 31, 1998, compared with the prior year's loss of $1.0
million. This increase was attributable to increased net revenues, with a
proportionately lower increase in selling, general and administrative expenses,
partially offset by lower gross profit percentages.
Years Ended December 31, 1997 and December 31, 1996
Net Revenues. Net revenues increased $38.3 million, or 59.2%, to $102.8
million, primarily from continued industry-wide growth in the leisure travel
industry and enhanced recognition of the Cheap Tickets brand name from
marketing and advertising efforts. The increase was also associated with
increases in capacity, including the expansion of existing call centers and
higher reservation agent productivity.
29
<PAGE>
During 1997, the increase in net revenues reflected the growth of non-
published fare sales by $37.4 million, or 63.4%, to $96.4 million. By contrast,
net revenues from commissions increased only $856,000, or 15.2%, to $6.5
million. The slower growth of net revenues from commissions was attributable to
slower growth in gross bookings of published fares and a decrease from 10% to
8% in commissions on published fares implemented by a number of air carriers
during 1997.
In 1997, nearly all of Cheap Tickets' net revenues were generated through
call centers, with the exception of approximately $176,000 from Internet sales
following the launch of Cheap Tickets' website in October 1997. Net revenues
from non-published fare sales in 1997 represented 62.7% of gross bookings,
compared with 55.7% in 1996.
Gross Profit. Gross profit increased $6.1 million or 39.2% to $21.5 million
and decreased as a percentage of net revenues from 23.9% to 20.9%. The 3%
decrease was primarily attributable to a reduction in published fares margins
of 2.4% of net revenues. A combination of a reduction in commissions as a
percentage of net revenues and an overall industry reduction in published fare
commission rates accounted for the decrease. A further decrease of 0.6% of net
revenues from non-published fares was the result of a termination in 1997 of
certain profitable routes and the imposition of various restrictions by a major
carrier.
Selling, General and Administrative Expenses. Cheap Tickets' selling,
general and administrative expenses increased $8.7 million, or 60.9%, to $23.1
million and increased as a percentage of net revenues from 22.2% to 22.5%.
These increases resulted primarily from increased employees and infrastructure
to support higher levels of sales. The increase in compensation and employee
benefits reflected the hiring of over 119 new employees, largely reservation
agents and, to a lesser extent, support staff. Other major components of the
increase were telephone expense, advertising costs, delivery expenses, and
credit card and bank fees. Occupancy costs also rose, with the opening of three
additional retail locations and the expansion of space in Honolulu and
Los Angeles.
Net Earnings (Loss). Cheap Tickets incurred a net loss in 1997 of $1.0
million, compared with net earnings of $674,000 in 1996. The decrease in net
earnings was primarily attributable to the decrease in gross profit as a
percentage of net revenues.
Years Ended December 31, 1996 and December 31, 1995
Net Revenues. Net revenues decreased $4.5 million, or 6.5%, to $64.6
million. The decrease corresponded to a reduction in sales of non-published
fares of $7.4 million, or 11.1%, to $59.0 million. Net revenues from
commissions increased by $2.9 million, or 105.0%, to $5.6 million. The
reduction in non-published fare sales was primarily attributable to the
termination of a contract provision with one carrier that had required Cheap
Tickets to sell non-published fares through certain travel agents at low
margins, resulting in $10.5 million in net revenues from such sales in 1995,
compared with $617,000 in 1996. The reduction in non-published fare sales was
partially offset by increased sales of published fares and the commissions
resulting therefrom. Overall gross bookings in 1996 increased $14.0 million, or
15.2% to $105.9 million, as the increase in gross bookings of published fares
exceeded the decrease in gross bookings of non-published fares.
Gross Profit. Gross profit increased $2.8 million or 21.9% to $15.4 million
and increased as a percentage of net revenues from 18.3% to 23.9%. This
increase was primarily attributable to (1) increases from published fares and
volume bonuses of 4.7% of net revenues due to an increase in
30
<PAGE>
the proportion of these components as a percentage of total gross profit and
(2) an increase in non-published fares attributable to the procurement of a
favorable contract with a major carrier and cessation of the sales of low
margin non-published fares to certain travel agents.
Selling, General and Administrative Expenses. Cheap Tickets' selling,
general and administrative expenses increased $2.4 million, or 20.4%, to $14.4
million and increased as a percentage of net revenues from 17.2% to 22.2%. The
largest component of the increase was compensation expense, which was primarily
attributable to the opening of the Lakeport call center in January 1996.
Net Earnings. Net earnings increased from $17,000 to $674,000. Higher
margins on both non-published and published fare sales contributed to the
increase. In addition, there was non-recurring income of $37,000 in 1996,
compared with non-recurring expense in 1995 of $709,000.
Seasonality and Quarterly Financial Information
Cheap Tickets' business is seasonal due primarily to customers' leisure
travel patterns and changes in the availability of non-published fares. As a
result, Cheap Tickets typically has higher sales and gross profit in the second
and third quarters and lower sales and gross profit in the fourth quarter.
During periods of high-volume air travel, such as occur in the fourth quarter
of each year, Cheap Tickets historically has had access to fewer non-published
fares, and such fares on certain major routes may be blacked out or otherwise
unavailable. Online gross bookings may also tend to be seasonal and may decline
or grow less rapidly in the summer months. The seasonal sales cycle is fairly
predictable, but the cycle may shift year-to-year, corresponding to changes in
the economy or other factors affecting the market such as price wars. This
could lead to unusual volatility in revenues and earnings.
31
<PAGE>
The following table sets forth selected unaudited quarterly financial
information for each of the eight quarters in the period ended June 30, 1999,
as well as such data expressed as a percentage of Cheap Tickets' net revenues
for the periods presented. This information has been derived from unaudited
statements of operations data that, in the opinion of management, are stated on
a basis consistent with the audited financial statements and include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such information in accordance with GAAP. Cheap Tickets'
results of operations for any quarter are not necessarily indicative of the
results to be expected in any future period.
<TABLE>
<CAPTION>
Quarter Ended
(unaudited)
----------------------------------------------------------------------------
1997 1998 1999
------------------ ----------------------------------- -----------------
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
-------- ------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Results of operations:
Non-published fares..... $28,789 $22,666 $30,449 $45,722 $46,823 $36,852 $55,962 $ 97,416
Commissions............. 1,602 1,796 1,949 2,491 3,614 3,215 4,567 5,154
------- ------- ------- ------- ------- ------- ------- --------
Net revenues.......... 30,391 24,462 32,398 48,213 50,437 40,067 60,529 102,570
Cost of sales........... 24,097 19,386 25,959 39,016 39,572 31,520 47,852 83,028
------- ------- ------- ------- ------- ------- ------- --------
Gross profit............ 6,294 5,076 6,439 9,197 10,865 8,547 12,677 19,542
Selling, general and
administrative
expenses............... 6,439 6,530 6,430 8,128 9,535 9,319 11,157 14,739
------- ------- ------- ------- ------- ------- ------- --------
Net operating income.... (145) (1,454) 9 1,069 1,330 (772) 1,520 4,803
Other income
(deductions)........... 9 27 35 22 32 80 124 687
------- ------- ------- ------- ------- ------- ------- --------
Earnings (loss) before
income taxes........... (136) (1,427) 44 1,091 1,362 (692) 1,644 5,490
Income taxes............ (56) (529) 18 447 559 (283) 674 2,251
------- ------- ------- ------- ------- ------- ------- --------
Net earnings (loss)..... $ (80) $ (898) $ 26 $ 644 $ 803 $ (409) $ 970 $ 3,239
======= ======= ======= ======= ======= ======= ======= ========
Basic earnings (loss)
per share.............. $ (0.01) $ (0.07) $ (0.01) $ 0.04 $ 0.05 $ (0.04) $ 0.02 $ 0.15
Diluted earnings (loss)
per share.............. $ (0.01) $ (0.07) $ (0.01) $ 0.03 $ 0.04 $ (0.03) $ 0.01 $ 0.15
Operating Data:
Gross bookings ......... $42,959 $41,590 $52,754 $70,431 $75,930 $71,018 $89,740 $135,296
======= ======= ======= ======= ======= ======= ======= ========
<CAPTION>
As a Percentage of Net Revenues
Quarter Ended
(unaudited)
----------------------------------------------------------------------------
1997 1998 1999
------------------ ----------------------------------- -----------------
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
-------- ------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-published fares..... 94.7% 92.7% 94.0% 94.8% 92.8% 92.0% 92.5% 95.0%
Commissions............. 5.3 7.3 6.0 5.2 7.2 8.0 7.5 5.0
------- ------- ------- ------- ------- ------- ------- --------
Net revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales........... 79.2 79.3 80.1 80.9 78.5 78.7 79.1 80.9
------- ------- ------- ------- ------- ------- ------- --------
Gross profit............ 20.8 20.7 19.9 19.1 21.5 21.3 20.9 19.1
Selling, general and
administrative
expenses............... 21.3 26.6 19.9 16.9 18.9 23.2 18.4 14.4
------- ------- ------- ------- ------- ------- ------- --------
Net operating income.... (0.5) (5.9) 0.0 2.2 2.6 (1.9) 2.5 4.7
Other income
(deductions)........... 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.7
------- ------- ------- ------- ------- ------- ------- --------
Earnings (loss) before
income taxes........... (0.4) (5.8) 0.1 2.3 2.7 (1.7) 2.7 5.4
Income taxes............ (0.1) (2.1) 0.0 1.0 1.1 (0.7) 1.1 2.2
------- ------- ------- ------- ------- ------- ------- --------
Net earnings (loss)..... (0.3)% (3.7)% 0.1% 1.3% 1.6% (1.0)% 1.6% 3.2%
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
32
<PAGE>
Liquidity and Capital Resources
For the six months ended June 30, 1999, Cheap Tickets generated cash from
operating activities of $15.8 million, compared with $6.5 million for the six
months ended June 30, 1998. For the six months ended June 30, 1999, cash
generated from operating activities was comprised principally of net earnings
plus depreciation of $4.8 million and an increase in accounts payable of $8.9
million. For the six months ended June 30, 1998, cash generated from operating
activities was comprised principally of net earnings plus depreciation of
$940,000 and an increase in accounts payable of $5.0 million. The primary
account payable is the weekly settlement to the Airline Reporting Corporation
for airline tickets purchased less commissions earned. This is generally a
significant balance, and the timing of the current payment relative to month-
end can cause fluctuations in month-end balances.
For the year ended December 31, 1998, Cheap Tickets generated cash from
operating activities of $2.0 million, compared with $1.5 million for the year
ended December 31, 1997. For the year ended December 31, 1998, cash generated
from operating activities was comprised principally of net earnings plus
depreciation of $1.6 million and net changes in working capital and other
accounts. For the year ended December 31, 1997, cash generated from operating
activities was comprised principally of an increase in accounts payable of $2.5
million adjusted by changes in other accounts. For that period, there was a net
loss of $1.0 million, offset by depreciation of $370,000.
For 1996, Cheap Tickets generated cash from operating activities of
$411,000. This cash was generated primarily from the sum of net earnings and
depreciation of $878,000, partially offset by changes in operating accounts.
For the six months ended June 30, 1999, Cheap Tickets used cash from
investing activities of $20.6 million compared with $512,000 for the six months
ended June 30, 1998. Cash used in investing activities for the six months ended
June 30, 1999 included net purchases of short-term marketable securities for
$18.4 million. Capital expenditures for the six months ended June 30, 1999 and
1998 were $2.2 million and $512,000, respectively. For the six months ended
June 30, 1999, Cheap Tickets received net proceeds from the offering of $55.0
million after deduction of underwriters' fees and other costs of issuance less
$4.8 million to redeem mandatorily redeemable preferred stock and accumulated
dividends.
For the year ended December 31, 1998, Cheap Tickets used cash from investing
activities of $4.8 million, while in the prior period it used cash in investing
activities of $486,000. Cash used in investing activities for the year ended
December 31, 1998 included net purchases of short term marketable securities
for $4.9 million. Capital expenditures for the years ended December 31, 1998
and 1997 were $485,000 and $496,000, respectively. In 1998, Cheap Tickets
received $496,000 in proceeds from the sale of a company office, of which
$489,000 was used to pay the outstanding mortgage on the property. In 1997,
Cheap Tickets raised $3.9 million net of issuance expenses from a private
placement of preferred stock. In 1996, Cheap Tickets made $1.3 million in
capital expenditures, primarily consisting of the furnishing and equipping of a
new call center in Lakeport, California and the acquisition of additional
equipment.
At June 30, 1999, Cheap Tickets maintained on hand cash and cash equivalents
of $48.0 million and short term marketable securities of $23.4 million. Cheap
Ticket's net working capital was $56.9 million. Cheap Tickets has available a
$3.0 million credit facility with a bank expiring on December 5, 1999. This
facility accrues interest at either (1) the bank's base rate or (2) LIBOR plus
an applicable margin, at Cheap Tickets' option. There were no drawdowns against
this facility at
33
<PAGE>
June 30, 1999. Cheap Tickets had outstanding long-term debt net of current
installments of $528,000 and capital lease obligations of $1,764,000.
Cheap Tickets believes that the net proceeds from this offering, together
with its current cash and cash equivalents, short term marketable securities
and anticipated cash flow from operations will be sufficient to meet its
anticipated cash needs for working capital, debt service and capital
expenditures, at least for the foreseeable future. Cheap Tickets has budgeted
approximately $9.0 million for capital expenditures in 1999, nearly all of
which was intended to be used for technological improvements and upgrades.
Approximately $4.2 million has been expended through June 30, 1999. If cash
generated from internal operations is not sufficient to satisfy CheapTickets'
liquidity requirements, Cheap Tickets may seek to increase available bank lines
or sell additional equity or debt securities. The sale of convertible debt or
equity securities could result in additional dilution to Cheap Tickets'
shareholders. There is no assurance that financing will be available in amounts
or on terms acceptable to Cheap Tickets, if at all.
Recently Issued Accounting Standards
In 1998, Cheap Tickets adopted SFAS No. 130 "Reporting Comprehensive
Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." SFAS No. 130 states that all items that are
required to be recognized under generally accepted accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The adoption
of SFAS No. 130 did not have an effect on Cheap Tickets' financial statements
since Cheap Tickets does not have elements of comprehensive income other than
net earnings.
SFAS No. 131 requires disclosures regarding segments of an enterprise and
related information that reflects the different types of business activities in
which the enterprise engages and the different economic environments in which
it operates. The effect of implementing SFAS No. 131 was not significant as
Cheap Tickets manages its business as a single operating segment, Cheap Tickets
is domiciled entirely in the U.S. and substantially all of Cheap Tickets'
revenues are derived from the sales of airline tickets.
SFAS No. 132 standardized the disclosure requirements for pension and other
postretirement benefits. The adoption of SFAS No. 132 does not change existing
measurement or recognition standards for Cheap Tickets' defined contribution
plan and does not have a material effect on Cheap Tickets' financial
statements.
In June 1998, FASB issued SFAS No. 133. "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position and measurement of those
derivative instruments at fair value. In June 1999, FASB issued SFAS No. 137
which deferred the effective date of SFAS No. 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. Currently, Cheap Tickets does not
hold derivative instruments or engage in hedging activities. The adoption of
SFAS No. 133 is not expected to have a material effect on Cheap Tickets'
financial statements.
34
<PAGE>
Effective January 1, 1999, Cheap Tickets implemented Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up
Activities," issued by the Accounting Standards Executive Committee (AcSEC) of
the American Institute of Certified Public Accountants (AICPA). The
implementation did not have a material effect on the financial statements.
The FASB issued SFAS No. 134 in October 1998 and SFAS No. 136 in June 1999
which do not apply to Cheap Tickets. In February 1999, the FASB issued SFAS No.
135, "Rescission of FASB Statement No. 75 and Technical Corrections," which was
effective shortly after issuance and did not have a material effect on Cheap
Tickets' financial statements.
Year 2000 Compliance
Overview
Cheap Tickets is taking steps to address potential Year 2000 problems. Cheap
Tickets has formed a project team from its systems and technology, finance,
telecom and operations departments. The project team is responsible for
implementing the following four-phase process: (1) identifying the computer
systems and products affected; (2) contacting vendors and suppliers; (3)
determining the Year 2000 compliance status of each system and product; and (4)
implementing any necessary changes. Although Cheap Tickets does not currently
expect the impact of the Year 2000 issue will be material to systems still
under evaluation, Cheap Tickets could discover (or fail to discover) Year 2000
issues in the course of its evaluation process that would have a material and
adverse effect on Cheap Tickets' business, results of operations or financial
condition if not properly addressed.
Cheap Tickets currently has three types of computer systems or programs
which may be affected. They include: (1) reservations database systems, (2)
PC/LAN systems and (3) non-informational technology systems. The reservations
database systems involve the computer programs and products responsible for
airline, cruise, car and hotel reservations and other transactional systems.
PC/LAN systems include Cheap Tickets' personal computer network systems. Non-
informational technology systems include systems or hardware containing
embedded technology such as micro controllers.
Cheap Tickets has already completed the four phases for all of its systems
including SABRE reservations, TravelBase Accounting, Payroll, Credit Card
Processing Software, Credit Card Processor, PC/LAN Hardware, PC/LAN Software
and Telecommunications Systems.
Reservation Database Systems. The main supplier of the Cheap Tickets'
reservation database systems is SABRE. Currently, over 90% of Cheap Tickets'
computing transactions are processed through the SABRE systems. This includes
transactions involving airline reservations, booking, ticketing, car and hotel
rentals, cruises and accounting. SABRE has advised Cheap Tickets that it has a
Year 2000 implementation plan in place. Further, SABRE has advised Cheap
Tickets that it has already resolved Year 2000 issues for its main computer
system--the airlines reservations system. In turn, Cheap Tickets has
implemented all changes required by SABRE for Cheap Tickets to be Year 2000
compliant. There can be no assurances that SABRE will be Year 2000 compliant
and that the impact of SABRE's non-compliance, if any, would not be material.
PC/LAN Systems. Cheap Tickets has completed the replacement of all of its
PC/LAN computing systems. All the new PC/LAN systems being installed, including
hardware, software, applications and operating systems, have been represented
by their vendors to be Year 2000
35
<PAGE>
compliant. Cheap Tickets believes that any systems that it has not yet replaced
do not present any Year 2000 concerns because, to Cheap Tickets' knowledge,
these systems already are Year 2000 compliant. In addition, Cheap Tickets is
currently requiring that any new systems it purchases meet Year 2000 compliance
requirements. There can be no assurances that such PC/LAN computing systems
will be Year 2000 compliant and that the impact of such non-compliance, if any,
would not be material.
Non-Informational Technology Systems. Cheap Tickets has evaluated its non-
informational technology systems. Each of its operational centers has achieved
Year 2000 compliance for these systems. Cheap Tickets has not yet developed a
contingency plan in the event that any of its critical computer systems are not
Year 2000 compliant by January 1, 2000.
Based on the steps being taken and progress to date, management estimates
that the expenses for ensuring Year 2000 compliance of its computer products
and systems will not have a material adverse effect on operations or earnings,
and can be financed out of cash flow from operations. Despite such plans and
Cheap Tickets' assessment of current hardware and software, the assessment of
Cheap Tickets' current state of compliance may not be fully accurate, and Cheap
Tickets' plans for achieving full compliance with Year 2000 issues may not in
fact be fully successful. Cheap Tickets is also in the process of attempting to
verify that all of the products supplied by third-party vendors have either
resolved the Year 2000 issue or have a published plan to do so. In certain
cases, such as with SABRE, Cheap Tickets has relied in good faith on
representations and warranties regarding Year 2000 compliance provided to it by
third-party vendors of hardware and software, and on consultants. Such
representations and warranties may not be accurate in all material respects and
the advice or assessments of consultants may not be reliable. If third parties
are not able to make their systems Year 2000 compliant in a timely manner, it
could have a material and adverse effect on Cheap Tickets' business, results of
operations and financial condition. Cheap Tickets has not developed a
contingency plan to address the possibility that SABRE is unable to achieve
Year 2000 compliance and does not intend to do so.
Federal Aviation Administration Readiness. On July 21, 1999, the FAA
announced that all of its computer systems were fully Year 2000 compliant.
According to the FAA's announcement, compliance had been verified by an
independent contractor, and the FAA would continue to test its systems and
contingency plans through year end and through leap-year day February 29, 2000.
The FAA's state of Year 2000 readiness could have a significant impact on air
travel on or about January 1, 2000 and for an uncertain period of time
thereafter. Air travel may be affected both by travelers' safety fears and by
actual disruption caused by lack of Year 2000 readiness.
Possible Air Traffic Disruption. Disruption of air traffic on or about
January 1, 2000, whether or not attributable to the state of FAA Year 2000
readiness, may have an adverse impact on Cheap Tickets. However, the effect, if
any, is uncertain. Fear by travelers of disruption could result in reduced
reservations for year-end flights and possibly less leisure travel generally at
year-end. In addition, if such fears develop, the airlines may lower prices
generally or engage in fare wars to attract customers. If the airlines did
engage in such behavior, Cheap Tickets' business could be hurt. However, if air
traffic is not disrupted, and airlines and the FAA, in fact, achieve Year 2000
readiness, air travel should return to normal levels shortly following January
1, 2000. In such a situation, the overall disruption to Cheap Tickets may be
limited to the holiday vacation period which includes January 1, 2000. On the
other hand, a breakdown of the air control system, or other breakdowns
generally resulting in reduced air traffic or less safe air travel, could have
more serious impact on the air travel business generally and could affect Cheap
Tickets' business, results of
36
<PAGE>
operations and financial condition more adversely. Management has not drawn any
conclusions about whether any such Year 2000 effect will be experienced and, if
so, how it will affect Cheap Tickets. In addition, Cheap Tickets has not
developed a contingency plan to address this situation and does not intend to
do so.
Effect on Other Entities. Finally, Year 2000 issues may impact other
entities with which Cheap Tickets does business, including, for example,
airlines and those responsible for maintaining telephone and Internet
communications. Accordingly, Cheap Tickets cannot predict the effect of the
Year 2000 problem on such entities. If these other entities fail to take
preventive/or corrective actions in a timely manner, the Year 2000 issue could
have a material and adverse effect on Cheap Tickets' business, results of
operations and financial condition. Cheap Tickets has not yet developed a
contingency plan to address the possibility that other entities with which it
does business are unable to achieve Year 2000 compliance and does not intend to
do so.
37
<PAGE>
BUSINESS
Cheap Tickets is a leading retail seller of discount tickets for domestic
leisure air travel. For the six months ended June 30, 1999, Cheap Tickets sold
approximately 843,000 airline tickets through call centers, retail stores and
its Internet site. Cheap Tickets has rights to buy these fares under contracts
from over 35 airline carriers, including America West, American, Continental,
Northwest, TWA, United and US Airways.
Industry Background
Consumers in the United States spent $126 billion on travel through travel
agencies in 1997, up from $101 billion in 1995, according to the Travel Weekly
1998 U.S. Travel Agency Survey. According to the same source, the leisure
travel component of this market is also growing rapidly, as leisure travel
accounted for $64.5 billion, or 51%, of total travel in 1997. Leisure travel
bookings increased 30% from 1995 to 1997, the largest increase in recent years.
Management believes that the growth in leisure travel has been driven by a
number of factors, including an increase in disposable income levels in the
United States, the aging of the population and the availability of affordable
airfares. Airline travel (including business and leisure travel) continues to
be the largest segment of the travel industry, with $70.5 billion, or 56%, of
total travel booked through travel agencies in 1997.
Airline Ticket Sales
Published Fares. Historically, airlines have sold tickets directly or
through travel agencies on a commission basis. The traditional travel agency
channel of distribution is highly fragmented, with few nationally recognized
brands. According to The American Society of Travel Agents, over 23,000 travel
agencies operate in more than 33,000 locations in the United States, and the
average travel agency generates approximately $3.8 million in annual gross
bookings per location.
Travel agents are compensated primarily through commissions paid by airlines
on tickets sold. Some travel agencies also charge service fees to their
customers. Travel agents generally receive commissions of 8% of total ticket
price, although these commissions are frequently capped at $25 for a domestic
U.S. one-way ticket and $50 for a domestic round trip ticket. Airlines also
generally pay approximately 5% in commissions for online sales. In addition,
travel agencies can earn performance-based incentive compensation.
Commissions are determined in the sole discretion of the airlines and are
subject to frequent change. In recent years, airlines have reduced rates and
capped per-ticket commissions generally payable to travel agencies. In
addition, they have further reduced rates and capped commissions for online
reservations. The downward pressure on commission rates may cause traditional
travel agencies to charge service fees to their customers, shift their focus to
higher margin, non-air travel services or reduce the level of customer service.
Travel agencies typically book reservations through electronic global
distribution services such as the SABRE system and Galileo International
Partnership's Apollo system. Global distribution services provide real-time
access for agents to extensive data on fares, availability, schedules and other
travel information. This data is constantly changing, with as many as one
million airfare changes made daily. Customers have historically had to rely on
travel agents to access and interpret this rapidly changing information.
Non-Published Fares. According to the Air Transport Association, airline
excess capacity in the United States was 31.9% from 1995 to 1998, and excess
capacity was approximately 29.8% in
38
<PAGE>
1998. The airlines can predict excess capacity up to a year in advance for
specific routes and times. Airlines are motivated to sell excess capacity at
prices substantially lower than published tariffs because the marginal cost of
filling excess seats is minimal. However, to succeed in this strategy, the
airlines need assurance that sales of excess capacity at lower prices do not
erode published fare structures. The ability to sell such seats without eroding
published fare structures is a source of incremental profits for airlines.
Management believes that it would be difficult for airlines to market their
excess capacity directly to the public at discount prices because their
discount fares would compete with their own regular published fares, and they
would also risk drawing immediate price competition from other airlines. In
fact, airlines generally have not sold excess capacity directly to the public,
except in extremely limited situations, usually involving last-minute special
offers and the use of frequent flier awards. Management believes that leisure
travelers are particularly suited to the products offered by Cheap Tickets, as
they are highly price sensitive and willing to be flexible on carriers, routes
and times of travel.
Airlines generally have sold excess capacity indirectly through
intermediaries in a manner designed not to erode their published fare
structures while at the same time maximizing incremental excess revenues. They
have accomplished this by selling excess capacity to independent third parties
under net fare contracts. The tickets are then resold by these third parties to
the public at prices set by them, generally at a substantial discount below
regularly published fares. The prices of these tickets are not published unless
they have been published directly by the reseller in the media or otherwise,
and the fares are not available from the airlines directly. Hence, they are
referred to as "non-published fares." The profit margins on non-published fare
sales generally exceed the margin received for sales of tickets sold on an
agented basis.
Non-published fares are restricted to specific routes and times, cannot be
canceled or refunded, and generally contain other restrictions which, while
making them unattractive for full-fare travelers, are acceptable to price
sensitive leisure travelers with flexible itineraries.
For international routes, management believes that the market for the sale
of non-published fares is highly competitive, with numerous participants
offering deeply discounted fares. For domestic routes, there are few sellers,
and they generally have contracts with a small number of carriers for a limited
number of routes. Among these, management believes Cheap Tickets is the leading
seller of non-published fares for regularly scheduled domestic routes. Cheap
Tickets has contracts with carriers covering most major domestic and
international routes.
The Growth of Internet Commerce, Products and Services
The enormous growth and acceptance of the Internet as a medium of
communication and commerce presents significant opportunities for Cheap
Tickets. According to Dataquest, more than 43 million households in America
currently have Internet access and that number is projected to grow to nearly
95 million households by 2001. The factors driving this growth include the
increasing number and decreasing cost of personal computers in homes and
offices, technological innovations providing easier, faster and cheaper access
to the Internet, the proliferation of content and services being provided on
the Internet and the increasing use of the Internet by businesses and consumers
as a medium for conducting business.
The Internet possesses a number of unique and commercially powerful
characteristics that differentiate it from traditional media: users communicate
or access information without geographic limitations; users access dynamic and
interactive content on a real-time basis; and users communicate and interact
instantaneously. The Internet has created a dynamic and particularly attractive
medium
39
<PAGE>
for commerce, empowering customers to gather more comparative purchasing data
than is feasible with traditional commerce systems, to shop in a more
convenient manner and to interact with sellers in many new ways. Forrester
Research estimates that online retail revenues will increase from approximately
$4.8 billion in 1998 to approximately $17.4 billion by 2001.
Online Travel Market
As a result of pressures on traditional travel distribution channels and the
emergence of new "e-commerce" opportunities, the online travel industry has
grown rapidly. The Internet provides a convenient and efficient medium for
sales of airline tickets by affording customers direct access to up-to-the-
minute travel information, including changing fares and routes, the ability to
engage in competitive shopping, and the capability to purchase tickets.
According to Forrester Research, the online travel market is the second largest
by dollar volume and fastest growing area of Internet commerce. Online airline
travel bookings were $1.6 billion in 1998 and are expected to grow at a
compounded annual growth rate of 46%, reaching $10.6 billion in 2003.
In the online travel services market, Cheap Tickets competes for published
fares with other entities that operate similar websites, such as Priceline.com,
Inc., Expedia, which is operated by Microsoft Corporation, Travelocity, which
is operated by SABRE Group Holdings Inc., a majority-owned subsidiary of
American Airlines and Preview Travel, Inc. Many airlines also operate websites
for the direct sale of their own fares.
Cheap Tickets' Business Strategy
Cheap Tickets' objective is to provide a wide variety of travel products to
leisure travelers at discount prices and to enhance its position as a leading
provider of non-published fares for domestic leisure travel. Cheap Tickets also
seeks to benefit travel providers by selling airlines' otherwise unused excess
capacity at high incremental margins without diluting their published fare
structure. The principal elements of Cheap Tickets' strategy are:
Provide a Broad Selection of Discounted Fares for Customers. Cheap Tickets
offers a broad selection of non-published and published fares for regularly
scheduled domestic routes at discounted prices. Management believes that its
breadth of fare selection is unmatched in the industry. Cheap Tickets has
access to domestic and international non-published fares for regularly
scheduled flights through contracts with over 35 carriers, including America
West, American, Continental, TWA, United and US Airways. Currently, Cheap
Tickets offers approximately 425,000 non-published fares at any given time for
most major domestic and international routes at discounts attractive for the
leisure traveler. In addition, through the SABRE reservations system, Cheap
Tickets offers approximately 45 million published airfares, including those of
all major domestic and international commercial airlines. Cheap Tickets' non-
published fares are integrated with these published fares on a special area of
SABRE, to which only Cheap Tickets has access, permitting Cheap Tickets'
reservation agents and its Internet customers to choose the least expensive
available itinerary.
Sell Direct to Consumers. Cheap Tickets has been selling airline tickets
directly to the public since its inception in 1986 and has an established
infrastructure to execute its direct sales strategy. It sells its tickets
through call centers, the Internet and retail stores. Cheap Tickets operates
four call centers staffed by approximately 520 employees in Colorado Springs,
Honolulu, and Los Angeles and Lakeport, California. The call centers provide
toll-free telephone support and reservation services seven days a week at "1-
800-OK-CHEAP." Online customers can access Cheap Tickets' easy-to-use
40
<PAGE>
website at their convenience. Cheap Tickets also operates 12 retail stores and
a customer service center. Tickets are shipped on a next-day basis, and Cheap
Tickets has the capability to offer "E-tickets."
Provide Effective Yield Management Services for Airline Carriers. Cheap
Tickets has consistently provided an efficient distribution channel to assist
carriers in selling excess capacity without eroding published fare structures.
Cheap Tickets provides airlines with a yield management solution, enabling them
to increase profits through incremental revenues accompanied by low marginal
costs and, in some cases, to gain market share at the expense of competitors.
Cheap Tickets targets leisure travelers who are willing to travel on certain
routes to fill flights which normally have a low load factor. Restrictions
placed on non-published fares allow Cheap Tickets to sell non-published fares
aggressively to leisure travelers while leaving the airlines and travel and
online agencies to service full fare customers.
Demonstrate Ability to Match Excess Airline Capacity to Consumer
Demand. Cheap Tickets has proven to airlines that it can efficiently match
airlines' excess capacity to consumer demand for leisure travel by selling
increasing volumes of non-published fares. From 1996 through 1998, Cheap
Tickets sold non-published fares of $59.0 million, $96.4 million, and $159.8
million, respectively. For the six months ended June 30, 1999, Cheap Tickets
sold $153.4 million of non-published fares. Management believes that Cheap
Tickets' track record of selling excess capacity without compromising the
airlines' fare structures provide a strong incentive for the airlines to
continue to use Cheap Tickets for the sale of domestic non-published fares.
Cheap Tickets Growth Strategy
Cheap Tickets seeks to become the leading provider of discount travel
products and services to leisure travelers. Cheap Tickets' growth strategy is
to expand its customer base aggressively, form additional strategic alliances,
improve call center productivity, broaden its leisure travel offerings and
consider possible selective acquisitions. The key elements of Cheap Tickets'
growth strategy are as follows:
Aggressively Build Brand Recognition. Cheap Tickets' strategy is to promote,
advertise and broaden its brand recognition through a variety of marketing
techniques. Historically, Cheap Tickets has promoted itself almost exclusively
through print media and word-of-mouth. A recent customer survey commissioned by
Cheap Tickets determined that 54% of customers learned of Cheap Tickets by
word-of-mouth. This has translated into relatively low customer acquisition
costs. With the advent of its Internet business, Cheap Tickets has promoted its
brand through Internet advertising. To broaden its exposure, Cheap Tickets
plans to launch a significant new national media campaign consisting of
television and radio advertising.
Rapidly Expand Internet Bookings. Cheap Tickets intends to capitalize on its
position in selling non-published fares to continue to rapidly expand its
Internet ticket sales. Management plans to accomplish this through increased
marketing to heighten awareness of Cheap Tickets' online product offerings and
the Cheap Tickets' brand. Cheap Tickets plans to maintain and strengthen its
online visibility and customer base through relationships with Internet content
and commerce companies. Online access to Cheap Tickets' products began in
October 1997. As of June 30, 1999, over 1.2 million online users had registered
at Cheap Tickets' website, with more than 783,000 new registrants since
December 1998. For the six months ended June 30, 1999, Cheap Tickets had
approximately $59 million in gross bookings from the sale of 229,000 tickets
over the Internet and
41
<PAGE>
approximately 26% of Cheap Tickets' gross bookings were made over the Internet.
Management believes that Cheap Tickets' gross bookings from the Internet will
continue to grow rapidly.
Enhance and Expand Strategic Relationships. Cheap Tickets currently has
contractual relationships with more than 35 airlines, including America West,
American, Continental, Northwest, TWA, United and US Airways. These
relationships give Cheap Tickets access to non-published fares, which has
helped Cheap Tickets to become a leading seller of non-published domestic fares
to consumers. Cheap Tickets intends to continue to build these relationships
through increased sales of excess capacity and to seek new relationships with
other airlines, travel suppliers, Internet portals and travel-related website
companies. Through these existing and new strategic relationships, Cheap
Tickets seeks to broaden access to its non-published fares and to reach
additional customers. In addition, Cheap Tickets intends to build on its
relationship with SABRE to enable it to continue to provide ease of access to
what management believes to be the broadest available selection of discounted
fares for regularly scheduled domestic routes.
Expand Call Center Capacity through Improved Productivity. Cheap Tickets
intends to continue to invest substantial resources in developing technological
enhancements to its call centers. Cheap Tickets has just implemented an
intelligent call routing system to link Cheap Tickets' four call centers, to
direct calls to specific agents best able to service particular customer needs
and prioritize calls to reduce hold times, and an interactive voice response
system to reduce the need for agents to answer general questions, thereby
increasing the number of calls Cheap Tickets can service and the sales
productivity of reservation agents. Cheap Tickets is also actively developing a
more automated front-end application for its reservation agents that will
reduce errors and increase productivity. Management believes that such
enhancements will increase sales and substantially improve operating
efficiency.
Broaden Existing Products and Services. Cheap Tickets has historically
realized nearly all gross bookings through airline ticket sales. However, it
recently began selling cruise tickets, auto rentals and hotel reservations.
Cheap Tickets intends to capitalize on its market presence in non-published
fares, brand recognition, Internet site, service infrastructure and customer
base to promote these additional travel products. Cheap Tickets' is focusing on
developing complementary products that require minimal incremental resources to
sell and distribute.
International Expansion. Cheap Tickets plans to grow internationally through
acquisitions, joint ventures or internal expansion. Cheap Tickets may seek to
acquire, partner with, or invest in, travel service companies in foreign
countries, where there is the potential to apply the Cheap Tickets' business
model.
Make Selective Acquisitions. Cheap Tickets is considering the acquisition of
companies which will add to its customer base, product lines, strategic
relationships or distribution. Cheap Tickets currently has no agreements or
understandings with respect to any such acquisitions.
Products and Services
Leisure Airline Tickets. Cheap Tickets has the right to acquire non-
published fares pursuant to contracts from carriers. Cheap Tickets then resells
these tickets at profit margins which exceed the typical commissions payable
for the sale of tickets on an agented basis. The prices Cheap Tickets offers to
customers are generally at a substantial discount to published fares. Cheap
Tickets purchases these fares only when it resells them to customers, so that
it does not have inventory carrying costs.
42
<PAGE>
Cheap Tickets' non-published fares are not available to consumers directly from
the airlines and are not published, except as advertised by Cheap Tickets.
Availability of non-published fares varies from route to route based on
availability from the airline carriers. Cheap Tickets currently offers
approximately 425,000 non-published fares at any given time, covering most
major domestic and international routes. Cheap Tickets sells these tickets with
limitations and restrictions that make them unattractive for full fare
travelers, who seek the convenience of tickets that can be exchanged or
canceled and do not have advance purchase or minimum stay requirements.
In 1998 and for the first six months of 1999, approximately 59% and 68%,
respectively, of Cheap Tickets' airline gross bookings were from non-published
fares. For customers who are unable to find a non-published fare for a
particular itinerary, Cheap Tickets also offers a full menu of regularly
published fares. In 1994, Cheap Tickets became the first non-airline to file
its non-published fares through the Airline Tariff Publishing Corporation. This
allows Cheap Tickets to integrate its non-published fares with published fares
in a special area of the SABRE reservations system to which only Cheap Tickets
has access. This system automatically sorts through millions of fares,
including Cheap Ticket's own non-published fares, to identify the lowest fares
available for the desired itinerary. These fares are then posted in ascending
price order for use by Cheap Tickets' reservation agents and Internet
customers.
For published fares, Cheap Tickets receives commissions on gross bookings.
Airlines generally pay commissions of 8% of total ticket price, although these
commissions are frequently capped at $25 for a domestic U.S. one-way ticket and
$50 for a domestic round trip ticket. Airlines also generally pay approximately
5% in commissions for online sales. Cheap Tickets receives commissions at least
as favorable as those received by travel agents, and with many carriers Cheap
Tickets has negotiated more favorable commission rates. In addition, Cheap
Tickets frequently benefits from performance-based override commissions.
Other Travel Products and Services. Cheap Tickets has contractual
relationships to sell cruises on Carnival Cruises and Princess Cruises and also
has contractual relationships with major auto rental companies to provide
reservations. Cheap Tickets has recently entered into a number of contracts to
sell hotel room reservations. Such alternative products represented less than
1% of Cheap Tickets' gross bookings for the first six months of 1999. Cheap
Tickets sees these other travel products and services as potential areas of
future growth.
Call Center Operations. At June 30, 1999, Cheap Tickets had approximately
520 reservation agents and other call center employees at its four call
centers. Facilities are located in Honolulu, Colorado Springs, Los Angeles and
Lakeport, California. Reservation agents at these call centers receive all
in-bound calls to Cheap Tickets' toll free number "1-800-OK-CHEAP." On average,
the call centers receive approximately 100,000 calls per day. Reservation
agents currently conduct fare searches for requested itineraries, sell airline
tickets, explain rules and restrictions applicable to fares and ticket delivery
details, identify retail ticket locations, and provide other assistance. The
call centers also provide customer service for both call center customers and
Internet users.
Cheap Tickets implemented an intelligent call routing and interactive voice
response technology that enables callers to receive fare quotes and get answers
to common information requests in an automated phone-based environment. By
automating caller activities and compensating agents on an incentive basis,
Cheap Tickets seeks to maximize agent productivity. Call centers are segmented
into teams, who are rewarded for the highest productivity and operating
effectiveness.
43
<PAGE>
Internet Operations. Cheap Tickets' online reservations and ticketing
service through its website at "www.cheaptickets.com" provides its customers
access to information on schedules, availability and non-published and
published fares and enables them to book their own travel arrangements at their
convenience. The website is designed to provide customers with quick,
efficient, and flexible service in a manner that facilitates comparison
shopping. Cheap Tickets' online service automates the processing of customer
orders, interacts with the systems of third party travel suppliers, and allows
Cheap Tickets to gather, store and use customer and transaction information in
a comprehensive and cost-efficient manner. The website allows customers to
dispense with providing personal profile and payment information after their
initial registration. The website has permitted Cheap Tickets to expand its
customer base through better service while reducing transactional costs.
The website contains customized software applications that interface the
website with the electronic booking system and database. Cheap Tickets has
contracted with SABRE for the development and hosting of the site, the
development of the customized software applications, and access to the
electronic booking system and database. Cheap Tickets also has developed its
own proprietary customized software applications that interfaces the website
directly with the SABRE electronic booking system and database.
Cheap Tickets maintains a relational database containing information
compiled from customer profiles, shopping patterns and sales data. Cheap
Tickets analyzes information in this database to develop targeted marketing
programs and provide personalized and enhanced customer service. Its database
is scaleable to permit large transaction volumes with no significant software
changes. Cheap Tickets' systems support automated e-mail communications with
customers to facilitate confirmations of orders, provide customer support,
obtain customer feedback and engage in targeted marketing programs.
Cheap Tickets uses a combination of proprietary and industry-standard
encryption and authentication measures designed to protect a customer's
information. Cheap Tickets maintains an Internet firewall to protect its
internal systems and all credit card and other customer information.
Strategic Relationships
Airline Relationships. Cheap Tickets currently has contracts with more than
35 airlines. For the first six months of 1999, approximately 60% of sales of
non-published fares came from tickets acquired from three airlines: Continental
represented approximately 28%; TWA represented approximately 22%, and America
West, 10%. Cheap Tickets sells non-published fares purchased under these
contracts, with minimum stay and advance purchase requirements, as non-
refundable, non-endorsable and non-changeable tickets and without frequent
flyer mileage or upgrades. Generally, the airline contracts range from one to
one and a half years in length and can be cancelled on short notice. None of
these carriers has any obligation to renew the contracts at their expiration,
but Cheap Tickets has consistently been successful in obtaining renewals.
Management believes that Cheap Tickets' track record of selling excess capacity
without compromising the airlines' fare structures provides a strong incentive
for the airlines to continue to use Cheap Tickets for the sale of domestic non-
published fares. Management believes that Cheap Tickets' success in matching
excess capacity to consumer demand for low ticket prices comes from its
strategy of directing its marketing efforts to leisure travelers and selling
restricted tickets directly to the public in high volumes through call centers
and over the Internet. Although Cheap Tickets has a consistent history of
renewing its contracts, there are no assurances that any one or several of them
will be renewed.
44
<PAGE>
SABRE Relationship. SABRE is a world leader in the electronic distribution
of travel-related products and services and is a leading provider of
information technology solutions for the travel and transportation industry.
SABRE's electronic booking system and database contains flight schedules,
availability, and published fare information for more than 400 airlines, 50
auto rental companies, 35,000 hotel properties, and dozens of railways, tour
companies, passenger ferries, and cruise lines located throughout the world.
Through the SABRE reservations system, Cheap Tickets offers approximately 45
million published airfares, including those of all major domestic and
international commercial airlines. In addition, SABRE's electronic booking
system and database hosts Cheap Tickets' non-published fare information through
a unique arrangement that permits Cheap Tickets to integrate its non-published
fares with published fares on a special area of the SABRE reservations system
to which only Cheap Tickets has access. This system automatically sorts through
millions of fares, including Cheap Tickets' own non-published fares, to
identify the lowest fares available for the desired itinerary. These choices
are then posted in ascending price order for use by Cheap Tickets' reservation
agents and Internet customers.
Marketing and Brand Awareness
Cheap Tickets intends to aggressively build its brand name to enhance
consumer awareness and add new customers. As part of this program Cheap Tickets
plans to significantly increase its marketing and advertising expenditures.
Traditionally Cheap Tickets has depended primarily on print and, more recently,
Internet-based advertising. Cheap Tickets is now initiating a major national
campaign using television, print, radio and the Internet. Television
advertising will use 30-second placements, primarily on cable channels focused
on the 35-55 year old segment. The launch of the first 30-day campaign is
planned for August 1999. Radio spots will complement the television campaign.
Cheap Tickets also intends to broaden the scope of print advertising to include
more and higher profile publications as well as to increase the number of its
focus cities. Finally, Cheap Tickets plans to continue to pursue a highly
targeted Internet-based advertising campaign. Its Internet advertising efforts
will be targeted using keyword search and banner ads on Internet sites
frequented by its target consumer base. Through such targeted efforts, Cheap
Tickets seeks to obtain the highest return for its advertising expenditures. It
is a featured advertiser on the Travelocity website. Cheap Tickets also
advertises on Yahoo!, Excite, Lycos, HotBot, Snap.com and OnSale. Through its
banner advertisements, Cheap Tickets has achieved "click-through" rates to its
website as high as 8%.
Competition
Competition for Non-Published Fares.
Sellers of Non-Published Fares. Cheap Tickets' existing direct competition
for non-published fares comes largely from companies that specialize in the
distribution of discounted fares in the form of regularly scheduled and
chartered flights. Management believes that the market for the sale of non-
published fares is highly fragmented. For international routes, it is highly
competitive, with numerous participants offering deeply discounted fares. For
domestic routes, there are few sellers,
and they generally have net fare contracts with a small number of carriers for
a limited number of routes. Among these, management believes Cheap Tickets is
the leading seller of non-published fares for regularly scheduled domestic
routes. Cheap Tickets has contracts with many carriers covering most major
domestic and international routes. As the domestic airline industry continues
to evolve, other competitors could increase their share of the market, or new
ones could enter the market.
Online Travel Companies. Online travel companies have established a strong
market presence primarily based on the sale of published fares. They are now
also selling non-published fares. For
45
<PAGE>
example, Priceline.com, Inc. has agreements with a number of carriers to
acquire non-published fares. Recently, it signed an agreement to purchase non-
published tickets from Continental, Cheap Tickets' largest supplier of non-
published fares. A number of online companies possess larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources than Cheap Tickets.
Airlines and Travel Agents. Airlines do not generally offer non-published
fares directly or indirectly through affiliates or travel agents for regularly
scheduled travel, presumably to prevent the erosion of their published fare
structure. Some airlines do offer limited special discounted fares through
their Internet sites that are not generally made available to travel agents.
These fares are typically offered only on a last-minute, "special sale" basis.
In addition, some airlines offer special promotional fares, combining low base
prices and the use of frequent flyer awards. Airlines may expand their offering
of special promotional fares, enter the non-published fare market or sell non-
published tickets through travel agents.
Certain Competitive Factors Affecting Non-Published Fares.
Published fares also compete with Cheap Tickets' non-published fares. They
effectively establish price ceilings for Cheap Tickets' non-published fares.
From time to time, airlines also offer special fares, which may compete
directly with Cheap Tickets' discounted non-published fares. Direct competition
also comes from the airlines when fare wars break out.
Competition for Published Fares.
In the sale of published fares, Cheap Tickets currently competes with
airlines, traditional travel agents, online travel services and travel industry
reservation databases. The online travel services market is new, rapidly
evolving and intensely competitive, and Cheap Tickets expects such competition
to intensify in the future. In the online travel services market, Cheap Tickets
competes for published fares with similar commercial websites of other
companies, such as Expedia, which is operated by Microsoft Corporation,
Travelocity, which is operated by SABRE Group Holdings Inc., a majority-owned
subsidiary of American Airlines, Preview Travel, Inc., Cendant Corporation,
TravelWeb, which is operated by Pegasus, Internet Travel Network, Biztravel.com
and TheTrip.com, among others. Several traditional travel agencies, including
larger travel agencies such as American Express Travel Related Services Co.
Inc., Uniglobe Travel and Carlson Wagonlit Travel, have established, or may
establish in the future, commercial websites offering online travel services.
Several airlines also have established commercial websites to sell their
tickets and offer other online travel services.
Employees
As of June 30, 1999, the Company had 800 employees including 522 reservation
agents and other call center employees, 52 retail store employees, 9 cruise
employees, 21 Internet employees, 75 operations support employees and 121
corporate and administrative employees. Cheap Tickets' ability to attract and
retain highly qualified employees will be the principal determinant of its
success. Cheap Tickets has a policy of using performance-based and equity-based
compensation programs to reward and motivate significant contributors among its
employees. Competition for qualified personnel in the industry is intense.
There can be no assurance that Cheap Tickets' current and planned staffing will
be adequate to support its future operations or that management will be able to
hire, train, retain, motivate and manage required personnel. Although none of
Cheap Tickets'
46
<PAGE>
employees is represented by a labor union, there can be no assurance that its
employees will not join or form a labor union. However, Cheap Tickets has not
experienced any work stoppages and considers its relations with its employees
to be good.
Facilities
Cheap Tickets is headquartered in Honolulu, Hawaii, where it leases an
aggregate of approximately 23,524 square feet of space housing its corporate
offices and a call center. The leases for such space expire in November 2000
and December 2003, with an option to renew such leases covering approximately
13,300 square feet for an additional five years. Cheap Tickets also leases an
aggregate of approximately 5,400 square feet of retail or storage space in six
other locations in Hawaii. In July 1994, Cheap Tickets entered into a lease
expiring in September 2004 for approximately 9,600 square feet in Los Angeles,
California, to serve as one call center. In June 1999, Cheap Tickets entered
into a lease expiring May 2009 for approximately 25,000 square feet to house
its Colorado Springs, Colorado call centers. Cheap Tickets also leases an
aggregate of approximately 8,800 square feet of retail and administrative space
in five other locations in California, approximately 975 square feet of retail
space in Seattle in one location, and approximately 1,650 square feet of retail
and administrative space in New York in two locations. Cheap Tickets owns a
20,000 square-foot facility in Lakeport, California, which serves as a fourth
call center.
Legal Proceedings
On June 29, 1999, a former employee filed an action against Cheap Tickets in
California Superior Court alleging, among other causes of action, that he was
fraudulently induced to become and stay as an employee, that he was improperly
excluded from participation in various management incentive plans, that he was
improperly cut back on the allocation of shares in Cheap Tickets' initial
public offering, and that Cheap Tickets was unjustly enriched by his management
of the Company's cruise division. As a result, the former employee claims
compensatory damages in varying amounts. The largest claim for compensatory
damages is for $20,000,000, representing the amount by which the plaintiff
claims to have enhanced the Cheap Tickets' public offering by reason of his
efforts as manager of the Company's cruise division. The plaintiff also seeks
unspecified punitive damages.
We believe that this lawsuit is without merit and intend to vigorously
contest this lawsuit. The lawsuit is in an early stage of litigation, and it is
too early to determine what, if any, liability we will have with respect to the
claims made in this lawsuit. The defense of such litigation could also entail
considerable cost and the diversion of efforts of management, either of which
could hurt our results of operations. While an unfavorable outcome in these
matters is possible, we do not believe that the outcome of this lawsuit will
have a material adverse effect on our business, financial condition, or results
of operations.
In addition, Cheap Tickets may from time to time become a party to various
legal proceedings arising in the ordinary course of our business. Any such
proceeding against Cheap Tickets, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
47
<PAGE>
MANAGEMENT
Directors and Executive Officers
The names, ages and positions of Cheap Tickets' directors and officers as of
June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael J. Hartley...... 49 Chairman of the Board, Chief Executive Officer and President
F. Michael Bartholomew.. 51 Chief Operating Officer
Dale K. Jorgenson....... 60 Chief Financial Officer and Vice President of Finance
Tammy A. Ishibashi...... 32 Executive Vice President of Ticket Distribution
Donald K. Klabunde...... 42 Vice President of Systems & Technology
Ronald L. McElfresh..... 50 Vice President of Online Services
Sandra T. Hartley....... 49 Vice President of Employee Relations and Director
Lester R. Stiefel....... 47 Vice President of Human Resources
LaMont C. Brewer........ 43 Director of Call Centers
Ronald J. Tsolis, Jr. .. 31 Director of Pricing and Yield Management
Giles H. Bateman(1)(2).. 54 Director
George R.
Mrkonic(1)(2).......... 47 Director
Donald J.
Phillips(1)(2)......... 60 Director
Cece Smith(1)(2)........ 54 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Michael J. Hartley, a co-founder of Cheap Tickets, has served as Chief
Executive Officer, President and Director of the Company since Cheap Tickets'
inception in August 1986, and has served as Chairman of the Board since January
1999. Mr. Hartley is the husband of Sandra T. Hartley, Cheap Tickets' Vice
President of Employee Relations and the uncle of Tammy A. Ishibashi, Cheap
Tickets' Executive Vice President of Ticket Distribution. Prior to founding
Cheap Tickets, Mr. Hartley founded and sold one charter airline and served as
an organizer of two other airlines.
F. Michael Bartholomew has served as Chief Operating Officer of Cheap
Tickets since January 1999. He joined the Company in December 1997 as Senior
Vice President of Operations. From April 1994 to September 1997, Mr.
Bartholomew was Vice President of Customer Management, at Providian Financial
Corporation, a $10 billion public consumer financial services company. From May
1991 to April 1994, Mr. Bartholomew was President of Sierra Technology, a
specialized management consulting company. Prior to that, Mr. Bartholomew was a
Senior Advisor of the U.S. Special Forces, Navy Seals, U.S. Navy. Mr.
Bartholomew holds a B.S. degree in Finance from St. Louis University.
Dale K. Jorgenson joined Cheap Tickets in May 1998 as Chief Financial
Officer and Vice President of Finance. Prior to that, from 1988 to 1998, he was
Chief Financial Officer and Vice President of Finance, of Interpacific Hawaii
Retail Group and DFS, Ltd. Hawaii Region, both large retail chains in Hawaii.
Prior to that, he held similar positions for 14 years with Castle & Cooke,
Inc., now Dole Food Co. Mr. Jorgenson holds a B.A. degree in Business
Administration from the University of Washington and an M.B.A. degree from
Golden Gate University. He is a certified public accountant.
48
<PAGE>
Tammy A. Ishibashi has served as Executive Vice President of Ticket
Distribution since February 1995 and is responsible for managing the retail
stores and ticket distribution process, which includes fare filings with the
Airline Tariff Publishing Corporation, ticket distribution, refunds and ARC
reporting, and for overseeing the five departments necessary to accomplish this
process. She joined Cheap Tickets as Treasurer in September 1990, a position
she held until November 1993 when she was appointed to Second Vice President.
Ms. Ishibashi served as a Director of Cheap Tickets from September 1990 until
February 1999. Ms. Ishibashi is the niece of Michael J. Hartley, Cheap Tickets'
Chairman of the Board, Chief Executive Officer and President, and Sandra T.
Hartley, Cheap Tickets' Vice President of Employee Relations.
Donald K. Klabunde has served as Vice President of Systems & Technology
since January 1999. He joined Cheap Tickets in February 1998 as Director of
Systems & Technology, to direct the day-to-day and strategic operation of the
information and technology department in the planning, development,
implementation, and support of technological/systems enhancements throughout
the company. Prior to joining the Company, he worked for Deluxe Corporation, a
financial services company, since 1980 in a variety of technical support and
information and technology positions. Mr. Klabunde holds a B.A. degree from the
University of Minnesota.
Ronald L. McElfresh joined Cheap Tickets in January 1998 as Vice President
of Online Services, to design, develop, implement and maintain Cheap Tickets'
website. From 1996 to 1997, he worked at Digital Island, a global Internet
service provider, as the Director of Marketing. From June 1995 to June 1996, he
served as general manager at Hawaiian On-Line GTE, an Internet company. From
October 1994 to June 1995, he worked at GTE, a telecommunications company, as
an international services product manager, where he developed and managed
telephony and worked on product development for GTE's original Internet
services. From April 1989 to July 1993, Mr. McElfresh was the Director of
Product Marketing of Brite Voice Systems, Inc., a telecommunications company.
In October 1981, Mr. McElfresh co-founded INFOCOM, a multimedia development
company, where he held various product development and marketing positions,
most recently as General Manager, until October 1987. Mr. McElfresh holds a
B.A. degree from Blackhawk College.
Sandra T. Hartley, a co-founder of Cheap Tickets, has served as Vice
President of Employee Relations since January 1999. Her responsibilities
include employee relations and benefits, corporate functions and public
relations. She served as Chief Executive Officer of Cheap Tickets from August
1986 until September 1998. From August 1986 until January 1999, she has served
as Chairman of the Board of Directors. Ms. Hartley is the wife of Michael J.
Hartley, Cheap Tickets' Chairman of the Board, Chief Executive Officer and
President, and the aunt of Tammy A. Ishibashi, Cheap Tickets' Executive Vice
President of Ticket Distribution.
Lester R. Stiefel joined Cheap Tickets in April 1998 as Director of Human
Resources, to head the human resources function and to ensure that policies and
practices comply with employment laws and regulations and company standards.
Prior to joining the company he worked at Citibank, a financial institution, as
Vice President of Senior Resources Manager from 1986 to 1998, and at The Bank
of Nova Scotia, a financial institution, from 1984 to 1986. Mr. Stiefel holds a
B.A. degree from Herbert Lehman College and a Masters degree from Yeshiva
University.
LaMont C. Brewer joined Cheap Tickets in September 1998 as Call Center
Manager for the Honolulu, Hawaii location. From February 1999, Mr. Brewer has
served as Director of Call Centers. Prior to joining Cheap Tickets, he worked
at Michigan Bell/Ameritech, a telecommunications company, since 1985 in
different positions including general manager of a 380 station call center,
49
<PAGE>
quality assurance manager and training supervisor. Mr. Brewer holds a B.A.
degree from Wayne State University.
Ronald J. Tsolis, Jr. joined Cheap Tickets in May 1998 as Director of
Pricing and Yield Management to maximize the profitability of retail fares
offered by the Company. From July 1993 to May 1998, he held management
positions in Pricing, Planning, and Sales at US Airways. Mr. Tsolis holds a
B.S. degree in Business Logistics from Pennsylvania State University.
Giles H. Bateman has been a Director of Cheap Tickets since the closing of
our initial public offering. He has served as a director of CompUSA Inc. since
December 1991 and as Chairman of the Board of Directors since December 1993.
Since January 1992, Mr. Bateman has been an investor in and director of other
public and private companies, including Boatracs, Inc., Beverages and More,
Inc. and Auto Expo, Inc. The assets of Auto Expo, Inc. were assigned for the
benefit of its creditors in 1995. In 1991, Mr. Bateman was a visiting professor
at the University of San Diego Olin Hall School of Business Administration. Mr.
Bateman was co-founder of The Price Company, the operator of The Price Club
chain of warehouse club retail superstores. He served as a director and Chief
Financial Officer of The Price Company from 1976 to 1991 and as Vice Chairman
from 1986 to 1991. Since 1998, Mr. Bateman has volunteered as the Chairman of
the Board of Trustees of The Hoffman Institute in Northern California.
Mr. Bateman holds a B.A. degree from Oxford University and an M.B.A. degree
from Harvard University.
George R. Mrkonic has been a Director of Cheap Tickets since the closing of
our initial public offering. He has served as the Vice Chairman of Borders
Group, Inc. since December 1994, and a director since its formation in August
1994. He also served as President of Borders Group, Inc. from December 1994
until January 1997. Prior to joining Borders, Mr. Mrkonic served as Executive
Vice President of Specialty Retailing Group of Kmart Corporation, where he had
overall responsibility for the specialty retailing operations of Kmart
including, among others, Borders, Inc. and Walden Book Company, Inc., from
November 1990 to November 1994. Mr. Mrkonic is also a director of Champion
Enterprises, Inc., a manufacturer and seller of manufactured homes and Syntel,
Inc., a computer software and development company.
Donald J. Phillips has been a Director of Cheap Tickets since June 1998.
Since 1986, Mr. Phillips has been a general partner of Phillips-Smith Specialty
Retail Group, a retail venture capital investment firm. Mr. Phillips serves as
a director on the Board of Directors for several private companies, including
Garden.com, Inc. He previously served as a director of publicly-held retailers
CompUSA, Inc., PETsMART, Inc. and A Pea in the Pod, Inc. Mr. Phillips holds a
B.B.A. degree in Economics from Western Michigan University and an M.B.A.
degree from Harvard University.
Cece Smith has been a Director of Cheap Tickets since July 1997. Since 1986,
Ms. Smith has been a general partner of Phillips-Smith Specialty Retail Group,
a retail venture capital investment firm. Ms. Smith serves as a director on the
Board of Directors of Hot Topic, Inc., a public specialty retailer of music-
related apparel and accessories for young men and women, and a number of
private retail companies. She previously served as a director of publicly-held
retailers BizMart, Inc. and A Pea in the Pod, Inc. Ms. Smith holds a B.B.A.
degree in Business Administration from the University of Michigan and an M.L.A.
degree in Liberal Arts from Southern Methodist University. Ms. Smith served as
a director from 1992 to 1997 and as Chairman from 1994 to 1996 of the Federal
Reserve Bank of Dallas.
Members of the Board of Directors are elected each year at the Company's
annual meeting of stockholders and serve until the following annual meeting of
the stockholders and until their respective successors have been elected and
qualified.
50
<PAGE>
Prior to his founding of Cheap Tickets in 1986, Mr. Hartley served from 1973
to 1978 as President and Chief Operating Officer of a commuter airline
operating within Hawaii, which he subsequently sold. From 1974 to 1978, he also
operated a Hawaii-based aviation center, which provided fuel and maintenance
services and flight instruction. In 1977, Mr. Hartley pled guilty to the charge
of conspiracy with the intent to distribute a controlled substance stemming
from an event that occurred in 1975, when he was 25. He served a 90-day work
release program and two and one half years' probation. From 1981 to 1986, Mr.
Hartley was one of several founders of two start-up Hawaii-California airlines,
Hawaii Express and Air-Hawaii. Eight months after Mr. Hartley had been
dismissed as President by a dissident board, Hawaii Express failed in 1983. Mr.
Hartley served as an outside consultant to Air Hawaii until its initial flight
in November of 1985. Air Hawaii faced major fare wars from its competitors
prior to filing for bankruptcy in the spring of 1986.
Committees of the Board of Directors
In January 1999, the Board established an Audit Committee and a Compensation
Committee. The Audit Committee monitors the corporate financial reporting and
the internal and external audits of Cheap Tickets. The Audit Committee
currently consists of Directors Bateman, Mrkonic, Phillips, and Smith. The
Compensation Committee makes recommendations regarding Cheap Tickets' employee
stock plans and makes decisions concerning salaries and incentive compensation
for employees and consultants of Cheap Tickets. The Compensation Committee
currently consists of Directors Bateman, Mrkonic, Phillips, and Smith.
Director Compensation
Nonemployee directors receive $2,500 for each Board meeting and $1,000 for
each committee meeting attended in person as compensation for their services as
directors. Further, directors are reimbursed for certain reasonable expenses
incurred in attending Board or committee meetings. Each non-employee director
will receive upon joining the Company an option to acquire 1,500 shares of
common stock at an exercise price equal to the then fair market value. These
options shall vest in equal increments over three years. Each non-employee
director will also receive automatic annual grants of options to acquire
$25,000 worth of common stock based on an exercise price equal to the fair
market value of the common stock at the date of grant. Such options will vest
in equal increments over three years. For more information on Cheap Tickets'
1999 Stock Incentive Plan please refer to "Stock Plans--1999 Stock Incentive
Plan."
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between Cheap Tickets' Board of
Directors or Compensation Committee and any member of any other company's board
of directors or compensation committee, nor has any such interlocking
relationship existed in the past.
51
<PAGE>
Limitation of Liability and Indemnification Matters
Limitation of Liability under Certificate of Incorporation. Pursuant to the
provisions of the Delaware General Corporation Law, Cheap Tickets' Certificate
of Incorporation provides that directors and officers of Cheap Tickets shall
not be personally liable for monetary damages to Cheap Tickets or its
stockholders for a breach of fiduciary duty as a director or officer, except
for liability for:
. a breach of the duty of loyalty to Cheap Tickets or its stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law; and
. transactions from which the director or officer derived an improper
personal benefit.
The limitation of liability provided in the Certificate of Incorporation does
not affect the availability of equitable remedies such as injunctive relief or
rescission.
Indemnification Agreements. Cheap Tickets' Certificate of Incorporation, as
amended, also authorizes Cheap Tickets to indemnify its officers, directors and
other agents, by bylaws, agreements or otherwise, to the fullest extent
permitted under Delaware law. Cheap Tickets has entered into separate
indemnification agreements with its directors and officers which may, in some
cases, be broader than the specific indemnification provisions contained in the
Delaware General Corporation Law. The indemnification agreements may require
Cheap Tickets, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to obtain directors' and officers' insurance if available on reasonable
terms.
Indemnification under Bylaws. Cheap Tickets' Bylaws, as amended, require
Cheap Tickets to indemnify its directors and officers and permit Cheap Tickets
to indemnify its other employees to the fullest extent permitted by law. Cheap
Tickets believes that indemnification under its Bylaws, as amended, covers at
least negligence and gross negligence on the part of the indemnified party.
Indemnification under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of Cheap Tickets pursuant to the foregoing
provisions, or otherwise, Cheap Tickets has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Pending Indemnification Proceedings. At present, there is no pending
litigation or proceeding involving a director, officer, employee or agent of
Cheap Tickets where indemnification will be required or permitted. Cheap
Tickets is not aware of any threatened litigation or proceeding which may
result in a claim for such indemnification.
52
<PAGE>
Executive Compensation--Summary Compensation Table
The following table sets forth all compensation paid by Cheap Tickets during
fiscal 1998, 1997 and 1996 to (1) Cheap Tickets' principal executive officer
during fiscal 1998, (2) the four other most highly compensated executive
officers during fiscal 1998 serving at December 31, 1998 and (3) one additional
individual who would have been among Cheap Tickets' four most highly
compensated executive officers, but for the fact that he was not serving as an
executive officer of Cheap Tickets at the end of fiscal 1998.
<TABLE>
<CAPTION>
Long-Term
Compensation
---------------
Annual Compensation
--------------------- Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Options/SARs(#) Compensation($)
------------------ ---- -------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael J. Hartley(1).... 1998 $243,783 $50,000 -- $ --
Chairman of the Board,
Chief Executive 1997 229,090 -- -- --
Officer and President 1996 154,170 15,750 -- --
Sandra T. Hartley(2)..... 1998 235,500 12,500 -- --
Vice President,
Employee Relations 1997 233,050 -- -- --
1996 213,400 15,750 -- --
F. Michael
Bartholomew(3).......... 1998 165,000 41,250 140,000 --
Chief Operating Officer 1997 6,875 -- -- --
1996 -- -- -- --
Dale K. Jorgenson(4)..... 1998 78,366 21,875 140,000 --
Chief Financial Officer
and 1997 -- -- -- --
Vice President, Finance 1996 -- -- -- --
Tammy A. Ishibashi....... 1998 100,008 25,000 -- --
Executive Vice
President, 1997 73,110 -- -- --
Ticket Distribution 1996 56,600 5,000 -- --
Paul Ouyang(5)........... 1998 201,923 -- -- --
1997 225,000 -- -- 59,854(6)
1996 28,125 -- -- 45,895(7)
</TABLE>
- --------
(1) For fiscal year 1999, Mr. Hartley's annual salary will be approximately
$387,000.
(2) For fiscal year 1999, Mrs. Hartley's annual salary will be approximately
$75,000.
(3) Mr. Bartholomew's annual salary for 1997 would have been $165,000 if he had
been with Cheap Tickets for the entire year. He joined Cheap Tickets in
December 1997. For fiscal year 1999, Mr. Bartholomew's annual salary will
be approximately $190,000.
(4) Mr. Jorgenson's annual salary for 1998 would have been $150,000, if he had
been with Cheap Tickets for the entire year. He joined Cheap Tickets in May
1998. For fiscal year 1999, Mr. Jorgenson's annual salary will be
approximately $175,000.
(5) Mr. Ouyang was the Chief Financial Officer of Cheap Tickets until March 23,
1998, at which time he left Cheap Tickets.
(6) Includes reimbursement for legal fees and taxes.
(7) Includes compensation in the form of stock issuances.
53
<PAGE>
Option Grants During 1998
The following table sets forth certain information regarding stock options
granted in 1998 to the officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
for Option Term(4)
---------------------
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Price Expiration
Name Granted(1) Fiscal Year(2) Per Share Date(3) 5% 10%
- ---- ---------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
F. Michael Bartholomew.. 140,000 19.2% $0.18 11/21/07 $ 15,848 $ 40,162
Dale K. Jorgenson....... 140,000 19.2 0.18 5/19/08 15,848 40,162
</TABLE>
- --------
(1) Options generally have a ten-year term and vest at a rate 20% per annum.
(2) Cheap Tickets granted options for a total of 728,000 shares of common stock
to employees of Cheap Tickets during 1998.
(3) Options may terminate before their expiration dates if optionee's status as
an employee or consultant is terminated or upon the optionee's death or
disability.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent Cheap Tickets' estimate or projection of future prices of its
common stock prices. Based on the public offering price, the actual values
realized may be substantially greater than those assumed under these rules.
Aggregate Option Exercises in 1998 and Year-End Option Values
The following table sets forth for each of the officers named in the Summary
Compensation Table, certain information concerning the number of shares subject
to both exercisable and unexercisable stock options as of December 31, 1998.
Also reported are values for "in-the-money" options that represent the positive
spread between the respective exercise prices of outstanding options and the
fair market value of Cheap Tickets' common stock as of December 31, 1998. None
of these officers exercised options during 1998.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 1998 December 31, 1998(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael J. Hartley......... -- -- $ -- $ --
Sandra T. Hartley.......... -- -- -- --
F. Michael Bartholomew..... 28,000 112,000 351,960 1,407,840
Dale K. Jorgenson.......... -- 140,000 -- 1,759,800
Tammy A. Ishibashi......... -- -- -- --
Paul Ouyang................ -- -- -- --
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1998 and the exercise
price of the named officer's option. The fair market value at December 31,
1998 was deemed to be $12.75.
Stock Plans
1997 Stock Option Plan
Cheap Tickets' 1997 Stock Option Plan provides for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended and for the granting of nonstatutory stock
options to employees, directors and consultants. The 1997
54
<PAGE>
plan was approved by the Board of Directors in February 1998 and by Cheap
Tickets' shareholders in April 1998. Unless terminated sooner, the 1997 plan
will terminate automatically in 2008. A total of 1,979,642 shares of common
stock was reserved for issuance pursuant to the 1997 plan. As of June 30, 1999,
options to purchase 710,280 shares of common stock were outstanding under the
1997 plan. No further options have been or will be granted under the 1997 plan.
The 1997 plan may be administered by the Board of Directors or a committee
of the Board, which serves as the plan administrator. The plan administrator
has the power to determine the terms of the options granted, including the
number of shares subject to each option, the exercisability thereof, and the
form of consideration payable upon such exercise.
Options granted under the 1997 plan are not generally transferable by the
optionee. Generally each option is exercisable during the lifetime of the
optionee only by him or her. Unless otherwise specified in the option
agreement, options granted under the 1997 plan must be exercised within three
months of the end of the optionee's status as an employee or consultant of
Cheap Tickets, or within twelve months after his or her termination by death or
disability, but in no event later than the expiration of the option's term.
The exercise price of all incentive stock options granted under the 1997
plan must be at least equal to the fair market value of the common stock on the
date of the grant. The exercise price of nonstatutory stock options must be at
least equal to 85% of the fair market value of the common stock on the date of
the grant. With respect to any optionee who owns stock possessing more than 10%
of the voting power of all classes of Cheap Tickets' outstanding capital stock,
the exercise price of any option must equal at least 110% of the fair market
value of the common stock on the date of the grant and the term of any option
may not exceed five years. The term of other options under the 1997 plan may
not exceed ten years. The consideration to be paid for the shares of common
stock upon exercise of an option will be determined by the plan administrator
and may include, cash, check, promissory note, shares of common stock, or the
assignment of part of the proceeds from the sale of shares acquired upon
exercise of the option.
The 1997 plan provides that in the event of a merger or a sale of all or
substantially all of Cheap Tickets' assets the plan administrator has the
authority to provide for the full automatic vesting and exercisability of each
option, including shares as to which the option would not otherwise be
exercisable. If an option becomes exercisable in full in the event of a merger
or sale of assets, the plan administrator will notify the optionee that the
option is fully exercisable for a specified period from the date of the notice,
and the option will terminate upon the expiration of that period. To the extent
the option has not been previously exercised, each option will terminate
immediately prior to the consummation of the merger or sale of assets.
During 1998, Cheap Tickets granted to F. Michael Bartholomew an option to
acquire 140,000 shares of common stock at an exercise price of $0.18 per share.
Upon the completion of Cheap Tickets' initial public offering, the option
became fully vested and exercisable. For more information on our capitalization
before and after the offering, please refer to "Capitalization."
1999 Stock Incentive Plan
Cheap Tickets' 1999 Stock Incentive Plan was adopted by the Board of
Directors and approved by Cheap Tickets' stockholders in March 1999. All option
grants made after the initial public offering were and will be made solely
under the 1999 plan. The maximum number of shares
55
<PAGE>
available for grant of incentive stock options under the 1999 plan initially is
1,260,000 shares of common stock, plus an annual increase to be added on the
first day of Cheap Tickets' fiscal year beginning in 2000 equal to the lesser
of (1) 700,000 shares of common stock, (2) two percent of the number of shares
outstanding as of such date; or (3) a lesser number of shares determined by the
plan administrator of the 1999 plan. As of June 30, 1999, 1,221,000 shares
remain available for future grants under the 1999 plan.
With respect to 1999 awards granted to directors or officers, the 1999 plan
is administered by the Board of Directors or a committee designated by the
Board of Directors constituted to permit 1999 awards to be exempt from Section
16(b) of the Exchange Act in accordance with Rule 16b-3 thereunder. With
respect to 1999 awards granted to other participants, the 1999 plan is
administered by the Board of Directors or a committee designated by the Board
of Directors. In each case, the respective plan administrator shall determine
the provisions, terms and conditions of each 1999 awards, including, but not
limited to, the 1999 award vesting schedule, repurchase provisions, rights of
first refusal, forfeiture provisions, form of payment (cash, shares of common
stock, or other consideration) upon settlement of the 1999 award, payment
contingencies and satisfaction of any performance criteria.
The exercise price of options under the 1999 plan must be at least equal to
the fair market value of the common stock on the date of grant, and the term of
the option must not exceed ten years. The term of other 1999 awards will be
determined by the respective plan administrator. With respect to an employee
who owns stock possessing more than 10% of the voting power of all classes of
Cheap Tickets' outstanding capital stock, the exercise price of any incentive
stock option must equal at least 110% of the fair market value of the common
stock on the grant date and the term of the option must not exceed five years.
The exercise price or purchase price, if any, of other 1999 awards will be
determined based on current market prices for Cheap Tickets' common stock by
the respective plan administrator. The consideration to be paid for the shares
of common stock upon exercise or purchase of a 1999 award will be determined by
the plan administrator and may include cash, check, promissory note, shares of
common stock, or the assignment of part of the proceeds from the sale of shares
acquired upon exercise or purchase of the 1999 award.
Pursuant to the 1999 plan, the Board of Directors has adopted the 1999 Non-
Employee Director Option Program. Under this program, each non-employee
director serving on Cheap Tickets' Board of Directors upon Cheap Tickets'
initial public offering and each non-employee director appointed to the Board
following the initial public offering received an option to acquire 1,500
shares of common stock at an exercise price per share equal to the then fair
market value of the common stock at the date of grant. In addition, following
each annual stockholders' meeting commencing with the annual meeting in 2000,
each non-employee director who continues as a director following the meeting
and who has served as a director for at least eight months will receive an
option to acquire the number of shares equal to $25,000 divided by the fair
market value per share on the date of such annual meeting rounded down to the
next whole share in the case of any fractional share. These options will vest
and become exercisable in three equal installments on each yearly anniversary
of the grant date. In the event of a merger, sale of all or substantially all
of Cheap Tickets' assets, the liquidation or dissolution of Cheap Tickets, the
acquisition by any person or related groups of persons of securities possessing
more than 50% of the voting power of Cheap Tickets' outstanding securities with
certain exceptions, and certain changes in the composition of the Board of the
Directors over a period of 36 months, such options will vest and become fully
exercisable. The plan administrator may provide for the full automatic vesting
and exercisability of unvested options in anticipation of such a transaction.
56
<PAGE>
Each automatic option grant will have a term of ten years and will be
transferable to the extent provided in the agreement evidencing the option.
401(k) Plan
Cheap Tickets has a 401(k) plan pursuant to which eligible employees may
elect to reduce their current salary by up to the statutorily prescribed annual
limit and have the amount of such reduction contributed to the 401(k) plan.
Contributions to the 401(k) plan by Cheap Tickets are discretionary. The 401(k)
plan is intended to qualify under Section 401 of the Internal Revenue Code so
that contributions by participants to the 401(k) plan, and income earned on
plan contributions, are not taxed to participants until withdrawn from the
401(k) plan.
Employment Agreements
Cheap Tickets does not have any employment agreements with any of its key
personnel. Cheap Tickets has severance agreements with Michael J. Hartley and
Sandra T. Hartley. Each of the severance agreements requires Cheap Tickets to
pay the respective individual an amount equal to the lesser of (1) twice his or
her respective annual salary or (2) $400,000 in the event that their employment
is terminated either by Cheap Tickets without cause or by them for good reason.
CERTAIN TRANSACTIONS
During the last fiscal year, Cheap Tickets did not enter into any
transaction required to be disclosed pursuant to Item 404 of Regulation S-K.
57
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of Cheap Tickets' common stock as of June 30, 1999, and is
adjusted to reflect the sale of the shares offered hereby by (1) each person
(or group of affiliated persons) who is known by Cheap Tickets to own
beneficially more than 5% of Cheap Tickets' common stock, (2) each of Cheap
Tickets' directors, (3) each of the executive officers named in the Summary
Compensation Table, (4) each selling stockholder, and (5) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Number of Shares
Before the Beneficially Owned After
Offering(1)(2) Number of Shares the Offering(1)(2)
--------------------- to be Sold in ------------------------------
Name of Beneficial Owner Number Percentage the Offering Number Percentage
- ------------------------ ---------- ---------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Michael J. Hartley 1,186,625
(3)(11)................ 13,395,032 62.4% 12,208,407 50.9%
Sandra T. Hartley
(4)(11)................ 13,395,032 62.4 1,186,625 12,208,407 50.9
Donald T. Phillips
(5)(11)................ 2,960,472 13.8 1,183,067 1,777,405 7.4
Cece Smith (6)(11)...... 2,960,472 13.8 1,183,067 1,777,405 7.4
Tammy A. Ishibashi (7).. 704,998 3.3 105,750 599,248 2.5
Paul Ouyang (8)......... 373,646 1.7 -- 373,646 1.6
F. Michael Bartholomew
(9).................... 140,000 * 21,000 119,000 *
Dale K. Jorgenson (10).. 29,100 * -- 29,100 *
George R. Mrkonic....... 29,000 * -- 29,000 *
Giles H. Bateman........ 10,000 * -- 10,000 *
Craig Foley............. 8,903 * 3,558 5,345 *
All directors and
executive officers as a
group (14 persons)
(12)................... 17,290,822 79.8% 2,496,442 14,794,380 61.1%
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable within 60 days of August 2, 1999 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of each other person. Except
as indicated in the footnote to this table and pursuant to applicable
community property laws, each stockholder named in the table has sole
voting power and investment power with respect to the shares set forth
opposite such stockholder's name.
(2) Based on 21,483,171 shares of common stock outstanding prior to the
offering and 24,004,171 outstanding upon the completion of the offering.
(3) Includes 1,903,510 shares of common stock held by the Michael J. Hartley
Living Trust, 4,794,006 shares of common stock held by the Hartley
Investments Limited Partnership (held for the benefit of Michael J.
Hartley) and 6,697,516 shares of common stock held by Sandra T. Hartley.
Mr. Hartley is the husband of Sandra T. Hartley, Cheap Tickets' Vice
President, Employee Relations who owns 6,697,516 shares of common stock.
Mr. Hartley's address is 1440 Kapiolani Boulevard, Honolulu, Hawaii 96814.
See note (4).
58
<PAGE>
(4) Includes 1,903,510 shares of common stock held by the Sandra T. Hartley
Living Trust, 4,794,006 shares of common stock held by the Hartley
Investments Limited Partnership (held for the benefit of Sandra T.
Hartley) and 6,697,516 shares of common stock held by Michael J. Hartley.
Ms. Hartley is the wife of Michael J. Hartley, Cheap Tickets' Chairman of
the Board, Chief Executive Officer and President who owns 6,697,516 shares
of common stock. Ms. Hartley's address is 1440 Kapiolani Boulevard,
Honolulu, Hawaii 96814. See note (3).
(5) Mr. Phillips is a co-founder and general partner of Phillips-Smith
Specialty Retail Group III, L.P. Mr. Phillips' address is c/o Phillips-
Smith Specialty Retail Group, 5080 Spectrum Drive, Suite 805, West
Addison, Texas 75001. See Note (6).
(6) Ms. Smith is a co-founder and general partner of Phillips-Smith Specialty
Retail Group III, L.P. Ms. Smith's address is c/o Phillips-Smith Specialty
Retail Group, 5080 Spectrum Drive, Suite 805, West Addison, Texas 75001.
See Note (5).
(7) Ms. Ishibashi is the niece of Michael J. Hartley, Cheap Tickets' Chairman
of the Board, Chief Executive Officer and President, and Sandra T.
Hartley, Cheap Tickets' Vice President, Employee Relations. See notes (3)
and (4).
(8) Represents 373,646 shares held in the name of Paul Ouyang and Deborah
Ouyang, Trustees of the Ouyang 1990 Trust.
(9) Represents stock options held by Mr. Bartholomew to purchase 140,000
shares of common stock.
(10) Represents vested stock options held by Mr. Jorgenson to purchase 28,000
shares of common stock. Also includes 200 shares of common stock held by
Mr. Jorgenson's minor child and deemed to be beneficially owned by him.
(11) These stockholders have granted the options to the underwriters to
purchase shares of common stock to cover over-allotments, if any. Such
shares will not be sold unless the underwriters exercise the over-
allotment option, and the above table assumes that such over-allotment
option will not be exercised. If the over-allotment option is exercised in
full, Michael J. Hartley and Sandra T. Hartley will sell, in the
aggregate, 375,000 additional shares of common stock, and Donald T.
Phillips and Cece Smith will sell, in the aggregate, 375,000 additional
shares of common stock.
(12) Where more than one person or entity is the beneficial owner (as defined
in Rule 13d-3 under the Exchange Act) of the same shares listed in the
table, such shares are counted only once in determining the totals listed
in the table.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Cheap Tickets consists of 70,000,000 shares
of common stock, par value $0.001 per share and 10,000,000 shares of preferred
stock par value $0.01 per share.
The following description of Cheap Tickets' capital stock does not purport
to be complete and is subject to and qualified in its entirety by Cheap
Tickets' Certificate of Incorporation and Bylaws and by the provisions of
applicable Delaware law.
The Certificate of Incorporation and Bylaws contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of
delaying, deferring or preventing a future takeover or change in control of
Cheap Tickets unless such takeover or change in control is approved by the
Board of Directors.
Common Stock
As of June 30, 1999, there were 21,483,171 shares of common stock
outstanding. Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of Cheap Tickets, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior liquidation rights of preferred
stock, if any, then outstanding. The holders of common stock have the
preemptive right to purchase their pro rata portion of any additional shares of
common stock whether then or thereafter authorized. The common stock has no
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and the shares of common stock to be outstanding after the
offering will be fully paid and non-assessable.
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue 10,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking and purchase fund provisions, and
the number of shares constituting any series and the designations of such
series. No shares of preferred are issued and outstanding. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of Cheap Tickets. Cheap Tickets has no present
plan to issue any additional shares of preferred stock.
Options
As of June 30, 1999, (1) options to purchase a total of 710,280 shares of
common stock were outstanding; and (2) up to 1,221,000 additional shares of
common stock may be subject to options granted in the future under the 1999
Stock Incentive Plan.
60
<PAGE>
Registration Rights
As of the effective date of the registration statement, holders of 1,782,750
shares of common stock will be entitled to registration rights with respect to
their shares.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Delaware Anti-Takeover Law
Cheap Tickets is subject to Section 203 of the Delaware General Corporation
Law. This is an anti-takeover law that restricts certain transactions and
business combinations between a corporation and an interested stockholder
owning 15% or more of the corporation's outstanding voting stock, for a period
of three years from the date the stockholder becomes an interested stockholder.
Subject to certain exceptions, unless the transaction is approved by the board
of directors and the holders of at least two-thirds of the outstanding voting
stock of the corporation, excluding shares held by the interested stockholder,
this law prohibits significant business transactions such as a merger with,
disposition of assets to, or receipt of disproportionate financial benefits by
the interested stockholder, or any other transaction that would increase the
interested stockholder's proportionate ownership of any class or series of the
corporation's stock. The statutory ban does not apply if, upon consummation of
the transaction in which any person becomes an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock of the
corporation. This calculation does not include shares held by persons who are
both directors and officers or by certain employee stock plans.
Action by Written Consent
Cheap Tickets' Certificate of Incorporation provides that the holders of
two-thirds of the outstanding voting capital stock can take action by written
consent or at a duly called annual or special meeting of stockholders. This
provision may have the effect of deterring hostile takeovers or delaying
changes in control or management of Cheap Tickets.
Advance Notice Provision
Cheap Tickets' Bylaws provide that stockholders seeking to bring business
before, or nominate directors at, any annual meeting of stockholders, must
provide timely notice in writing. To be timely, a stockholder's notice must be
given in writing to the Secretary of Cheap Tickets not less than 30 days nor
more than 60 days prior to the meeting.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Securities
Transfer and Trust, Inc., a Colorado corporation.
61
<PAGE>
UNDERWRITING
The several underwriters named below, for which William Blair & Company,
L.L.C., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, CIBC
World Markets Corp. and Volpe Brown Whelan & Company, LLC, are acting as
representatives, have severally agreed, subject to the terms and conditions set
forth in the underwriting agreement by and among Cheap Tickets, the selling
stockholders and the underwriters, to purchase from Cheap Tickets and the
selling stockholders the respective number of shares of common stock set forth
opposite each underwriters' name in the table below.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
William Blair & Company, L.L.C. ...................................
Dain Rauscher Wessels..............................................
CIBC World Markets Corp. ..........................................
Volpe Brown Whelan & Company, LLC..................................
---------
Total............................................................ 5,000,000
=========
</TABLE>
This offering will be underwritten on a firm commitment basis. In the
underwriting agreement, the underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase the shares of common stock being sold
pursuant thereto at a price per share equal to the public offering price less
the underwriting discount specified on the cover page of this prospectus.
According to the terms of the underwriting agreement, the underwriters will
either purchase all of the shares or none of them. In the event of default by
any underwriter, in certain circumstances the purchase commitments of the non-
defaulting underwriters may be increased or the underwriting agreement may be
terminated.
The representatives of the underwriters have advised Cheap Tickets and the
selling stockholders that the underwriters propose to offer the common stock to
the public initially at the public offering price set forth on the cover page
of this prospectus and to selected dealers at such price less a concession of
not more than $ per share. The underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other dealers.
The underwriters will offer the shares subject to prior sale and subject to
receipt and acceptance of the shares by the underwriters. The underwriters may
reject any order to purchase shares in whole or in part. The underwriters
expect that Cheap Tickets will deliver the shares to the underwriters through
the facilities of the Depository Trust Company in New York, New York on or
about , 1999. At that time, the underwriters will pay Cheap Tickets for
the shares in immediately available funds. After commencement of the public
offering, the public offering price and other selling terms may be changed by
the representatives.
Certain of the selling stockholders have granted to the underwriters an
option, exercisable within 30 days after the date of this prospectus, to
purchase up to an aggregate of 750,000 additional shares of common stock at the
same price per share to be paid by the underwriters for the other shares
offered hereby for the purpose of covering the sale of shares in excess of the
shares initially allocated in the offering. If the underwriters purchase any
such additional shares pursuant to this option, each of the underwriters will
be committed to purchase such additional shares in approximately the same
proportion as set forth in the table above. The underwriters may exercise the
option only for the purpose of covering excess sales, if any, made in
connection with the distribution of the shares of common stock offered hereby.
62
<PAGE>
The following table summarizes the compensation to be paid by Cheap Tickets
and the selling stockholders to the underwriters:
<TABLE>
<CAPTION>
Total
-----------------------------
Per Without With
Share Over-Allotment Over-Allotment
------- -------------- --------------
<S> <C> <C> <C>
Public offering price................ $ $ $
Underwriting discount paid by Cheap
Tickets, Inc........................ $ $ $
Underwriting discount paid by the
selling stockholders................ $ $ $
</TABLE>
Cheap Tickets estimates that its share of the total expenses of this
offering, excluding the underwriting discount, will be approximately $650,000.
Stockholders of Cheap Tickets, who hold in the aggregate 14,639,005 shares
of common stock, and Cheap Tickets have agreed that for a period of 90 days
after the date of this prospectus, without the prior written consent of the
representatives, they will not, directly or indirectly, offer, sell, assign,
transfer, encumber, pledge, contract to sell, grant an option to purchase, or
otherwise dispose of, other than by operation of law, any shares of common
stock or securities convertible or exchangeable into, or exercisable for,
common stock. This agreement does not extend to bona fide gifts to immediate
family members of such persons who agree to be bound by such restrictions, or
to limited partners or shareholders, who agree to be bound by such
restrictions. In considering a request for its consent to a sale or transfer
within the 90-day period, the representatives will take into account various
factors, including the number of shares requested to be sold, the anticipated
manner and timing of sale, the potential impact of the sale on the market for
the common stock, and market conditions generally. Cheap Tickets may grant
options and issue common stock under existing stock option or stock purchase
plans and issue unregistered shares in connection with any outstanding
convertible securities or options during the lock-up period. For information on
shares available for sale following the offering, please refer to "Risk
Factors--Substantial sales of our common stock could adversely affect our stock
price."
Cheap Tickets and the selling stockholders have agreed to indemnify the
underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the underwriters may be required to make in respect thereof.
The representatives have informed Cheap Tickets that the underwriters will
not confirm, without client authorization, sales to their client accounts as to
which they have discretionary authority.
In connection with this offering, the underwriters and other persons
participating in this offering may engage in transactions which affect the
market price of the common stock. These may include stabilizing and over-
allotment transactions and purchases to cover syndicate short positions.
Stabilizing transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the common stock. Over-allotment
involves selling more shares of common stock in this offering than are
specified on the cover page of this prospectus, which results in a syndicate
short position. The underwriters may cover this short position by purchasing
common stock in the open market or by exercising all or part of their over-
allotment option. In addition, the representatives may impose a penalty bid.
This allows the representatives to reclaim the selling concession allowed to an
underwriter or selling group member if common stock sold by such underwriter or
selling group member in this offering is repurchased by the representatives in
stabilizing or syndicate short covering transactions. These transactions, which
may be effected on the Nasdaq National Market or otherwise, may stabilize,
maintain or otherwise affect the market price of the common stock and
63
<PAGE>
could cause the price to be higher than it would be without these transactions.
The underwriters and other participants in this offering are not required to
engage in any of these activities and may discontinue any of these activities
at any time without notice. Cheap Tickets, the underwriters and the selling
stockholders make no representation or prediction as to whether the
underwriters will engage in such transactions or choose to discontinue any
transactions engaged in or as to the direction or magnitude of any effect that
these transactions may have on the price of the common stock.
In connection with this offering, certain underwriters and selling group
members, if any, who are qualified market markers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, during the business day prior to the pricing
of this offering before the commencement of offers or sales of our common
stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security. If all independent bids are lowered below the passive market
makers' bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon by
Morrison & Foerster LLP, Los Angeles, California. Certain matters in connection
with this offering will be passed upon for the underwriters by Sonnenschein
Nath & Rosenthal, Chicago, Illinois. Certain other legal matters will be passed
upon by Ching & Lee, Honolulu, Hawaii.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
In August 1998, Cheap Tickets selected PricewaterhouseCoopers LLP as its
principal independent auditors to replace KPMG LLP. The decision to retain
PricewaterhouseCoopers LLP was recommended by the Board of Directors. In
connection with the audit for the years ended December 31, 1996 and 1997, and
the period through August 1998, there were no disagreements with KPMG LLP on
any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which, if not resolved to the
satisfaction of KPMG LLP, would have caused them to make reference to the
matter in their report. The report of KPMG LLP on the financial statements of
Cheap Tickets for the years ended December 31, 1996 and 1997 did not contain
any adverse opinion or disclaimer of opinion and was not qualified or modified
as to uncertainty, audit scope or accounting principles.
64
<PAGE>
ADDITIONAL INFORMATION
Cheap Tickets has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock offered hereby. This prospectus does not contain all of
the information set forth in the registration statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to Cheap Tickets and the shares of common
stock offered hereby, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. Copies of such materials may be examined without charge at, or
obtained upon payment of prescribed fees from, the Public Reference Section of
the Commission at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 (telephone 202-942-8090), and at the Commission's
regional offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at 7 World Trade Center, 13th Floor, New York New York
10048. The Commission maintains a World Wide Website that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http://www.sec.gov. Reports, proxy statements and other information concerning
Cheap Tickets may also be inspected at the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington D.C. 20006.
We are subject to the informational requirements of the Exchange Act and, in
accordance therewith, file reports, proxy statements and other information with
the Commission. You can inspect and copy these reports, proxy statements and
other information at the public reference facilities maintained by the
Commission and at the Commission's regional offices at the addresses noted
above. You can also obtain copies of this material from the Public Reference
Section of the Commission as described above, or inspect them without charge at
the Commission's Web site. Our common stock is quoted on the Nasdaq National
Market. You may inspect reports, proxy and information statements and other
information concerning us at the National Association of Securities Dealers,
Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
65
<PAGE>
CHEAP TICKETS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to the Financial Statements.......................................... F-8
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
The Stockholders and Board of Directors
Cheap Tickets, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity and cash flows present fairly,
in all material respects, the financial position of Cheap Tickets, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Cheap Tickets' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Honolulu, Hawaii
February 15, 1999
F-2
<PAGE>
CHEAP TICKETS, INC.
BALANCE SHEETS
December 31, 1997 and 1998 and June 30, 1999
<TABLE>
<CAPTION>
June 30,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Assets (Note 4)
Current Assets:
Cash and cash equivalents............. $ 6,254,406 $ 2,973,988 $48,035,773
Marketable securities................. -- 4,935,229 23,399,606
Trade accounts and other receivables.. 663,969 924,348 3,076,880
Refundable income taxes............... 663,209 -- --
Ticket inventories.................... 119,771 286,331 369,811
Other current assets.................. 259,719 725,692 1,077,417
----------- ----------- -----------
Total current assets................. 7,961,074 9,845,588 75,959,487
Property and equipment, net (Note 3).... 2,520,046 2,999,418 6,615,997
Property held for sale.................. 550,000 -- --
Other assets............................ 172,470 380,846 157,306
----------- ----------- -----------
$11,203,590 $13,225,852 $82,732,790
=========== =========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable...................... $ 4,385,778 $ 4,681,055 $13,535,677
Accrued salaries...................... 337,455 399,167 1,283,533
Accrued vacation...................... 79,168 421,288 540,000
Accrued expenses and other
liabilities.......................... 140,905 222,321 321,630
Current installments of long-term debt
(Note 4)............................. 528,825 221,469 321,104
Current installments of capital lease
obligations (Note 9)................. 132,722 287,809 910,595
Deferred revenue, current............. -- 400,000
Income taxes payable.................. -- 139,640 1,760,007
----------- ----------- -----------
Total current liabilities............ 5,604,853 6,372,749 19,072,546
Long-term debt, excluding current
installments (Note 4).................. 598,139 585,556 527,977
Capital lease obligations, excluding
current installments (Note 9).......... 349,542 652,359 1,764,198
Deferred revenue, non-current........... -- 1,400,000
Other noncurrent liabilities............ 217,598 93,961 79,504
----------- ----------- -----------
Total liabilities.................... 6,770,132 7,704,625 22,844,225
----------- ----------- -----------
Commitments and contingencies (Notes 8,
9, 12 and 13)..........................
Mandatorily redeemable cumulative
preferred stock, $1 par value
(aggregate involuntary liquidation
preference of $4,250,000, plus unpaid
cumulative dividends). Issued and
outstanding 425,000 shares in 1997 and
1998 and none at June 30, 1999
(unaudited) (Note 5)................... 3,621,896 4,136,028 --
----------- ----------- -----------
Stockholders' Equity (Notes 5, 6, 11 and
12):
Preferred stock, $1 par value in 1997
and 1998, respectively, and $0.01 par
value at June 30, 1999 (unaudited).
Authorized 5,000,000 shares in 1997
and 1998 and 10,000,000 shares at
June 30, 1999 (unaudited); none
issued in 1997, 1998 and at June 30,
1999 (unaudited) (except for 425,000
shares of mandatorily redeemable
cumulative preferred stock shown
above)............................... -- -- --
Common stock, $0.01 par value in 1997
and 1998 and $0.001 par value at June
30, 1999 (unaudited). Authorized
70,000,000 shares; issued and
outstanding 14,847,322 shares at
December 31, 1997, 14,473,676 shares
at December 31, 1998 and 21,483,171
shares at June 30, 1999 (unaudited).. 10,605 10,338 21,483
Additional paid-in capital............ 547,017 1,246,937 55,969,347
Unearned compensation................. (19,127) (696,275) (433,240)
Retained earnings..................... 273,067 824,199 4,330,975
----------- ----------- -----------
Total stockholders' equity........... 811,562 1,385,199 59,888,565
----------- ----------- -----------
$11,203,590 $13,225,852 $82,732,790
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
CHEAP TICKETS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1997 and 1998
and Six Months Ended June 30, 1998 and 1999
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
-------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Non-published fares..... $58,981,893 $96,379,304 $159,845,855 $76,171,559 $153,378,836
Published fare
commissions and
bonuses................ 5,613,761 6,470,082 11,268,472 4,439,757 9,720,662
----------- ----------- ------------ ----------- ------------
Net revenues.......... 64,595,654 102,849,386 171,114,327 80,611,316 163,099,498
Cost of sales........... 49,167,998 81,370,511 136,067,182 64,975,150 130,880,303
----------- ----------- ------------ ----------- ------------
Gross profit............ 15,427,656 21,478,875 35,047,145 15,636,166 32,219,195
Selling, general and
administrative expenses
(Notes 10, 11 and 12).. 14,351,321 23,091,193 33,411,112 14,558,385 25,895,895
----------- ----------- ------------ ----------- ------------
Net operating income
(loss)................. 1,076,335 (1,612,318) 1,636,033 1,077,781 6,323,300
Other income
(deductions):
Gain (loss) on sale or
disposal of property
and equipment........ 3,680 (2,164) (48,786) (2,878) --
Interest income....... 81,987 183,723 374,269 155,730 883,630
Interest expense...... (91,488) (185,428) (148,253) (81,770) (93,895)
Other, net............ 42,185 994 (7,731) (14,450) 21,644
----------- ----------- ------------ ----------- ------------
36,364 (2,875) 169,499 56,632 811,379
----------- ----------- ------------ ----------- ------------
Earnings (loss) before
income taxes........... 1,112,699 (1,615,193) 1,805,532 1,134,413 7,134,679
Income taxes (Note 7)... 438,997 (606,633) 740,268 465,053 2,925,219
----------- ----------- ------------ ----------- ------------
Net earnings (loss)..... 673,702 (1,008,560) 1,065,264 669,360 4,209,460
Preferred dividends..... -- (170,000) (340,000) (170,000) (78,712)
Accretion of mandatorily
redeemable cumulative
preferred stock
discount............... -- (87,066) (174,132) (87,066) (36,657)
Redemption of
mandatorily redeemable
cumulative preferred
stock.................. -- -- -- -- (587,315)
----------- ----------- ------------ ----------- ------------
Income (loss) available
to common shares....... $ 673,702 $(1,265,626) $ 551,132 $ 412,294 $ 3,506,776
=========== =========== ============ =========== ============
Basic earnings (loss)
per common share....... $ 0.05 $ (0.09) $ 0.04 $ 0.03 $ 0.19
=========== =========== ============ =========== ============
Average common shares
outstanding............ 14,249,480 14,847,322 14,567,084 14,660,506 18,216,743
=========== =========== ============ =========== ============
Diluted earnings (loss)
per common share....... $ 0.05 $ (0.09) $ 0.03 $ 0.02 $ 0.17
=========== =========== ============ =========== ============
Average diluted common
shares outstanding..... 14,249,480 14,847,322 17,920,868 17,648,764 20,293,879
=========== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
CHEAP TICKETS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1997 and 1998
and Six Months Ended June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Unearned Retained Stockholders'
Stock Capital Compensation Earnings Equity
------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $ 1,000 $ -- $ -- $ 865,066 $ 866,066
Net earnings.......... -- -- -- 673,702 673,702
Issuance of common
stock (Note 11)...... 53 45,842 (45,895) -- --
Amortization of
unearned compensation
(Note 11)............ -- -- 3,824 -- 3,824
------- ----------- --------- ---------- -----------
Balance at December 31,
1996................... 1,053 45,842 (42,071) 1,538,768 1,543,592
Net loss.............. -- -- -- (1,008,560) (1,008,560)
Issuance of warrants
(Note 5)............. -- 510,652 -- -- 510,652
Accretion to
mandatorily
redeemable cumulative
preferred stock
redemption price
(Note 5)............. -- -- -- (87,066) (87,066)
1000-for-1 common
stock split (Note
6)................... 9,477 (9,477) -- -- --
Stock dividend (Note
6)................... 75 -- -- (75) --
Accrual of dividends
on mandatorily
redeemable cumulative
preferred stock (Note
5)................... -- -- -- (170,000) (170,000)
Amortization of
unearned compensation
(Note 11)............ -- -- 22,944 -- 22,944
------- ----------- --------- ---------- -----------
Balance at December 31,
1997................... 10,605 547,017 (19,127) 273,067 811,562
Net earnings.......... -- -- -- 1,065,264 1,065,264
Accretion to
mandatorily
redeemable cumulative
preferred stock
redemption price
(Note 5)............. -- -- -- (174,132) (174,132)
Accrual of dividends
on mandatorily
redeemable preferred
stock (Note 5)....... -- -- -- (340,000) (340,000)
Reversal of
amortization of
unearned compensation
(Note 11)............ -- -- (3,820) -- (3,820)
Forfeiture of common
stock (Note 11)...... (267) (22,680) 22,947 -- --
Stock option
compensation (Note
12).................. -- 722,600 (722,600) -- --
Amortization of
unearned stock option
compensation (Note
12).................. -- -- 26,325 -- 26,325
------- ----------- --------- ---------- -----------
Balance at December 31,
1998 .................. 10,338 1,246,937 (696,275) 824,199 1,385,199
Net earnings.......... -- -- -- 4,209,460 4,209,460
14-for-1 common stock
split................ 4,136 (4,136) -- -- --
Accrual of dividends
on mandatorily
redeemable preferred
stock (Note 5)....... -- -- -- (78,712) (78,712)
Accretion to
mandatorily
redeemable cumulative
preferred stock
redemption price
(Note 5)............. -- -- -- (36,657) (36,657)
Redemption of
mandatorily
redeemable cumulative
preferred stock (Note
5)................... -- -- -- (587,315) (587,315)
Exercise of common
stock warrants
(Note 5)............. 2,969 (848) -- -- 2,121
Sale of common stock
under public
offering, net of
expenses (Note 6).... 4,025 54,943,831 -- -- 54,947,856
Exercise of stock
options.............. 15 2,695 -- -- 2,710
Amortization and
forfeiture of stock
option compensation.. -- (219,132) 263,035 -- 43,903
------- ----------- --------- ---------- -----------
Balance at June 30, 1999
(unaudited)............ $21,483 $55,969,347 $(433,240) $4,330,975 $59,888,565
======= =========== ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
CHEAP TICKETS, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1997 and 1998
and Six Months Ended June 30, 1998 and 1999
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net earnings (loss)... $ 673,702 $(1,008,560) $ 1,065,264 $ 669,360 $ 4,209,460
Adjustments to
reconcile net
earnings (loss) to
net cash provided by
operating activities:
Deferred income
taxes............... 11,263 (19,053) (102,049) -- (60,448)
Depreciation and
amortization........ 204,552 370,237 563,514 269,624 585,212
Stock option
compensation........ -- -- 26,325 19,127 43,903
Stock compensation
expense (benefit)... 3,824 22,944 (3,820) -- --
Amortization of
discount on
marketable
securities.......... -- -- (51,029) -- (58,122)
Loss (gain) on sale
or disposal of
property and
equipment........... (3,680) 2,164 48,786 2,878 --
Loss on sale of
marketable
securities.......... -- -- -- -- 4,698
Changes in--
Trade accounts and
other receivables... (632,912) 152,199 (269,202) (148,377) (2,152,532)
Refundable income
taxes............... 39,004 (663,209) 663,209 488,383 --
Ticket inventories... (260,023) 142,998 (166,560) (208,875) (83,480)
Other current
assets.............. (42,540) (105,790) (289,087) (69,383) (306,201)
Other noncurrent
assets.............. (67,924) (26,267) (242,743) (74,973) 221,450
Accounts payable..... 384,344 2,516,670 295,276 5,016,784 8,854,622
Accrued salaries..... 17,667 92,702 61,712 171,430 884,366
Accrued vacation..... 18,622 31,460 342,120 90,000 118,712
Deferred revenue,
current............. -- -- -- -- 400,000
Income taxes
payable............. 200,336 (200,336) 139,640 -- 1,620,367
Accrued expenses and
other liabilities... (174,119) 89,606 81,416 302,883 99,309
Deferred revenue,
noncurrent.......... -- -- -- -- 1,400,000
Other noncurrent
liabilities......... 38,440 64,952 (155,284) (37,488) 468
----------- ----------- ----------- ----------- ------------
Net cash provided by
operating
activities......... 410,556 1,462,717 2,007,488 6,491,373 15,781,784
----------- ----------- ----------- ----------- ------------
Cash flows from
investing activities:
Capital expenditures.. (1,295,832) (496,406) (484,817) (511,604) (2,167,172)
Proceeds from sale of
property and
equipment............ 36,349 10,075 551,214 100 --
Purchase of marketable
securities........... -- -- (4,884,200) -- (28,665,624)
Proceeds from sale of
marketable
securities........... -- -- -- -- 10,254,671
----------- ----------- ----------- ----------- ------------
Net cash used in
investing activities.. (1,259,483) (486,331) (4,817,803) (511,504) (20,578,125)
----------- ----------- ----------- ----------- ------------
Cash flows from
financing activities:
Redemption of
mandatorily
redeemable cumulative
preferred stock...... -- -- -- -- (4,838,712)
Proceeds from issuance
of common stock, net
of expenses paid..... -- -- -- -- 54,952,686
Proceeds from issuance
of mandatorily
redeemable cumulative
preferred stock and
common stock
warrants, net........ -- 3,875,482 -- -- --
Decrease in bank
overdraft............ (233,777) -- -- -- --
Proceeds from issuance
of long-term debt.... 928,213 -- 307,200 307,200 235,875
Principal payments on
long-term debt....... (54,019) (56,960) (627,138) (74,460) (193,819)
Proceeds from issuance
of other debt........ -- 500,000 -- -- --
Principal payments on
other debt........... -- (500,000) -- -- --
Principal payments on
capital lease
obligations.......... (46,117) (123,786) (150,165) (66,479) (297,904)
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities......... 594,300 3,694,736 (470,103) 166,261 49,858,126
----------- ----------- ----------- ----------- ------------
Net increase
(decrease) in cash
and cash
equivalents........ (254,627) 4,671,122 (3,280,418) 6,146,130 45,061,785
Cash and cash
equivalents at
beginning of period... 1,837,911 1,583,284 6,254,406 6,254,406 2,973,988
----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents at end of
period................ $ 1,583,284 $ 6,254,406 $ 2,973,988 $12,400,536 $ 48,035,773
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
CHEAP TICKETS, INC.
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1996, 1997 and 1998
and Six Months Ended June 30, 1998 and 1999
<TABLE>
<CAPTION>
Six Months Ended
--------------------
Years Ended December 31,
-------------------------- June 30, June 30,
1996 1997 1998 1998 1999
-------- -------- -------- -------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental cash flow
information:
Cash paid for:
Interest................... $ 91,488 $185,428 $145,447 $ 81,770 $ 95,868
Income taxes, net of
refunds received.......... 188,394 275,965 39,467 (23,330) 1,365,300
Noncash investing and
financing activities:
Unearned compensation for
stock options granted..... -- -- 722,600 -- --
Satisfaction of debt
obligation (Note 10)...... -- 250,000 -- -- --
Acquisitions of new
equipment through capital
leases.................... 501,423 150,744 608,069 3,393 2,032,529
Unearned compensation for
stock compensation
arrangement (Note 11)..... 45,895 -- -- -- --
Accrued and unpaid
dividends on mandatorily
redeemable preferred
stock..................... -- 170,000 340,000 170,000 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
1. Summary of Significant Accounting Policies
Business
Cheap Tickets, Inc. ("Cheap Tickets" or "the Company") was incorporated
under the laws of the state of Hawaii on August 20, 1986, for the primary
purpose of providing travel services, including airline tickets, cruise
tickets, auto rentals, hotel reservations and other travel products. In
February 1999, Cheap Tickets reincorporated in the state of Delaware. Cheap
Tickets operates in Hawaii, California, New York and Washington, with
approximately 18%, 10% and 8% of sales activity to customers residing in the
state of Hawaii for the years ended December 31, 1996, 1997 and 1998,
respectively, and 9% and 7% for the six months ended June 30, 1998 and 1999,
respectively. Cheap Tickets deals with over 100 airline carriers. Revenues from
non-published fares through three of these airline carriers accounted for
approximately 61%, 60% and 49% of total non-published fares for the years ended
December 31, 1996, 1997 and 1998, respectively, and 48% and 60% for the six
months ended June 30, 1998 and 1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the estimated fair value of property held
for sale, the valuation allowance for deferred tax assets and the allowance for
doubtful receivables. Management believes that such provisions and allowances
have been appropriately determined in accordance with generally accepted
accounting principles.
Cash Equivalents
Cheap Tickets considers all highly liquid debt securities with original
maturities of three months or less to be cash equivalents.
Marketable Securities
Cheap Tickets' marketable securities are categorized as available-for-sale
securities as defined by Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Available-for-sale securities are reported at fair value with unrealized
holding gains and losses excluded from earnings and reported in a separate
component of stockholders' equity.
Ticket Inventories
Ticket inventories, consisting of prepaid Hawaii inter-island airline
coupons, are stated at the lower of cost or market. Cheap Tickets does not
carry any other airline ticket inventories. Inventory cost is the acquisition
price of the coupons or tickets. The specific identification method is used to
determine the basis of inventory and cost of coupons or tickets removed from
inventory.
F-8
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
Trade Accounts and Other Receivables
Trade accounts and other receivables primarily consist of commissions and
volume bonuses from travel service providers. There were no allowances for
doubtful accounts receivable at December 31, 1997 and 1998, and June 30, 1999.
Property and Equipment
Property and equipment are carried at cost. Equipment held under capital
leases is stated at the lower of the present value of minimum lease payments or
estimated fair value of the equipment at the inception of the lease.
Depreciation on property and equipment is calculated on the straight-line
method over the estimated useful lives of the respective assets. Leasehold
improvements and equipment held under capital leases are amortized on the
straight-line method over the estimated useful life of the asset or the lease
term, whichever is shorter.
The estimated depreciable lives of major classes of property and equipment
are as follows:
<TABLE>
<S> <C>
Building and improvements................................... 40 years
Leasehold improvements...................................... 5 to 40 years
Furniture, fixtures and office equipment.................... 5 to 7 years
Computer equipment.......................................... 3 to 5 years
Vehicles.................................................... 5 years
</TABLE>
Property Held for Sale
In 1995, Cheap Tickets moved its Hawaii operations to larger leased
premises. The Company's commercial condominium office facility from which it
moved, was held for sale at December 31, 1997. This property was stated at
estimated fair value, less costs to sell. A write-down of $94,904 was recorded
in 1995. The property was sold in August 1998 and a loss of $56,000 was
recorded thereon.
Revenue Recognition
Revenues consist of non-published fares, commissions and overrides on
published fares, and volume bonuses from a travel service network. Non-
published fares are fares that are bought by Cheap Tickets under negotiated net
fare contracts from various airline carriers and other travel service providers
and resold to consumers at fares determined by Cheap Tickets generally at a
significant discount off published fares. Cheap Tickets also sells travel
services at regular published fares and earns a commission on such sales.
Cheap Tickets recognizes revenues and commissions when earned, which is at
the time the reservation is ticketed and payment is received. Such revenues are
reported net of an allowance for cancellations and refunds. Due to the
restrictive nature of Cheap Tickets' sales, which are generally noncancelable
and nonrefundable, cancellations and refunds are not significant.
Volume bonus and override revenues are recognized at the end of each monthly
or quarterly measurement period if the specified target has been achieved.
F-9
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
Advertising
Advertising costs are expensed as incurred. Advertising expenses amounted to
$1,453,392, $2,495,325 and $3,823,150 for the years ended December 31, 1996,
1997 and 1998, respectively, and $1,347,648 and $4,164,443 for the six months
ended June 30, 1998 and 1999, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Cheap Tickets adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective January 1, 1996. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
(undiscounted and without interest) expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on Cheap Tickets' financial position,
results of operations, or liquidity.
Fair Value of Financial Instruments
The fair values of Cheap Tickets' long-term debt approximates carrying
values based on current financing for similar loans available to the Company.
The fair values of marketable securities are based on quoted prices.
Accounting for Stock Based Compensation
The Company accounts for employee stock based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations, as permitted by SFAS No. 123,
"Accounting for Stock Based Compensation."
F-10
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
Per Share Data
The following is a reconciliation of the numerator and denominators of the
basic and diluted earnings (loss) per common share:
<TABLE>
<CAPTION>
Income Shares Per Share
Years ended December 31, (Numerator) (Denominator) Amount
------------------------ ----------- ------------- ---------
<S> <C> <C> <C>
1996:
Basic
Income available to common shares.... $ 673,702 14,249,480 $ 0.05
======
Effect of dilutive securities.......... -- --
----------- ----------
Diluted
Net income and assumed conversions... $ 673,702 14,249,480 $ 0.05
=========== ========== ======
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
1997:
Basic
Loss available to common shares...... $(1,265,626) 14,847,322 $(0.09)
======
Effect of dilutive securities.......... -- --
----------- ----------
Diluted
Net loss and assumed conversions..... $(1,265,626) 14,847,322 $(0.09)
=========== ========== ======
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
1998:
Basic
Income available to common shares.... $ 551,132 14,567,084 $ 0.04
======
Effect of dilutive securities
Common stock warrants................ -- 2,969,456
Stock options........................ -- 384,328
----------- ----------
Diluted
Net loss and assumed conversions..... $ 551,132 17,920,868 $ 0.03
=========== ========== ======
</TABLE>
F-11
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
<TABLE>
<CAPTION>
Income Shares Per Share
Six months ended June 30, (Numerator) (Denominator) Amount
------------------------- ---------- ------------- ---------
(unaudited)
<S> <C> <C> <C>
1998:
Basic
Income available to common shares...... $ 412,294 14,660,506 $0.03
=====
Effect of dilutive securities
Common stock warrants.................. -- 2,969,456
Stock options.......................... -- 18,802
---------- ----------
Diluted
Net income and assumed conversions..... $ 412,294 17,648,764 $0.02
========== ========== =====
1999:
Basic
Income available to common shares...... $3,506,776 18,216,743 $0.19
=====
Effect of dilutive securities
Common stock warrants.................. 1,321,571
Stock options.......................... -- 755,565
---------- ----------
Diluted
Net income and assumed conversions..... $3,506,776 20,293,879 $0.17
========== ========== =====
</TABLE>
Net earnings (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Warrants
to purchase 2,969,456 shares of common stock were outstanding in 1997 but were
not included in the computation of diluted loss per share for the year ended
December 31, 1997 since it would have had an antidilutive effect. Such warrants
had a dilutive effect for the year ended December 31, 1998.
New Pronouncements
In 1998, Cheap Tickets adopted SFAS No. 130 "Reporting Comprehensive
Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." SFAS No. 130 states that all items that are
required to be recognized under generally accepted accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The adoption
of SFAS No. 130 did not have an effect on Cheap Tickets' financial statements
since the Company does not have elements of comprehensive income other than net
earnings.
SFAS No. 131 requires disclosures regarding segments of an enterprise and
related information that reflects the different types of business activities in
which the enterprise engages and the different economic environments in which
it operates. The effect of implementing SFAS No. 131 was not significant as
Cheap Tickets manages its business as a single operation segment, is domiciled
entirely in the U.S. and substantially all of the Company's revenues are
derived from sales of airline tickets.
F-12
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
SFAS No. 132 standardized the disclosure requirements for pension and other
postretirement benefits. The adoption of SFAS No. 132 (which does not change
existing measurement or recognition standards for Cheap Tickets' defined
contribution plan) did not have a material effect on Cheap Tickets' financial
statements.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position and measurement of those
derivative instruments at fair value. In June 1999, FASB issued SFAS No. 137
which deferred the effective date of SFAS No. 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. Currently, Cheap Tickets does not
hold derivative instruments or engage in hedging activities. The adoption of
SFAS No. 133 is not expected to have a material effect on Cheap Tickets'
financial statements.
Effective January 1, 1999, Cheap Tickets implemented Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up
Activities," issued by the Accounting Standards Executive Committee (AcSEC) of
the American Institute of Certified Public Accountants (AICPA). The
implementation did not have a material effect on the financial statements.
The FASB issued SFAS No. 134 in October 1998 and SFAS No. 136 in June 1999
which do not apply to Cheap Tickets. In February 1999, the FASB issued SFAS No.
135, "Rescission of FASB Statement No. 75 and Technical Corrections," which was
effective shortly after issuance and did not have a material effect on Cheap
Tickets' financial statements.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
net loss as previously reported.
Unaudited Interim Financial Information
The accompanying interim financial statements as of June 30, 1999, and for
the six months ended June 30, 1998 and 1999 together with the related notes are
unaudited but include all adjustments consisting of only normal recurring
adjustments, which the Company considers necessary to present fairly, in all
material respects, its financial position, results of operations and cash flows
for such periods. Results for the six months ended June 30, 1998 and 1999 are
not necessarily indicative of results for the entire year. Historically, the
fourth quarter of the year generally reflects slower business activity due to
the seasonality of the Company's business.
2. Marketable Securities
Marketable securities at December 31, 1998 comprised U.S. government agency
debt securities having contractual maturities of less than one year. Marketable
securities at June 30, 1999 comprised U.S. government agency debt securities,
municipal debt securities, corporate debt securities and
F-13
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
preferred stock. All debt securities other than municipal debt have contractual
maturities of less than one year. Municipal debt securities have contractual
maturities of more than 10 years. The fair value of the debt securities
approximated amortized cost. There were no sales of securities in 1996, 1997
and 1998. Securities sold and matured amounted to $10.3 million during the six
months ended June 30, 1999.
3. Property and Equipment
A summary of property and equipment at December 31, 1997 and 1998 and June
30, 1999 is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1997 1998 1999
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Land........................................ $ 158,239 $ 158,239 $ 158,239
Building improvements....................... 741,761 741,761 741,761
Leasehold improvements...................... 339,807 358,737 467,342
Furniture, fixtures and office equipment
(Note 9)................................... 2,089,861 3,088,240 7,176,287
Vehicles.................................... 122,916 122,916 122,916
---------- ---------- ----------
3,452,584 4,469,893 8,666,545
Less accumulated depreciation and
amortization............................... 932,538 1,470,475 2,050,548
---------- ---------- ----------
$2,520,046 $2,999,418 $6,615,997
========== ========== ==========
</TABLE>
Depreciation and amortization amounted to $204,552, $370,237 and $563,514
for the years ended December 31, 1996, 1997 and 1998, respectively, and
$269,624 and $585,212 for the six months ended June 30, 1998 and 1999,
respectively.
F-14
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
4. Debt
Long-term debt at December 31, 1997 and 1998 and June 30, 1999 consists of
the following:
<TABLE>
<CAPTION>
December 31,
------------------- June 30,
1997 1998 1999
---------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Bank Debt-
3.125% above an indexed rate (total rate of
8.125% at December 31, 1998 and 8.25% at June
30, 1999) note payable in monthly
installments of $5,811 including interest,
due May 1, 2012, collateralized by a first
mortgage on land and building................ $ 585,816 $564,890 $553,023
1.5% above bank's base rate mortgage note,
payable in monthly installments of $6,000
including interest, collateralized by
property held for sale. The note was repaid
in 1998...................................... 496,316 -- --
10% note payable in monthly installments of
$1,413 including interest, balance due
January 26, 2001, collateralized by a
vehicle...................................... 44,832 31,785 --
Other-
8.25% note payable in monthly installments of
$13,930 including interest, due February 28,
2000......................................... -- 210,350 121,139
6.8% note payable in monthly installments of
$16,448, including interest, due May 28,
2000......................................... -- -- 174,919
---------- -------- --------
Total long-term debt.......................... 1,126,964 807,025 849,081
Less current installments of long-term debt... 528,825 221,469 321,104
---------- -------- --------
Long-term debt, excluding current
installments................................. $ 598,139 $585,556 $527,977
========== ======== ========
</TABLE>
The aggregate maturities of long-term debt subsequent to December 31, 1998
are as follows:
<TABLE>
<S> <C>
Year ending December 31
1999.............................................................. $221,469
2000.............................................................. 69,774
2001.............................................................. 29,995
2002.............................................................. 30,935
2003.............................................................. 33,545
Later years....................................................... 421,307
--------
$807,025
========
</TABLE>
Cheap Tickets has available a $3,000,000 credit facility with a bank
expiring on December 5, 1999. Borrowings under the credit facility accrue
interest at either (1) the bank's base rate (7.75% at December 31, 1998 and
June 30, 1999) or (2) LIBOR plus an applicable margin, as defined, at the
Company's option. The credit facility is collateralized by deposit accounts
with the bank, accounts receivable, inventory, furniture and equipment and
intangible assets. The credit facility contains restrictive covenants which
include requirements to maintain minimum tangible net worth and meet
F-15
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
certain financial ratios. There were no outstanding borrowings under the credit
facility at December 31, 1997 and 1998, and June 30, 1999.
5. Mandatorily Redeemable Cumulative Preferred Stock
In July 1997, Cheap Tickets issued and sold 425,000 shares of mandatorily
redeemable cumulative preferred stock, with detachable warrants to purchase an
aggregate of 2,969,456 shares of common stock of Cheap Tickets at an aggregate
exercise price of $2,121, in exchange for cash consideration of $4,250,000 (the
"Equity Transaction").
The net proceeds of $3,875,482, after reflecting transaction costs of
$374,518, were allocated between the warrants and preferred stock based on
their relative fair values, resulting in an allocation of $510,652 and
$3,364,830 to the warrants and preferred stock, respectively. The value
attributable to the warrants was recorded as additional paid-in capital. The
excess of the redemption value of the preferred stock of $4,250,000 over the
initial carrying value of $3,364,830 was being accreted by periodic charges to
retained earnings. The accretion amounted to $87,066 and $174,132 for the years
ended December 31, 1997 and 1998, respectively and $87,066 and $36,657 for the
six months ended June 30, 1998 and 1999, respectively.
The preferred stock had a par value of $1 per share, was nonvoting and
accrued cumulative annual dividends of $.80 per share. Accrued dividends
amounted to $170,000 and $340,000 for the years ended December 31, 1997 and
1998, respectively and $170,000 and $78,712 for the six months ended June 30,
1998 and 1999, respectively. Undeclared cumulative dividends amounted to
$170,000 and $510,000 as of December 31, 1997 and 1998, respectively, and were
accrued as an addition to preferred stock in the accompanying balance sheets.
By its terms, the preferred stock was required to be redeemed at the time of
an initial public offering of Cheap Tickets. The initial public offering of
Cheap Tickets occurred on March 19, 1999. The redemption price was equal to its
price of issuance, $4,250,000, plus accrued dividends of $589,000 at March 24,
1999, the date of redemption. Unamortized accretion of approximately $587,000
on March 24, 1999 was charged against retained earnings. Coincident with the
redemption of the preferred stock, the warrants were exercised and 2,969,375
shares were issued in a cashless exercise.
6. Stockholders' Equity
Common Stock
On June 24, 1997, Cheap Tickets' Board of Directors approved an amendment to
Cheap Tickets' articles of incorporation wherein the authorized common stock of
Cheap Tickets was increased from 5,000 shares at $1 par value to 5,000,000
shares at $0.01 par value, and to effect a 1,000-for-1 stock split. In
connection with the stock split, $9,477 was transferred to common stock from
additional paid-in capital, representing the adjustment to reflect the
aggregate common stock par value subsequent to the aforementioned amendment.
F-16
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
Subsequent to the stock split, a stock dividend was declared and issued to
the common stockholders on a pro rata basis so that the common stock warrants,
if and when exercised, would reflect a 15% common equity interest, considering
the shares of common stock outstanding and the 1,979,642 shares of common stock
to be reserved for issuance under the stock option plan established in April
1998 (see Note 12).
In February 1999, the authorized common stock of Cheap Tickets was increased
from 5,000,000 shares at $0.01 par value to 70,000,000 shares at $0.001 par
value. Cheap Tickets also effected a 14-for-one stock split.
In these financial statements, all per share amounts and number of shares
have been restated to reflect the stock splits and stock dividend described
above.
As described in Note 11, 373,646 shares were forfeited by an officer upon
his resignation in March 1998.
Initial Public Offering
On March 19, 1999 Cheap Tickets completed an initial public offering of its
common stock in which 3,500,000 shares were issued at an offering price of $15
per share. The offering raised $47.7 million after underwriting discounts and
other related costs of issuance.
In connection with the initial public offering, the underwriters had the
option to purchase an additional 525,000 shares of common stock. They exercised
this option on April 19, 1999. Net proceeds to Cheap Tickets were $7.3 million
after underwriting discounts and other costs of issuance.
Preferred Stock
In February 1999, the authorized preferred stock of Cheap Tickets was
increased from 5,000,000 shares at $1 par value to 10,000,000 shares at $0.01
par value. The board of directors has the authority to issue shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, and liquidation preferences.
Restriction on Declaration and Payment of Dividends
In connection with the Equity Transaction, written approval from a majority
of the holders of mandatorily redeemable cumulative preferred stock, common
stock warrants, and common stock issued upon exercise of the warrants, was
required for the declaration or payment of dividends of common stockholders.
However, this restriction was removed upon redemption of the mandatorily
redeemable cumulative preferred stock on March 24, 1999.
F-17
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
7. Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996, 1997 and
1998 was as follows:
<TABLE>
<CAPTION>
Federal State Total
--------- --------- ---------
<S> <C> <C> <C>
Years ended December 31
1996:
Current................................ $ 340,761 $ 86,973 $ 427,734
Deferred............................... 8,889 2,374 11,263
--------- --------- ---------
$ 349,650 $ 89,347 $ 438,997
========= ========= =========
1997:
Current................................ $(468,136) $(119,444) $(587,580)
Deferred............................... (15,465) (3,588) (19,053)
--------- --------- ---------
$(483,601) $(123,032) $(606,633)
========= ========= =========
1998:
Current................................ $ 741,237 $ 101,080 $ 842,317
Deferred............................... (54,232) (47,817) (102,049)
--------- --------- ---------
$ 687,005 $ 53,263 $ 740,268
========= ========= =========
</TABLE>
Deferred tax benefit for the year ended December 31, 1997 includes a tax
benefit of $36,247 for operating loss carryforwards. The actual income tax
expense (benefit) for the years ended December 31, 1996, 1997 and 1998 differed
from the expected income tax expense (benefit) computed by applying the U.S.
federal income tax rate of 34% to earnings (loss) before income taxes due to
the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- --------
<S> <C> <C> <C>
Federal "expected" income tax expense
(benefit).................................... $378,318 $(549,166) $613,881
State franchise and income taxes, net of
federal income tax effect.................... 60,679 (81,201) 93,888
Other......................................... -- 23,734 32,499
-------- --------- --------
$438,997 $(606,633) $740,268
======== ========= ========
</TABLE>
F-18
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1997 and 1998 are presented
below:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for decline in value of property held for sale
not deductible for tax purposes......................... $ 38,121 $ --
Accrued rent not deductible for tax purposes............. 27,203 21,201
Accrued vacation not deductible for tax purposes......... 31,211 165,145
State tax credit carryforward............................ -- 34,129
Unearned compensation not deductible for tax purposes.... -- 10,319
Net operating loss carryforward.......................... 36,247 --
-------- --------
Total gross deferred tax assets........................ 132,782 230,794
-------- --------
Deferred tax liabilities:
Property and equipment, principally due to differences
between accounting and tax depreciation and
amortization............................................ (59,662) (63,166)
Unearned compensation deductible for tax purposes........ (7,541) --
-------- --------
Total gross deferred tax liabilities................... (67,203) (63,166)
-------- --------
Net deferred tax asset................................. $ 65,579 $167,628
======== ========
Deferred tax assets and liabilities are presented in the
accompanying balance sheets as follows:
Other current assets..................................... $ 31,211 $199,274
Other noncurrent assets.................................. 34,368 --
Other noncurrent liabilities............................. -- (31,646)
-------- --------
$ 65,579 $167,628
======== ========
</TABLE>
There was no valuation allowance provided for deferred tax assets as of
December 31, 1996, 1997 and 1998. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not Cheap
Tickets will realize the benefits of these deductible differences. The amount
of the deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income are reduced.
8. Profit Sharing and 401(k) Plan
Cheap Tickets sponsors a defined contribution profit sharing plan covering
all employees who attained the age of 20 and completed one year of service.
Vesting occurs at a rate of 20% per year commencing in the second year of
participation. Contributions to the plan were at the discretion of the board of
directors. Cheap Tickets did not contribute to the plan in 1996.
F-19
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
Effective January 1, 1997, Cheap Tickets converted the profit sharing plan
into a qualified 401(k) defined contribution plan. The 401(k) defined
contribution plan allows for voluntary participant contributions of up to 15%
of eligible compensation. Employer contributions are discretionary and fully
vest to the participant upon the participant's completion of seven years of
service. Cheap Tickets did not contribute to the 401(k) defined contribution
plan in 1997, 1998 and the six months ended June 30, 1999.
9. Lease Commitments
Cheap Tickets is obligated under capital leases for office equipment that
expire at various dates through 2004. At December 31, 1997 and 1998 and June
30, 1999, the gross amounts of office equipment and related accumulated
amortization recorded under capital leases are as follows:
<TABLE>
<CAPTION>
December 31,
------------------- June 30,
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Office equipment................................ $652,167 $1,260,237 $3,292,766
Less accumulated amortization (amortization
expense charged to depreciation and
amortization).................................. 144,570 384,869 702,390
-------- ---------- ----------
$507,597 $ 875,368 $2,590,376
======== ========== ==========
</TABLE>
Cheap Tickets has noncancelable operating leases, primarily for office
space, that expire at various dates through 2009. These leases generally
contain renewal options for periods ranging from one to five years. Rent
expense incurred for all operating leases amounted to $519,560, $851,709, and
$1,175,289 for the years ended December 31, 1996, 1997 and 1998, respectively,
and $545,024 and $661,660 for the six months ended June 30, 1998 and 1999,
respectively.
Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ----------
<S> <C> <C>
Year ending December 31
1999................................................ $ 335,435 $ 923,400
2000................................................ 321,287 933,100
2001................................................ 268,323 621,700
2002................................................ 56,371 532,500
2003................................................ 49,133 533,300
Later years......................................... 14,435 1,984,400
---------- ----------
Total minimum lease payments...................... 1,044,984 $5,528,400
==========
Less amounts representing interest (at rates ranging
from 7.75% to 14.05%)................................ 104,816
----------
Present value of net minimum capital lease
payments........................................... 940,168
Less current installments of capital lease
obligations.......................................... 287,809
----------
Capital lease obligations, excluding current
installments....................................... $ 652,359
==========
</TABLE>
F-20
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
10. Incentive Reimbursements from Local Governments
In 1996, Cheap Tickets commenced operations of a new reservation center in
Lakeport, California. As an incentive for Cheap Tickets to operate at the
location, the local government agreed to reimburse Cheap Tickets for certain
payroll costs related to training. Estimated reimbursements associated with
payroll costs incurred of approximately $458,000 and $28,000 in 1996 and 1997,
respectively, have been recorded by Cheap Tickets as a reduction of selling,
general and administrative expenses in the accompanying statements of
operations. At December 31, 1996, $353,164 of these incentive reimbursements
were to be collected from the local government. In 1997, $250,000 of the
incentive reimbursements receivable was settled by offsetting the receivable
with an outstanding debt obligation to the local government of $250,000, with
the remaining receivable balance collected in full. No gain or loss was
recognized on the offsetting of such amounts.
Additional incentives provided by the local government included the waiver
of certain expenses, including lease rent and property taxes totaling
approximately $99,000 and $12,000 in 1996 and 1997, respectively. Cheap Tickets
also received $95,400 associated with additional lease rent incentives in 1996
and had recorded this amount as a reduction of selling, general and
administrative expenses in 1996.
11. Stock Compensation Arrangement
In November 1996, Cheap Tickets entered into a Restricted Stock Grant and
Shareholder Agreement (Agreement) whereby 747,292 shares of common stock, after
giving effect to the stock splits and a common stock dividend (see Note 6),
were granted to an officer of Cheap Tickets as compensation for his employment.
There was a two year vesting period whereby the shares vested 50 percent after
each year of service with Cheap Tickets. The estimated fair value of the common
stock shares on the date of grant of $45,895 was being amortized as
compensation expense over the two year vesting period.
In March 1998, the officer resigned from Cheap Tickets. In connection with
the resignation, the officer forfeited his nonvested shares of common stock
issued under the Agreement. Such forfeited common stock amounted to 373,646
shares. The officer's forfeiture of the common shares resulted in a benefit of
$3,820 in 1998 for the recovery of compensation expense previously taken and
decreases in common stock and additional paid-in capital of $267 and $22,680,
respectively.
12. Stock Option Plans
Cheap Tickets' 1997 Stock Option Plan provided for the issuance of up to
1,979,642 shares of common stock.
In 1998 Cheap Tickets granted options to purchase up to 728,000 shares of
common stock with exercise prices less than the estimated market prices on the
grant dates. The weighted-average grant-date fair value of options granted in
1998 was $1.30. The estimated compensation cost for these options amounted to
$722,600 at the grant dates. Stock option compensation expense, included in
F-21
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
selling, general and administrative expenses, was $26,325 for the year ended
December 31, 1998 and $500 and $43,903 for the six months ended June 30, 1998
and 1999, respectively. The remaining unamortized compensation cost of $696,275
and $433,240 at December 31, 1998 and June 30, 1999, respectively will be
amortized over the future vesting periods of the options. The granted options
have a five-year vesting period and a ten-year exercise period from the date of
the grant. However, options to purchase up to 140,000 shares fully vested upon
Cheap Tickets' initial public offering of its stock.
The following table summarizes activity under the stock option plan:
<TABLE>
<CAPTION>
Options Outstanding
----------------------
Average
Exercise
Shares Price
---------- ----------
<S> <C> <C>
Balance at December 31, 1997........................ -- $ --
Options granted..................................... 728,000 0.31
----------
Balance at December 31, 1998........................ 728,000 0.31
Options granted..................................... 52,000 25.69
Options exercised................................... (15,120) 0.18
Options forfeited................................... (54,600) 0.71
----------
Balance at June 30, 1999 (unaudited)................ 710,280 $ 2.14
========== ========
</TABLE>
At December 31, 1998, options for 660,800 shares have an exercise price of
$0.18 per share with a weighted average remaining contractual life of 9.4 years
and options for 67,200 shares have an exercise price of $1.57 per share with a
weighted-average remaining contractual life of 9.8 years. At June 30, 1999,
options for 612,080 shares have an exercise price of $0.18 per share with a
weighted-average remaining contractual life of 8.9 years; options for 46,200
shares have an exercise price of $1.57 per share with a weighted-average
remaining contractual life of 9.3 years; and options for 52,000 shares have
exercise prices ranging from $11.93 per share to $33.75 per share with
weighted-average remaining contractual lives of 9.1 to 10.0 years. Options to
acquire 28,000 shares were exercisable at December 31, 1998. Options for
234,416 shares were exercisable at June 30, 1999.
Under SFAS No. 123, the fair value of each grant was estimated on the grant
date using the minimum value method based on the following weighted-average
assumptions:
<TABLE>
<S> <C>
Expected dividend yield.......................................... 0.00%
Risk-free interest rate.......................................... 5.80%
Expected life of the options..................................... 10 years
</TABLE>
F-22
<PAGE>
CHEAP TICKETS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(Information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
Compensation cost has been charged against income for the stock option plan
under APB No. 25. The pro forma net income and pro forma earnings per share for
the year ended December 31, 1998 had Cheap Tickets elected to adopt the fair-
value based method of accounting prescribed by SFAS No. 123 is presented below:
<TABLE>
<S> <C>
Net income:
As reported.................................................. $1,065,264
Pro forma.................................................... $1,061,513
Basic earnings per share:
As reported ................................................. $ 0.04
Pro forma.................................................... $ 0.04
Diluted earnings per share:
As reported.................................................. $ 0.03
Pro forma.................................................... $ 0.03
</TABLE>
Cheap Tickets' 1999 Stock Incentive Plan was adopted by the Board of
Directors in February 1999 and approved by the stockholders prior to the
initial public offering. All grants subsequent to the initial public offering
were and will be made under the 1999 Stock Incentive Plan. Under the 1999 Stock
Incentive Plan, 1,260,000 shares of common stock plus an annual increase to be
added on the first day of Cheap Ticket's fiscal year beginning in 2000 equal to
two percent of the number of shares outstanding as of such date or a lesser
number of shares determined by the plan administrator of the 1999 Stock
Incentive Plan were reserved for issuance. The Plan requires that the exercise
price be at least equal to the fair market value of the common stock on the
date of grant, and the term of the option not exceed ten years. For all
optionees holding less than 10% of the voting power of all classes of Cheap
Tickets' outstanding capital stock, an exercise price equal to fair market
value at date of grant will not create any requirement for excess compensation
charges.
Pursuant to the 1999 Stock Incentive Plan, the Board of Directors adopted
the 1999 non-employee Director Option Program. Under this program, each non-
employee director appointed to the Board received an option to acquire 1,500
shares of common stock at an exercise price per share equal to the then fair
market value of the common stock at the date of grant.
13. Contingencies
Litigation (unaudited)
Various legal proceedings are pending against Cheap Tickets. The ultimate
liability of Cheap Tickets, if any, cannot be determined at this time. Based
upon consultation with counsel, management does not expect that the aggregate
liability, if any, resulting from these proceedings would have a material
effect on Cheap Tickets' financial position, results of operations or
liquidity.
F-23
<PAGE>
[CHEAP TICKETS, INC. LOGO WITH PICTURES OF WORLDWIDE DESTINATIONS]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
which is set forth in this prospectus. We are offering to sell shares of
common stock and seeking offers to buy shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of the prospectus or of any sale of common
stock.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Forward Looking Statements............................................... 21
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Price Range of Our Common Stock.......................................... 22
Capitalization........................................................... 23
Selected Financial and Operating Data.................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 38
Management............................................................... 48
Certain Transactions..................................................... 57
Principal and Selling Stockholders....................................... 58
Description of Capital Stock............................................. 60
Underwriting............................................................. 62
Legal Matters............................................................ 64
Experts.................................................................. 64
Additional Information................................................... 65
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,000,000 Shares
[LOGO OF CHEAP TICKETS INC.]
www.cheaptickets.com
Common Stock
-----------------
PROSPECTUS
, 1999
-----------------
William Blair & Company
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
CIBC World Markets
Volpe Brown Whelan & Company
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the Offering of the securities being offered hereunder other
than underwriting discounts and commissions.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
Registration fee.................................................. $ 77,328
NASD filing fee................................................... 28,316
Nasdaq National Market listing fee................................ 17,500
Printing and Engraving expenses................................... 200,000
Legal fees and expenses........................................... 200,000
Blue Sky qualification fees and expenses.......................... 5,000
Accounting fees and expenses...................................... 50,000
Transfer Agent and registrar fees................................. 15,000
Miscellaneous..................................................... 56,856
--------
Total........................................................... $650,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the DGCL contains detailed provisions on indemnification of
directors and officers against expenses, judgments, fines and amounts paid in
settlement, actually and reasonably incurred in connection with legal
proceedings. Section 102(a)(7) of the DGCL permits a provision in the
certificate of incorporation of each corporation organized thereunder, such as
the Company, eliminating or limiting, with certain exceptions, the personal
liability of a director of the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. The Certificate of
Incorporation of the Company eliminates the liability of each of its directors
to its stockholders or the Company for monetary damages for breach of fiduciary
duty to the full extent provided by the Delaware General Corporation Law (the
"DGCL"), as such law exists or may hereafter be amended.
Indemnification applies to any threatened, pending or completed action, suit
or proceeding, whether, civil, criminal, administrative or investigative.
Indemnification may include all expenses (including attorneys' fees, judgments,
fines, ERISA excise taxes and amounts paid in settlement) reasonably incurred
by the indemnified person.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit
Document Number
-------- -------
<S> <C>
Form of Underwriting Agreement...................................... 1.1
Certificate of Incorporation........................................ 3.1
Form of First Amended and Restated Certificate of Incorporation..... 3.2
Bylaws.............................................................. 3.3
Form of First Amended and Restated Bylaws........................... 3.4
Form of Indemnification Agreements.................................. 10.4
</TABLE>
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
From January 1, 1996 through December 31, 1998: (a) the Company issued and
sold 5,950,000 shares of 8% Mandatorily Redeemable Preferred Stock and warrants
to purchase up to 2,969,456 shares of Common Stock to Phillips-Smith Specialty
Retail Group III, L.P. and Craig Foley for an aggregate purchase price of
$4,250,000; and (b) the Company issued 373,646 shares of Common Stock to a
former officer of the Company as compensation with an aggregate value of
$22,948.
The issuances described about were deemed exempt from registration under the
Securities Act in reliance upon Sections 4(2) or 3(a) of the Securities Act.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Company,
to information about the Company.
Item 16. Exhibits and Financial Statements
(a) Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1*** Form of Underwriting Agreement.
3.1* Certificate of Incorporation.
3.2* Form of First Amended and Restated Certificate of Incorporation.
3.3* Bylaws.
3.4* Form of First Amended and Restated Bylaws.
4.1* Specimen Stock Certificate.
5.1*** Opinion of Morrison & Foerster LLP.
10.1* 1997 Stock Option Plan.
10.2* 1999 Stock Incentive Plan.
10.3* Form of Severance Agreement for Michael J. Hartley and Sandra T.
Hartley.
10.4* Form of Indemnification Agreement.
10.5* The Commerce Tower Office Lease dated July 2, 1995 between Tosei Shoji
Co. and Cheap Tickets, Inc., as amended by the 1st Amendment to the
Commerce Tower Office Lease dated June 14, 1996 and the 2nd Amendment
to the Commerce Tower Office Lease dated October 9, 1997.
10.6* Sublease dated June 1, 1998 between Levi Straus & Co. and Cheap
Tickets, Inc.
10.7* Lease Agreement dated January 19, 1994 between Airport Center
Associates LP and Cheap Tickets, Inc., as amended by the 1st Amendment
to Lease dated July 20, 1994 and the 2nd Amendment to Lease dated
April 25, 1997.
10.8 Commercial Lease Agreement dated December 22, 1998 between Connell
Development Co. and Cheap Tickets, Inc.
10.9+* 1994 Net Fare/Commission Agreement dated October 18, 1993 between
Continental Airlines, Inc. and Cheap Tickets, Inc., as amended by
Addendum dated November 12, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.10+* 1999 Net Consolidator Agreement dated November 1, 1998 between Trans
World Airlines, Inc. and Cheap Tickets, Inc.
10.11+* Consolidator Agreement dated December 14, 1998 between America West
Airlines, Inc. and Cheap Tickets, Inc.
10.12* Credit Agreement dated November 26, 1997 between Bank of Hawaii and
Cheap Tickets, Inc., as amended by First Loan Modification Agreement
dated as of June 15, 1998; and Security Agreement dated November 26,
1997 between Bank of Hawaii and Cheap Tickets, Inc.
10.13+* Subscriber Agreement dated December 31, 1998 between The SABRE Group,
Inc. and Cheap Tickets, Inc., as amended by Amendment No. 1 to SABRE
Subscriber Agreement dated December 31, 1998.
10.14+* Agreement for Negotiated Fares Maintenance dated July 15, 1994 between
SABRE Travel Information Network and CTI Corporation.
10.15* Sabre TravelBase System Lease Agreement between SABRE Travel
Information Network and Cheap Tickets, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2*** Consent of Morrison & Foerster LLP (included in the opinion filed
herewith as Exhibit 5.1).
24.1 Power of attorney (included on the signature page).
27.1** Financial Data Schedule.
99.1*** Consent Letter of KPMG LLP.
99.2 Consent of Ching & Lee dated as of July 30, 1999.
</TABLE>
- --------
* Incorporated by reference from Registration Statement No. 333-70841, as
amended, originally filed with Securities and Exchange Commission on
January 20, 1999.
** Incorporated by reference from Registrant's quarterly report on Form 10-Q
filed with the Securities and Exchange Commission on August 2, 1999.
*** To be filed by Amendment.
+ Portions have been omitted pursuant to a confidential treatment request.
(b) Financial Statement Schedules
No schedules are included because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(a) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 14 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public
II-3
<PAGE>
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(b) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(c) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(d) To provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denomination and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Honolulu, County of
Honolulu, State of Hawaii, as of August 2, 1999.
CHEAP TICKETS, INC.
/s/ Michael J. Hartley
By: _________________________________
Chief Executive Officer and
President
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Michael J. Hartley and Dale
K. Jorgenson, and each of them, as his true and lawful attorneys-in-fact and
agents, jointly and severally, with full power of substitution and
resubstitution, for and in his stead, in any and all capacities, to sign on his
behalf this Registration Statement on Form S-1 in connection with the offering
of common stock by Cheap Tickets, Inc. and to execute any amendments thereto
(including post-effective amendments), including a registration statement filed
pursuant to Rule 462(b), or certificates that it may be required in connection
with this Registration Statement, and to file the same, with all exhibits
thereto, and all other documents in connection therewith, with the Securities
and Exchange Commission and granting unto said attorneys-in-fact and agents,
and each of them, jointly and severally, the full power and authority to do and
perform each and every act and thing necessary or advisable to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, jointly or severally,
or their or his substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Honolulu, County of
Honolulu, State of Hawaii, as of August 2, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Michael J. Hartley Chief Executive Officer,
____________________________________ President and Chairman of
Michael J. Hartley the Board of Directors
/s/ Dale K. Jorgenson Vice President of Finance
____________________________________ and Chief Financial Officer
Dale K. Jorgenson
/s/ Tammy A. Ishibashi Executive Vice President
____________________________________
Tammy A. Ishibashi
/s/ Sandra T. Hartley Director
____________________________________
Sandra T. Hartley
/s/ Donald J. Phillips Director
____________________________________
Donald J. Phillips
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Cece Smith Director
____________________________________
Cece Smith
/s/ George R. Mrkonic Director
____________________________________
George R. Mrkonic
/s/ Giles H. Bateman Director
____________________________________
Giles H. Bateman
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1*** Form of Underwriting Agreement.
3.1* Certificate of Incorporation.
3.2* Form of First Amended and Restated Certificate of Incorporation.
3.3* Bylaws.
3.4* Form of First Amended and Restated Bylaws.
4.1* Specimen Stock Certificate.
5.1*** Opinion of Morrison & Foerster LLP.
10.1* 1997 Stock Option Plan.
10.2* 1999 Stock Incentive Plan.
10.3* Form of Severance Agreement for Michael J. Hartley and Sandra T.
Hartley.
10.4* Form of Indemnification Agreement.
10.5* The Commerce Tower Office Lease dated July 2, 1995 between Tosei Shoji
Co. and Cheap Tickets, Inc., as amended by the 1st Amendment to the
Commerce Tower Office Lease dated June 14, 1996 and the 2nd Amendment
to the Commerce Tower Office Lease dated October 9, 1997.
10.6* Sublease dated June 1, 1998 between Levi Straus & Co. and Cheap
Tickets, Inc.
10.7* Lease Agreement dated January 19, 1994 between Airport Center
Associates LP and Cheap Tickets, Inc., as amended by the 1st Amendment
to Lease dated July 20, 1994 and the 2nd Amendment to Lease dated
April 25, 1997.
10.8 Commercial Lease Agreement dated December 22, 1998 between Connell
Development Co. and Cheap Tickets, Inc.
10.9+* 1994 Net Fare/Commission Agreement dated October 18, 1993 between
Continental Airlines, Inc. and Cheap Tickets, Inc., as amended by
Addendum dated November 12, 1998.
10.10+* 1999 Net Consolidator Agreement dated November 1, 1998 between Trans
World Airlines, Inc. and Cheap Tickets, Inc.
10.11+* Consolidator Agreement dated December 14, 1998 between America West
Airlines, Inc. and Cheap Tickets, Inc.
10.12* Credit Agreement dated November 26, 1997 between Bank of Hawaii and
Cheap Tickets, Inc., as amended by First Loan Modification Agreement
dated as of June 15, 1998; and Security Agreement dated November 26,
1997 between Bank of Hawaii and Cheap Tickets, Inc.
10.13+* Subscriber Agreement dated December 31, 1998 between The SABRE Group,
Inc. and Cheap Tickets, Inc., as amended by Amendment No. 1 to SABRE
Subscriber Agreement dated December 31, 1998.
10.14+* Agreement for Negotiated Fares Maintenance dated July 15, 1994 between
SABRE Travel Information Network and CTI Corporation.
10.15* SABRE TravelBase System Lease Agreement between SABRE Travel
Information Network and Cheap Tickets, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP.
23.2*** Consent of Morrison & Foerster LLP (included in the opinion filed
herewith as Exhibit 5.1).
24.1 Power of attorney (included on the signature page).
27.1** Financial Data Schedule.
99.1*** Consent Letter of KPMG LLP.
99.2 Consent of Ching & Lee dated as of July 30, 1999.
</TABLE>
- --------
* Incorporated by reference from Registration Statement No. 333-70841, as
amended, originally filed with Securities and Exchange Commission on
January 20, 1999.
** Incorporated by reference from Registrant's quarterly report on Form 10-Q
filed with the Securities and Exchange Commission on August 2, 1999.
*** To be filed by Amendment.
+ Portions have been omitted pursuant to a confidential treatment request.
<PAGE>
EXHIBIT 10.8
COMMERCIAL LEASE AGREEMENT
<TABLE>
<S> <C> <C>
TABLE OF CONTENTS EXHIBITS AND ADDENDA. Any exhibit or addendum attached to this
Article Page Lease is incorporated as a part of this Lease for all purposes.
1 Defined Terms 1 Any term not specifically defined in the Addenda shall have the
2. Lease and Lease Term 2 same meaning given to it in the body of this Lease. To the
3. Rent and Security Deposit 2 extent any provisions in the body of this Lease conflict with the
4. Taxes 3 Addenda, the Addenda shall control.
5. Insurance and Indemnity 3
6. Use of Demised Premises 4 [Check all boxes which apply. Boxes not checked do not apply.]
7. Property Condition, Maintenance, Repairs and 5
Alterations [X] Exhibit A Survey and/or Legal Description of the Property
8. Damage or Destruction 6 [X] Exhibit B Floor Plan and/or Site Plan
9. Condemnation 7
10. Assignment and Subletting 7 [X] Addendum A Expense Reimbursement
11. Default and Remedies 7 [X] Addendum B Renewal Options
12. Landlord's Contractual Lien 9 [X] Addendum C Right of First Refusal for Additional Space
13. Protection of Lenders 9 [DELETED]
14. Environmental Representations and Indemnity 10 [DELETED]
15. Professional Service Fees 10 [X] Addendum F Construction of Improvements
16. Miscellaneous 11 [X] Addendum G Rules and Regulation
17. Additional Provisions 13 [X] Addendum H Other Rent Schedule
</TABLE>
IN CONSIDERATION of the terms, provisions and agreements contained in this
Lease, the parties agree as follows:
ARTICLE ONE: DEFINED TERMS. As used in this Commercial Lease Agreement (the
"Lease"), the terms set forth in this Article One have the following respective
meanings:
1.01. Effective Date: The last date beneath the signatures of Landlord and
Tenant on page 13 below.
1.02. Landlord: CONNELL DEVELOPMENT CO.
Address: P.O. Box 541057, Dallas, Texas 75354-1057 (Location - 2351 W.
Northwest Hwy., Suite 2301, Dallas, Texas 75220)
Telephone: 214/357-4694 Fax: 214/357-4953
1.03. Tenant: CHEAP TICKETS, INC.
Address: 1440 Kapiolani Blvd., Suite 800, Honolulu, Hawaii 96814
Telephone: 808/945-7439 Fax: 808/946-5993
1.04. Demised Premises: MOUNTAIN SHADOWS BUSINESS PARK - BUILDING I
A. Address: 4805 N. 30th Street, Colorado Springs, CO 80903 in: El Paso
County, Colorado
B. Legal Description: The property on which the Demised Premises is
situated (the "Property" is more particularly
[DELETED]described on Exhibit A, SURVEY AND/OR LEGAL DESCRIPTION.
C. Floor Plan or Site Plan: Being a floor area of approximately 25,000
square feet [DELETED]being more particularly shown in outline form on
Exhibit B, FLOOR PLAN AND/OR SITE PLAN. The final floor plan and square
footage shall be determined upon approval of detailed plans and
specifications to be prepared by Landlord as part of the Tenant
Occupancy Expense.
D. Tenant's pro rata share of the Property.* [See Addendum A, EXPENSE
REIMBURSEMENT, if applicable]
*shall be based on the square footage [DELETED] contained in the Demised
Premises in proportion to the square footage in the Building 1 area.
1.05. Lease Term: Ten (10) years and No (0) months beginning on approximately
June 1, 1999 (the "Commencement Date") and
<PAGE>
ending on approximately May 31, 2009 the "Expiration Date").
1.06. Base Rent: $11.50 per square foot with two percent (2%) annual
increases, approximately $3,119,294.85 total Base Rent for the Lease Term
payable in monthly installments [DELETED] in advance as per the Rent Schedule
attached hereto as Addendum H (to be updated with the Commencement Date letter
to incorporate the actual commencement date and the final square footage. (The
total amount of Rent is defined in Section 3.01.)
1.07. [DELETED]
1.08. Security Deposit: $32,069.93 due upon execution of this Lease). [See
Section 3.04]
1.09. Permitted Use: General office or uses compatible with the building.
[See Section 6.01]
1.10. Party to whom Tenant is to deliver payments under this Lease [check
one]: [X] Landlord, [_] Principal Broker, or [_] Other Landlord may designate in
writing the party authorized to act on behalf of Landlord to enforce this Lease.
Any such authorization will remain in effect until it is revoked by Landlord in
writing.
1.11. Principal Broker: BACH COMMERCIAL BROKERAGE COMPANY acting as [check
one] [X] agent for Landlord exclusively, [_] agent for Tenant exclusively, [_]
an intermediary.
Principal Broker's Address: 2 North Cascade Avenue, Suite 680, Colorado Springs,
CO 80903-1626
Telephone: 719/442-2000 Fax: 719/442-0649
1.12. Cooperating Broker: PALMER McALLISTER CO. acting as [check one] [_]
agent for Landlord exclusively, [X] agent for Tenant exclusively, [_] an
intermediary.
Cooperating Broker's Address: 6 North Tejon Street, Suite 500, Colorado Springs,
CO 80903-1597
Telephone: Fax:
1.13. DELETED
A. DELETED
B. DELETED
1.14. Acceptance: The number of days for acceptance of this offer is Ten (10)
days. (See Section 16.14]
ARTICLE TWO: LEASE AND LEASE TERM
2.01. Lease of Demised Premises for Lease Term. Landlord leases the Demised
Premises to Tenant and Tenant leases the Demised Premises from Landlord for the
Lease Term stated in Section 1.05. The Commencement Date is the date specified
in Section 1.05, unless advanced or delayed under any provision of this Lease.
2.02. Delay in Commencement. Landlord shall not be liable to Tenant if
Landlord does not deliver possession of the Demised Premises to Tenant on the
Commencement Date specified in Section 1.05 above. Landlord's non-delivery of
possession of the Demised Premises to Tenant on the Commencement Date will not
affect this Lease or the obligations of Tenant under this Lease. However, the
Commencement Date shall be delayed until possession of the Demised Premises is
delivered to Tenant. The Lease Term shall be extended for a period equal to the
delay in delivery of possession of the Demised Premises to Tenant, plus the
number of days necessary for the Lease Term to expire on the last day of a
month. If Landlord does not deliver possession of the Demised Premises to Tenant
within sixty (60) days after the Commencement Date specified in Section 1.05,
Tenant may cancel this Lease by giving written notice to Landlord within ten
(10) days after the 60-day period ends. If Tenant gives such notice, this Lease
shall be canceled effective as of the date of its execution, and no party shall
have any obligations under this Lease. If Tenant does not give such notice
within the time specified, Tenant shall have no right to cancel this Lease, and
the Lease Term shall commence upon the delivery of possession of the Demised
Premises to Tenant. If delivery of possession of the Demised Premises to Tenant
is delayed, Landlord and Tenant shall, upon such delivery, execute an amendment
to this Lease setting forth the revised Commencement Date and Expiration Date of
the Lease Term.
2.03. Early Occupancy. If Tenant occupies the Demised Premises prior to the
Commencement Date, Tenant's occupancy of the
<PAGE>
Demised Premises shall be subject to all of the provisions of this Lease. Early
occupancy of the Demised Premises shall not advance the Expiration Date. Unless
otherwise provided herein, Tenant shall pay Base Rent and all other charges
specified in this Lease for the period of occupancy. It is understood that
Tenant will be performing work directly with contractors for a portion of their
Tenant improvements and this work will not constitute occupancy of the Demised
Premises.
2.04. Holding Over. Tenant shall vacate the Demised Premises immediately upon
the expiration of the Lease Term or earlier termination of this Lease. Tenant
shall reimburse Landlord for and indemnify Landlord against all damages incurred
by Landlord as a result of any delay by Tenant in vacating the Demised Premises.
If Tenant does not vacate the Demised Premises upon the expiration of the Lease
Term or earlier termination of this Lease, Tenant's occupancy of the Demised
Premises shall be a month-to-month tenancy, subject to all of the terms of this
Lease, except that the Base Rent during the holdover period shall be increased
to an amount which is 25% times the Base Rent in effect on the expiration or
termination of this Lease, computed on a monthly basis for each month of the
holdover period, plus all additional sums due under this Lease. This paragraph
shall not be construed as Landlord's consent for Tenant to hold over or to
extend this Lease. Tenant shall have the right to extend the primary lease term
for six (6) one (1) month periods, subject to three (3) months prior written
notice to Landlord at a holdover rate of 125% of the previous month's base rent
amount, plus all other amounts payable as discussed above.
ARTICLE THREE: RENT AND SECURITY DEPOSIT
3.01. Manner of Payment. All sums payable under this Lease by Tenant (the
"Rent") shall be made to the Landlord at the address designated in Section 1.02,
unless another person is designated in Section 1. 10, or to any other party or
address as Landlord may designate in writing. Any and all payments made to a
designated third party for the account of the Landlord shall be deemed made to
Landlord when received by the designated third party. All sums payable by Tenant
under this Lease, whether or not expressly denominated as rent, shall constitute
rent for the purposes of Section 502(b)(6) of the Bankruptcy Code and for all
other purposes. The Base Rent is the minimum rent for the Demised Premises and
is subject to the terms and conditions contained in this Lease, together with
the attached Addenda, if any.
3.02. Time of Payment. Upon execution of this Lease, Tenant shall pay the
installment of Base Rent plus other estimated costs for the first month of the
Lease Term. On or before the first day of the second month of the Lease Term and
of each month thereafter, the installment of Base Rent and other sums due under
this Lease shall be due and payable, in advance, without off-set, deduction or
prior demand. Tenant shall cause payments to be properly mailed or otherwise
delivered so as to be actually received by the party identified in 1.10 above on
or before the due date (and not merely deposited in the mail). If the Lease Term
commences or ends on a day other than the first or last day of a calendar month,
the rent for any fractional calendar month following the Commencement Date or
preceding the end of the Lease Term shall be prorated by days.
3.03 Late Charges. Tenant's failure to promptly pay sums due under this Lease
may cause Landlord to incur unanticipated costs. The exact amount of those costs
is impractical or extremely difficult to ascertain. The costs may include, but
are not limited to, processing and accounting charges and late charges which may
be imposed on Landlord by any ground Lease or deed of trust encumbering the
Demised Premises. Payments due to Landlord under this Lease are not an extension
of credit. Therefore, if any payment under the Lease is not actually received on
or before the due date (and not merely deposited in the mail), Landlord may, at
Landlord's option and to the extent allowed by applicable law, impose a Late
Charge on any late payments in an amount equal to one-half of one percent (0.5%)
of the amount of the past due payment (the "Late Charge") per day for each day
after the due date. until the past due amount in Good Funds is received by
Landlord, up to a maximum of two percent (2%) of the past due amount. A Late
Charge may be imposed only once on each past due payment. Any Late Charge will
be in addition to Landlord's other remedies for nonpayment of rent. If any check
tendered to Landlord by Tenant under this Lease is dishonored for any reason,
Tenant shall pay to the party receiving payments under this Lease a fee of
twenty-five dollars ($25.00), plus (at Landlord's option) a Late Charge as
provided above until good funds are received by Landlord. The parties agree that
any Late Charge and dishonored check fee represent a fair and reasonable
estimate of the costs Landlord will incur by reason of the late payment or
dishonored check. Payments received from Tenant shall be applied first to any
base rent, second to late charges, and last to other unpaid charges or
reimbursements due to Landlord. Notwithstanding the foregoing, Landlord will not
impose a Late Charge as to the first late payment in any calendar year, unless
Tenant fails to pay the late payment to Landlord within three (3) business days
after the delivery of a written notice from Landlord to Tenant demanding the
late payment be paid. However, Landlord may impose a Late Charge without advance
notice to Tenant on any subsequent late payment in the same calendar year.
3.04. Security Deposit. Upon execution of this Lease, Tenant shall deposit
with Landlord a cash Security Deposit in the amount stated in Section 1.08.
Landlord may apply all or part of the Security Deposit to any unpaid Rent or
other charges due from Tenant or to cure any other defaults of Tenant. If
Landlord uses any part of the Security Deposit, Tenant shall restore the
Security Deposit to its full amount within (10) days after Landlord's written
demand. Tenant's failure to restore the full amount of the Security Deposit
within the time specified shall be a default under this Lease. Interest at the
rate of four percent (4%) compounded annually shall
<PAGE>
accrue on the Security Deposit and shall become a part of the Security Deposit.
Landlord will not be required to keep the Security Deposit separate from its
other accounts and no trust relationship is created with respect to the Security
Deposit. Upon any termination of this Lease not resulting from Tenant's default,
and after Tenant has vacated the Property and cleaned and restored the Demised
Premises in the manner required by this Lease, Landlord shall refund the unused
portion of the Security Deposit to Tenant within thirty days after the
Termination Date or thirty days after Tenant fully complies with the conditions
of termination as required in Section 7.05, whichever is later.
3.05. Good Funds Payments. If, for any reason whatsoever, any two or more
payments by check from Tenant to Landlord for Rent are dishonored and returned
unpaid, thereafter Landlord may, at Landlords sole option, upon written notice
to Tenant. require that all future payments of Rent for the remaining term of
the Lease must be made by cash, certified check, cashier's check, or money order
("Good Funds") and that the delivery of Tenant's personal or corporate check
will no longer constitute payment of Rent under this Lease. Any acceptance by
Landlord of a payment for Rent by Tenant's personal or corporate check
thereafter shall not be construed as a waiver of Landlord's right to insist upon
payment by Good Funds as set forth herein.
ARTICLE FOUR: TAXES
4.01. Payment by Landlord. Landlord shall pay the real estate taxes on the
Demised Premises during the Lease Term.
4.02. Improvements by Tenant. If the real estate taxes levied against the
Demised Premises for the real estate tax year in which the Lease Term commences
are increased as a result of any alterations, additions or improvements made by
Tenant or by Landlord at the request of Tenant, Tenant shall pay to Landlord
upon demand the amount of the increase and continue to pay the increase during
the Lease Term. Landlord shall use reasonable efforts to obtain from the tax
assessor or assessors a written statement of the total amount of the increase.
4.03. Joint Assessment. If the real estate taxes are assessed against the
Demised Premises jointly with other property not constituting a part of the
Demised Premises, the real estate taxes applicable to the Demised Premises shall
be equal to the amount bearing the same proportion to the aggregate assessment
that the total square feet of building area in the Demised Premises bears to the
total square feet of building area included in the joint assessment.
4.04. Personal Property Taxes. Tenant shall pay all taxes assessed against
trade fixtures, furnishings, equipment, inventory, products, or any other
personal property belonging to Tenant. Tenant shall use reasonable efforts to
have Tenant's property taxed separately from the Demised Premises. If any of
Tenant's property is taxed with the Demised Premises, Tenant shall pay the taxes
for its property to Landlord within fifteen (15) days after Tenant receives a
written statement from the Landlord for the property taxes.
ARTICLE FIVE: INSURANCE AND INDEMNITY
5.01. Casualty Insurance. During the Lease Term, Landlord shall maintain
policies of insurance covering loss of or damage to the Demised Premises in an
amount or percentage of replacement value as Landlord deems reasonable in
relation to the age, location, type of construction and physical condition of
the Demised Premises and the availability of insurance at reasonable rates. The
policies shall provide protection against all perils included within the
classification of fire and extended coverage and any other perils which Landlord
deems necessary. Landlord may, at Landlords option, obtain insurance coverage
for Tenant's fixtures, equipment or building improvements installed by Tenant in
or on the Demised Premises. Tenant shall, at Tenant's expense, maintain
insurance on its fixtures, equipment and building improvements as Tenant deems
necessary to Protect Tenant's interest. Tenant shall not do or permit to be done
anything which invalidates any insurance policies. Any casualty insurance
carried by Landlord or Tenant shall be for the sole benefit of the party
carrying the insurance and under its sole control.
5.02. Increase in Premiums. Tenant shall not permit any operation or activity
to be conducted, or storage or use of any volatile or any other materials, on or
about the Demised Premises that would cause suspension or cancellation of any
fire and extended coverage insurance policy carried by Landlord, or increase the
premiums therefor, without the prior written consent of Landlord. If Tenant's
use and occupancy of the Demised Premises causes an increase in the premises for
any fire and extended coverage insurance policy carried by Landlord, Tenant
shall pay to Landlord, as additional rental, the amount of the increase within
ten days after demand and presentation by Landlord of written evidence of the
increase.
5.03 Liability Insurance. During the Lease Term, Tenant shall maintain a
commercial general liability policy of insurance, at Tenant's expense, insuring
Landlord against liability arising out of the ownership, use, occupancy, or
maintenance of the Demised Premises. The initial amounts of the insurance must
be at least: $1,000,000 for Each Occurrence, $2,000,000 General Aggregate per
policy year, $100,000 Property Damage for the Demised Premises, and $10,000
Medical Expense; plus a $5,000,000 commercial
<PAGE>
general liability umbrella; and shall be subject to periodic increases based
upon economic factors as Landlord may determine, in Landlord's discretion,
exercised in good faith. However, the amounts of the insurance shall not limit
Tenant's liability nor relieve Tenant of any obligation under this Lease. The
policies must contain cross-liability endorsements, if applicable, and must
insure Tenant's performance of the indemnity provisions of Section 5.04. The
policies must contain a provision which prohibits cancellation or modification
of the policy except upon thirty (30) days' prior written notice to Landlord.
Tenant may discharge Tenant's obligations under this Section by naming Landlord
as an additional insured under a comprehensive policy of commercial general
liability insurance maintained by Tenant and containing the coverage and
provisions described in this Section. Tenant shall deliver a copy of the policy
or certificate (or a renewal) to Landlord prior to the Commencement Date and
prior to the expiration of the policy during the Lease Term. If Tenant fails to
maintain the policy, Landlord may elect to maintain the insurance at Tenant's
expense. Tenant may, at Tenant's expense, maintain other liability insurance as
Tenant deems necessary.
5.04. Indemnity. Landlord shall not be liable to Tenant or to Tenant's
employees, agents, invitees or visitors, or to any other person, for any injury
to persons or damage to property on or about the Demised Premises or any
adjacent area owned by Landlord caused by the negligence or misconduct of
Tenant, Tenant's employees, subtenants, agents, licensees or concessionaires or
any other person entering the Demised Premises under express or implied
invitation of Tenant; or arising out of the use of the Demised Premises by
Tenant and the conduct of Tenants business, or arising out of any breach or
default by Tenant in the performance of Tenants obligations under this Lease;
and Tenant hereby agrees to indemnify and hold Landlord harmless from any loss,
expense or claims arising out of such damage or injury. Tenant shall not be
liable for any injury or damage caused by the negligence or misconduct of
Landlord, or Landlord's employees or agents, and Landlord agrees to indemnify
and hold Tenant harmless from any loss, expense or damage arising out of such
damage or injury.
5.05. Comparative Negligence. Tenant and Landlord hereby unconditionally and
irrevocably agree to indemnify, defend and hold each other and their officers,
agents, directors, subsidiaries, partners, employees, licensees and counsel
harmless, to the extent of each party's comparative negligence, if any, from and
against any and all loss, liability; demand, damage, judgment, suit, claim,
deficiency, interest, fee, charge, cost or expense (including, without
limitation, interest, court costs and penalties, reasonable attorneys fees and
disbursements and amounts paid in settlement, or liabilities resulting from any
change in federal, state or local law or regulation or interpretation of this
Lease) of whatever nature, on a comparative negligence basis, even when caused
in part by Landlord's or Tenant's negligence or the joint or concurring
negligence of Landlord, Tenant, and any other person or entity, which may result
or to which Landlord or Tenant and/or any of their officers, agents, directors,
employees, subsidiaries, partners, licensees and counsel may sustain, suffer,
incur or become subject to in connection with or arising in any way whatsoever
out of the leasing, operation, promotion, management; maintenance, repair, use
or occupation of the Demised Premises, or any other activity of whatever nature
in connection therewith, or arising out of or by reason of any investigation,
litigation or other proceedings brought or threatened, arising out of or based
upon the Leasing, operation, promotion, management, maintenance, repair, use or
occupancy of the Demised Premises, or any other activity on the Demised
Premises. This provision shall survive the expiration or termination of this
Lease.
5.06. Waiver of Subrogation. Each party to this Lease waives any and every
claim which arises or may arise in its favor against the other Party during the
term of this Lease or any renewal or extension of this Lease for any and all
loss of, or damage to, any of its property located within or upon, or
constituting a part of the Demised Premises, which loss or damage is covered by
valid and collectible fire and extended coverage insurance policies, to the
extent that such loss or damage is recoverable under such insurance policies.
These mutual waivers shall be in addition to, and not in limitation or
derogation of, any other waiver or release contained in this Lease with respect
to any loss of, or damage to, property of the parties. Inasmuch as these mutual
waivers will preclude the assignment of any aforesaid claim by way of
subrogation or otherwise to an insurance company (or any other person), each
party hereby agrees to give immediately to each insurance company (which has
issued to such party policies of fire and extended coverage insurance) written
notice of the terms of such mutual waivers, and to cause such policies to be
properly endorsed to prevent the invalidation of the insurance coverage by
reason of these waivers.
ARTICLE SIX: USE OF DEMISED PREMISES
6.01. Permitted Use. Tenant may use the Demised Premises only for the Permitted
Use stated in Section 1.09. Landlord acknowledges that the improvements to be
constructed on the Property and the Tenant Finish-Out to be constructed by
Landlord for Tenant conform to the city zoning ordinance with respect to the
permitted use, height setback requirements, minimum parking requirements,
coverage ratio of improvements to total area of land, and other matters which
may have a significant economic impact upon the Tenants intended use of the
Demised Premises. Tenant acknowledges that Tenant has or will independently
investigate and verify to Tenants satisfaction the extent of any limitations or
non-conforming uses of the Demised Premises. Tenant further acknowledges that
Tenant is not relying upon any warranties or representations of Landlord or the
Brokers who are participating in the negotiation of this Lease concerning the
Permitted Use of the Demised Premises, or with respect to any uses of the
improvements
<PAGE>
located on the Demised Premises. Tenant acknowledges that any Tenant Finish-out
work which Tenant performs will conform with all City ordinances, as discussed
above. In addition, Tenant acknowledges that Tenant's use will conform to City
zoning ordinances.
6.02. Compliance with Law. Tenant shall comply with all governmental laws,
ordinances and regulations applicable to the use of the Demised Premises, and
shall promptly comply with all governmental orders and directives for the
correction, prevention and abatement of nuisances and other activities in or
upon, or connected with the Demised Premises, all at Tenant's sole expense,
including any expense or cost resulting from the construction or installation of
fixtures and improvements or other accommodations for handicapped or disabled
persons required for compliance with governmental laws and regulations,
including but not limited to the [DELETED] and the Americans with Disabilities
Act (the "ADA"). To the extent any alterations to the approved plans and
specifications to the Demised Premises are required by the ADA or other
applicable laws or regulations, Landlord shall bear the expense of the
alterations. To the extent any alterations to areas of the Property outside the
Demised Premises are required by Title III of the ADA or other applicable laws
or regulations (for "path of travel" requirements or otherwise), Landlord shall
bear the expense of the alterations. Should Tenant initiate any work on the
Demised Premises in addition to the work agreed upon per plans and
specifications, all expenses associated therewith shall be at Tenant's expense,
including any ADA. *
6.03. Certificate of Occupancy. Landlord shall obtain a Certificate of
Occupancy from the municipality in which the Property is located if Landlord is
unable to obtain a Certificate of Occupancy, Tenant shall have the right to
terminate this Lease by written notice to Landlord if Landlord is unwilling or
unable to cure the defects which prevented the issuance of the Certificate of
Occupancy. Landlord may, but has no obligation to, cure any such defects,
including any repairs, installations, or replacements of any items which are not
presently existing on the Demised Premises, or which have not been expressly
agreed upon by Landlord in writing.
6.04. Signs. Without the prior written consent of Landlord, Tenant may not
place any signs, ornaments or other objects upon the Demised Premises or on the
Property, including but not limited to the roof or exterior of the building or
other improvements on the Property, or paint or otherwise decorate or deface the
exterior of the building. Any signs installed by Tenant must conform with
applicable laws, deed restrictions on the Property, and other applicable
requirements. Tenant must remove all signs, decorations and ornaments at the
expiration or termination of this Lease and must repair any damage and close any
holes caused by the removal. Subject to the above, Tenant shall have the right
to place signage on the building in accordance with City ordinances. Also, at
such time as Tenant has expanded into the entire Building 1, shown on Exhibit
"B", Tenant shall have the right to put Tenant's information on the monument. *
6.05. Utility Services. Tenant shall pay the cost of all utility services,
including but not limited to initial connection charges, all charges for gas,
water, sewerage, storm water disposal, communications and electricity used on
the Demised Premises, and for replacing all electric lights, lamps and tubes.
Should utilities for the building not be sub-metered to each Tenant, then Tenant
shall be responsible for its Prorata Share of said utilities, plus any extra
ordinary consumption specific to Tenant.
6.06. Landlord's Access. Landlord and Landlord's agents shall have the right
to, during normal business hours and upon reasonable advance notice, and without
unreasonably interfering with Tenant's business, enter the Demised Premises: (a)
to inspect the general condition and state of repair of the Demised Premises,
(b) to make repairs required or permitted under this Lease, (c) to show the
Demised Premises or the Property to any prospective tenant or purchaser, and (d)
for any other reasonable purpose. If Tenant changes the locks on the Demised
Premises, Tenant must provide Landlord with a copy of each separate key. During
the final one hundred fifty (150) days of the Lease Term, Landlord and
Landlord's agents may erect and maintain on or about the Demised Premises signs
advertising the Demised Premises for lease or for sale.
6.07. Possession. If Tenant pays the rent, properly maintains the Demised
Premises, and complies with all other terms of this Lease, Tenant may occupy and
enjoy the Demised Premises for the full Lease Term, subject to the provisions of
this Lease.
6.08. Exemptions from Liability. Landlord shall not be liable for any damage or
injury to the persons, business (or any loss of income), goods, inventory,
furnishings, fixtures, equipment, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Demised Premises, whether the damage or injury is caused by or results from: (a)
fire, steam, electricity, water, gas or wind; (b) the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances,
_______________________
* the roof on the building, in order not to damage the roof or void any
warranties. Landlord shall provide Tenant with information on the roof
contractor upon request from Tenant. Any roof problems or voiding of warranty
which arise out of Tenant's installation of equipment on the roof shall be at
Tenant's expense. Landlord understands that Tenant may desire to install
additional equipment on the roof as technology advances. Landlord shall not
unreasonable withhold approval for installation of additional equipment.
<PAGE>
plumbing, air conditioning or lighting fixtures or any other cause; (c)
conditions arising on or about the Demised Premises or upon other portions of
any budding of which the Demised Premises is a part, or from other sources or
places; or (d) any act or omission of any other tenant of any building on the
Property. Landlord shall not be liable for any damage or injury even though the
cause of or the means of repairing the damage or injury are not accessible to
Tenant. The provisions of this Section 6.08 shall not, however, exempt Landlord
from liability for Landlord's negligence [DELETED] or willful misconduct.
ARTICLE SEVEN: PROPERTY CONDITION, MAINTENANCE, REPAIRS AND ALTERATIONS
7.01. Property Condition. Except as disclosed in writing by Landlord to Tenant
contemporaneously with the execution of this Lease, to the best of Landlord's
actual knowledge the Demised Premises has no known latent structural defects,
construction defects of a material nature, and to the best of Landlord's actual
knowledge none of the improvements has been constructed with materials known to
be a potential health hazard to occupants of the Demised Premises. Tenant
acknowledges that neither the Principal Broker nor any Cooperating Broker has
made any warranty or representation to Tenant with respect to the condition of
the Demised Premises, and that Tenant is relying exclusively upon Tenant's own
investigations and the representations of Landlord, if any, with respect to the
condition of the Demised Premises. Landlord and Tenant agree to hold the Brokers
harmless of and from any and all damages, claim, costs and expenses of every
kind and character resulting from or related to Landlord's furnishing to the
Brokers any false, incorrect or inaccurate information with respect to the
Demised Premises, or Landlord's concealing any material information with respect
to the condition of the Demised Premises. Other than as expressly set forth in
this Lease, Landlord represents that on the Commencement Date (and for a period
of thirty (30) days thereafter) the building fixtures and equipment, plumbing
and plumbing fixtures, electrical and lighting system, any fire protection
sprinkler system, ventilating equipment, heating system, air conditioning
equipment, roof, skylights, doors, overhead doors, windows, dock levelers,
elevators, and the interior of the Demised Premises in general are in good
operating condition. Tenant shall have a period of thirty (30) days following
the Commencement Date in which to inspect the Demised Premises and to notify
Landlord in writing of any defects and maintenance, repairs or replacements
required to the above named equipment, fixtures, systems and interior. Within a
reasonable period of time after the timely receipt of any such written notice
from Tenant, Landlord shall, at Landlord's expense, correct the defects and
perform the maintenance, repairs and replacements.
7.02. [DELETED]
7.03. Maintenance and Repair. Except as otherwise provided in this Lease,
Landlord shall be under no obligation to perform any repair, maintenance or
management service in the Demised Premises or adjacent common areas. Tenant
shall be fully responsible, at its expense, for all repair, maintenance and
management services other than those which are expressly assumed by Landlord.
A. Landlord's Obligation.
(1) Subject to the provisions of Article Eight (Damage or
Destruction) and Article Nine (Condemnation) and except for damage caused by any
act or omission of Tenant, Landlord shall keep the roof, skylights, foundation,
structural components and the structural portions of exterior walls of the
Demised Premises in good order, condition and repair. Landlord shall not be
obligated except as otherwise provided in this lease, to maintain or repair
windows, doors, overhead doors, plate glass or the surfaces of walls. In
addition, Landlord shall not be obligated to make any repairs under this Section
until a reasonable time after receipt of written notice from Tenant of the need
for repairs. If any repairs are required to be made by Landlord, Tenant shall,
at Tenant's sole cost and expense, promptly remove Tenant's furnishings,
fixtures, inventory, equipment and other property, to the extent required to
enable Landlord to make repairs. Landlord's liability under this Section shall
be limited to the cost of those repairs or corrections. Tenant waives the
benefit of any present or future law which might give Tenant the right to repair
the Demised Premises at Landlord's expense or to terminate the Lease because of
the condition.
(2) All repair, maintenance, management and other services to be
performed by Landlord or Landlord's agents involve the exercise of professional
judgment by service providers, and Tenant expressly waives any claim for breach
of warranty arising from the performance of those services.
B. Tenant's Obligation.
(1) Subject to the provisions of Section 7.01, Section 7.03.A, Article
Eight (Damage or Destruction) and Article Nine (Condemnation), Landlord shall
at Tenant's expense keep an other portions of the Demised Premises in good
order, condition and repair, ordinary wear and tear excepted, including but not
limited to maintenance, repairs and all necessary replacements of the windows,
plate glass, doors, overhead doors, heating system, ventilating equipment, air
conditioning equipment, electrical and lighting
<PAGE>
systems, fire protection sprinkler system, dock levelers, elevators, interior
and exterior plumbing, the interior of the Demised Premises in general, pest
control and extermination, down spouts, gutters, paving, and including the
exterior of the Demised Premises. In addition, Tenant shall, at Tenant's
expense, repair any damage to any portion of the Property, including the roof,
skylights, foundation, or structural components and exterior walls of the
Demised Premises, caused by Tenant's gross negligence or willful misconduct. If
Tenant fails to maintain and repair the Property as required by this Section,
Landlord may, on ten (10) days' prior written notice, enter the Demised Premises
and perform the maintenance or repair on behalf of Tenant, except that no notice
is required in case of emergency, and Tenant shall reimburse Landlord
immediately upon demand for all costs incurred in performing the maintenance or
repair, plus a reasonable service charge. Use of the roof above the Premises is
reserved to Landlord, however, Tenant may install a small satellite dish on the
roof, subject to city ordinance and Landlord's prior approval. The installation
shall be accomplished in a workmanlike manner and in accordance with
specifications from the roof contractor who installed the roof on the building,
in order not to damage the roof or void any warranties. Landlord shall provide
Tenant with information on the roof contractor upon request from Tenant. Any
roof problems or voiding of warranty which arise out of Tenant's installation of
equipment on the roof shall be at Tenant's expense. Landlord understands that
Tenant may desire to install additional equipment on the roof as technology
advances. Landlord shall not unreasonably withhold approval for installation of
additional equipment.
(2) HVAC Service. Tenant shall, at Tenant's own cost and expense, enter
into a regularly scheduled preventative maintenance and service contract for all
refrigeration, heating, ventilating, and air conditioning systems and equipment
within the Demised Premises during the Lease Term. If Tenant fails to enter
into such a service contract acceptable to Landlord, Landlord may do so on
Tenant's behalf and Tenant agrees to pay Landlord the cost and expense thereof,
plus a reasonable service charge, regularly upon demand.
7.04. Alterations, Additions and Improvements. Tenant shall not create any
openings in the roof or exterior walls, or make any alterations, additions or
improvements to the Demised Premises without the prior written consent of
Landlord. Consent for non-structural alterations, additions or improvements
shall not be unreasonably withheld by Landlord. Tenant may erect or install
trade fixtures, shelves, bins, machinery, heating, ventilating and air
conditioning equipment and, provided that Tenant complies with all applicable
governmental laws, ordinances, codes, and regulations. At the expiration or
termination of this Lease, Tenant shall, subject to the restrictions of Section
7.05 below, have the right to remove items installed by Tenant, provided Tenant
is not in default at the time of the removal and provided further that Tenant
shall, at the time of removal of the items, repair in a good and workmanlike
manner any damage caused by the installation or removal. Tenant shall pay for
all costs incurred or arising out of alterations, additions or improvements in
or to the Demised Premises and shall not permit any mechanic's or materialman's
lien to be filed against the Demised Premises or the Property. Upon request by
Landlord, Tenant shall deliver to Landlord proof of payment reasonably
satisfactory to Landlord of all costs incurred or arising out of any
alterations, additions or improvements.
7.05. Condition upon Termination. Upon the expiration or termination of this
Lease, Tenant shall surrender the Demised Premises to Landlord broom clean and
in the same condition as received, except for ordinary wear and tear which
Tenant is not otherwise obligated to remedy under any provision of this Lease.
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Property Condition) or Article Eight (Damage or
Destruction). In addition, Landlord may require Tenant to remove any
alterations, additions or improvements (whether or not made with Landlord's
consent) prior to the expiration or termination of this Lease and to restore the
Demised Premises to its prior condition, an at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or termination of this Lease unless listed as personal
property and a list is provided to Landlord with a description and other
identification describing the property. In no event, however, shall Tenant
remove any of the following materials or equipment without Landlord's prior
written consent: (i) electrical wiring or power panels; (ii) lighting or
lighting fixtures; (iii) wall coverings, drapes, blinds or other window
coverings; (iv) carpets or other floor coverings; (v) heating, ventilating, or
air conditioning equipment; (vi) fencing or security gates; or (vii) any other
fixtures, equipment or items which, if removed, would affect the operation or
the appearance of the Property.
ARTICLE EIGHT: DAMAGE OR DESTRUCTION
8.01. Notice. If any buildings or other improvements situated on the Property
are damaged or destroyed by fire, flood, windstorm, tornado or other casualty,
Tenant shall immediately give written notice of the damage or destruction to
Landlord.
8.02. Partial Damage. If the building or other improvements situated on the
Demised Premises are damaged by fire, tornado, or other casually but not to such
an extent that rebuilding or repairs cannot reasonably be completed within one
hundred eighty (180) days from the date Landlord receives written notification
by Tenant of the occurrence of the damage, this Lease shall not terminate, but
Landlord shall proceed with reasonable diligence to rebuild or repair the
building and other improvements on the Demised Premises (other than leasehold
improvements made by Tenant or any assignee, subtenant or other occupant of the
Demised Premises) to substantially the condition in which they existed prior to
the damage. Within thirty (30) days after receipt of notice by Tenant, Landlord
shall obtain from a third party written verification of the damage and the time
required to repair or rebuild, and provide Tenant with said information. If the
casualty occurs during the final eighteen (18) months of the Lease Term,
Landlord shall not be required to rebuild or repair the damage unless Tenant
exercises Tenant's renewal option (if any) within fifteen (15) days after the
date of receipt by Landlord of the notification of the occurrence of the damage.
If Tenant does not exercise its renewal option, or if there is no renewal option
contained in this Lease, Landlord may, at Landlord's option, terminate this
Lease by promptly delivering a written termination notice to Tenant, in which
event the Rent shall be abated for the unexpired
<PAGE>
portion of the Lease Term, effective from the date of receipt by Landlord of the
written notification of the damage. To the extent the Demised Premises cannot be
occupied (in whole or in part) following the casualty, the Rent payable under
this Lease during the period in which the Demised Premises cannot be fully
occupied shall be adjusted equitably.
8.03. Substantial or Total Destruction. If the building or other improvements
situated on the Demised Premises are substantially or totally destroyed by fire,
tornado, or other casualty, or so damaged that rebuilding or repairs cannot
reasonably be completed within one hundred twenty (120) days from the date
Landlord receives written notification by Tenant of the occurrence of the
damage, either Landlord or Tenant may terminate this Lease by promptly
delivering a written termination notice to the other party, in which event the
monthly installments of Rent shall be abated for the unexpired portion of the
Lease Term, effective from the date of the damage or destruction. If neither
party promptly terminates this Lease, Landlord shall proceed with reasonable
diligence to rebuild and repair the building and other improvements (except that
Tenant shall rebuild and repair Tenant's fixtures and improvements in the
Demised Premises). To the extent the Demised Premises cannot be occupied (in
whole or in part) following the casualty, the Rent payable under this Lease
during the period in which the Demised Premises cannot be fully occupied shall
be adjusted equitably.
ARTICLE NINE: CONDEMNATION
If, during the Lease Term or any extension thereof, all or a substantial part of
the Demised Premises are taken for any public or quasi-public use under any
governmental law, ordinance or regulation or by right of eminent domain, or are
conveyed to the condemning authority under threat of condemnation, this Lease
shall terminate and the monthly installments of Rent shall be abated during the
unexpired portion of the Lease Term, effective from the date of the taking. If
less than a substantial part of the Demised Premises is taken for public or
quasi-public use under any governmental law, ordinance or regulation, or by
right of eminent domain, or is conveyed to the condemning authority under threat
of condemnation, Landlord, at its option, may by written notice terminate this
Lease. If Landlord does not terminate this Lease, Landlord shall promptly, at
Landlord's expense, restore and reconstruct the buildings and improvements
(other than leasehold improvements made by Tenant or any assignee, subtenant or
other occupant of the Demised Premises) situated on the Demised Premises in
order to make the same reasonably tenantable and suitable for the use for which
the Demised Premises is leased as defined in Section 6.01. The monthly
installments of Rent payable under this Lease during the unexpired portion of
the Lease Term shall be adjusted equitably. Landlord and Tenant shall each be
entitled to receive and retain such separate awards and portions of lump sum
awards as- may be allocated to their respective interests in any condemnation
proceeding. The termination of this Lease shall not affect the rights of the
parties to such awards.
ARTICLE TEN: ASSIGNMENT AND SUBLETTING
Tenant shall not, without the prior written consent of Landlord, which shall not
be unreasonably withheld, assign this Lease or sublet the Demised Premises or
any portion thereof. Any assignment or subletting shall be expressly subject to
all terms and provisions of this Lease, including the provisions of Section 6.01
pertaining to the use of the Demised Premises. In the event of any assignment or
subletting, Tenant shall remain fully liable for the fun performance of all
Tenant's obligations under this Lease. Tenant shall not assign its rights under
this Lease or sublet the Demised Premises without first obtaining a written
agreement from the assignee or sublessee whereby the assignee or sublessee
agrees to assume the obligations of Tenant under this Lease and to be bound by
the terms of this Lease. If an event of default occurs while the Demised
Premises is assigned or sublet, Landlord may, at Landlord's option, in addition
to any other remedies provided in this Lease or by law, collect directly from
the assignee or subtenant all rents becoming due under the terms of the
assignment or subletting and apply the rent against any sums due to Landlord
under this Lease. No direct collection by Landlord from any assignee or
subtenant will release Tenant from Tenant's obligations under this Lease.
Notwithstanding the above, Tenant shall have the right to sublet or assign all
or any part of the Demised Premises, without Landlord's prior consent, to any
affiliate or subsidiary of Tenant. Tenant shall give Landlord prior written
notice of such subletting or assignment, with pertinent information relating
thereto.
ARTICLE ELEVEN: DEFAULT AND REMEDIES
11.01. Default Each of the following events is an event of default under this
Lease:
A. Failure of Tenant to pay any installment of the Rent or other sum payable
to Landlord under this Lease on the date that it is due and the continuance of
that failure for a period of five (5) business days after Landlord delivers
written notice of the failure to Tenant. This clause shall not be construed to
permit or allow a delay in paying Rent beyond the due date and shall not affect
Landlord's right to impose a Late Charge as permitted in Section 3.03.
B. Failure of Tenant to comply with any term, condition or covenant of this
Lease, other than the payment of Rent or other sum of money, and the continuance
of that failure for a period of thirty (30) days after Landlord delivers written
notice of the failure to Tenant;
<PAGE>
C. Failure of Tenant or any guarantor of Tenant's obligations under this
Lease to pay its debts as they become due or an admission in writing of
inability to pay its debts, or the making of a general assignment for the
benefit of creditors;
D. The commencement by Tenant or any guarantor of Tenant's obligations;
under this Lease of any case, proceeding or other action seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or its
debts under any law relating to bankruptcy, insolvency, reorganization or relief
of debtors, or seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its property;
E. The commencement of any case, proceeding or other action against Tenant
or any guarantor of Tenant's obligations under this Lease seeking to have an
order for relief entered against it as debtor, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or its
debts under any law relating to bankruptcy, insolvency, reorganization or relief
of debtors, or seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its property, and
Tenant or any guarantor: (i) fails to obtain a dismissal of such case,
proceeding, or other action within sixty (60) days of its commencement; or (ii)
converts the case from one chapter of the Federal Bankruptcy Code to another
chapter; or (iii) is the subject of an order of relief which is not fully stayed
within seven (7) business days after the entry thereof; and
F. Abandonment by Tenant of any substantial portion of the Demised Premises
or cessation of the use of the Demised Premises for the purpose leased.
11.02. Remedies. Upon the occurrence of any of the events of default listed in
Section 11.01, Landlord shall have the option to pursue any one or more of the
following remedies without any prior notice or demand.
A. Terminate this Lease, in which event Tenant shall immediately surrender
the Demised Premises to Landlord. If Tenant fails to so surrender the Demised
Premises, Landlord may, without prejudice to any other remedy which it may have
for possession of the Demised Premises or Rent in arrears, enter upon and take
possession of the Demised Premises and expel or remove Tenant and any other
person who may be occupying the Demised Premises or any part thereof, by force
if necessary, without being liable for prosecution or any claim for damages.
Tenant shall pay to Landlord on demand the amount of all loss and damage which
Landlord may suffer by reason of the termination, whether through inability to
re-let the Demised Premises on satisfactory terms or otherwise.
B. Enter upon and take possession of the Demised Premises, by force if
necessary, without terminating this Lease and without being liable for
prosecution or for any claim for damages, and expel or remove Tenant and any
other person who may be occupying the Demised Premises or any part thereof.
Landlord may re- let the Demised Premises and receive the rent therefor. Tenant
agrees to pay to Landlord monthly or on demand from time to time any deficiency
that may arise by reason of any such re-letting. In determining the amount of
the deficiency, the professional service fees, attorneys' fees, court costs,
remodeling expenses and other costs of re-letting shall be subtracted from the
amount of rent received under the re-letting.
C. Enter upon the Demised Premises, by force if necessary, without
terminating this Lease and without being liable for prosecution or for any claim
for damages, and do whatever Tenant is obligated to do under the terms of this
Lease. Tenant agrees to pay Landlord on demand for expenses which Landlord may
incur in thus effecting compliance with Tenant's obligations under this Lease,
together with interest thereon at the rate of twelve percent (12%) per annum
from the date expended until paid. Landlord shall not be liable for any damages
resulting to Tenant from such action, whether caused by negligence of Landlord
or otherwise.
D. Accelerate and declare the Rent for the entire Lease Term, and all other
amounts due under this Lease, at once due and payable, and proceed by
attachment, suit or otherwise, to collect all amounts in the same manner as if
all such amounts due or to become due during the entire Lease Term were payable
in advance by the terms of this Lease, and neither the enforcement or collection
by Landlord of such amounts nor the payment by Tenant of such amounts shall
constitute a waiver by Landlord of any breach, existing or in the future, of any
of the terms or provisions of this Lease by Tenant or a waiver of any rights or
remedies which the Landlord may have with respect to any such breach.
E. In addition to the foregoing remedies, Landlord shall have the right to
change or modify the locks on the Demised Premises in the event Tenant fails to
pay the monthly installment of Rent when due. Landlord shall not be obligated to
provide another key to Tenant or allow Tenant to regain entry to the Demised
Premises unless and until Tenant pays Landlord all Rent which is delinquent.
Tenant agrees that Landlord shall not be liable for any damages resulting to the
Tenant from the lockout. At such time that Landlord changes or modifies the
lock, Landlord shall post a "Notice of Change of Locks" on the front of the
Demised Premises. Such Notice shall state that:
(1) Tenant's monthly installment of Rent is delinquent, and therefore,
under authority of Section 11.02.E of Tenant's Lease,
<PAGE>
the Landlord has exercised its contractual right to change or modify Tenant's
door locks;
(2) The Notice has been posted on the Tenant's front door by a
representative of Landlord and Tenant should make arrangements with the
representative to pay the delinquent installments of Rent when Tenant picks up
the key; and
(3) The failure of Tenant to comply with the provisions of the Lease and
the Notice and/or tampering with or changing the door lock(s) by Tenant may
subject Tenant to legal liability.
F. No re-entry or taking possession of the Demised Premises by Landlord
shall be construed as an election to terminate this Lease, unless a written
notice of that intention is given to Tenant. Notwithstanding any such re-letting
or re-entry or taking possession, Landlord may, at any time thereafter, elect to
terminate this Lease for a previous default. Pursuit of any of the foregoing
remedies shall not preclude pursuit of any other remedies provided by law, nor
shall pursuit of any remedy provided in this Lease constitute a forfeiture or
waiver of any monthly installment of Rent due to Landlord under this Lease or of
any damages accruing to Landlord by reason of the violation of any of the terms,
provisions and covenants contained in this Lease. Failure of Landlord to declare
any default immediately upon its occurrence, or failure to enforce one or more
of Landlord's remedies, or forbearance by Landlord to enforce one or more of
Landlord's remedies upon an event of default shall not be deemed or construed to
constitute a waiver of default or waiver of any violation or breach of the terms
of this Lease. Pursuit of any one of the above remedies shall not preclude
pursuit by Landlord of any of the other remedies provided in this Lease. The
loss or damage that Landlord may suffer by reason of termination of this Lease
or the deficiency from any re-letting as provided for above shall include the
expense of repossession and any repairs or remodeling undertaken by Landlord
following possession. If Landlord terminates this Lease at any time for any
default, in addition to other Landlord's remedies, Landlord may recover from
Tenant all damages Landlord may incur by reason of the default, including the
cost of recovering the Demised Premises and the Rent then remaining unpaid.
11.03. Notice of Default. Tenant shall give written notice of any failure by
Landlord to perform any of Landlord's obligations under this Lease to Landlord
and to any ground Lessor, mortgagee or beneficiary under any deed of trust
encumbering the Demised Premises whose name and address have been furnished to
Tenant in writing. Landlord shall not be in default under this Lease unless
Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure the
nonperformance within thirty (30) days after receipt of Tenant's notice.
However, if the nonperformance reasonably requires more than thirty (30) days to
cure, Landlord shall not be in default if the cure is commenced within he 30-day
period and is thereafter diligently pursued to completion.
11.04. Limitation of Landlord's Liability. As used in this Lease, the term
"Landlord" means only the current owner or owners of the fee title to the
Demised Premises or the leasehold estate under a ground Lease of the Demised
Premises at the time in question. Each Landlord is obligated to perform the
obligations of Landlord under this Lease only during the time such Landlord owns
such interest or title. Any Landlord who transfers its title or interest is
relieved of all liability with respect to the obligations of Landlord under this
Lease accruing on or after the date of transfer, and Tenant agrees to recognize
the transferee as Landlord under this Lease. However, each Landlord shall
deliver to its transferee the Security Deposit held by Landlord if such Security
Deposit has not then been applied under the terms of this Lease.
ARTICLE TWELVE: LANDLORD'S CONTRACTUAL LIEN
[DELETED]
ARTICLE THIRTEEN: PROTECTION OF LENDERS
13.01. Subordination and Attornment. Landlord shall have the right to
subordinate this Lease to any future ground Lease, deed of trust or mortgage
encumbering the Demised Premises, and advances made on the security thereof and
any renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Landlord's right to obtain such a subordination is
subject to Landlord's providing Tenant with a written Subordination. Non-
disturbance and Attornment Agreement from the ground lessor, beneficiary or
mortgagee wherein Tenant's right to peaceable possession of the Demised Premises
during thc Lease Term shall not be disturbed if Tenant pays the Rent and
performs all of Tenant's obligations under this Lease and is not otherwise in
default in which case Tenant shall attorn to the transferee of or successor to
Landlord's interest in the Demised Premises and recognize the transferee or
successor as Landlord under this Lease. If any ground lessor, beneficiary or
mortgagee elects to have this Lease superior to the lien of its ground lease,
deed of trust or mortgage and give Tenant written notice thereof, this Lease
shall be deemed superior to the ground lease, deed of trust or mortgage whether
this Lease is dated prior or subsequent to the date of the ground lease, deed of
trust or mortgage or the date of recording thereof. Tenant's rights under this
Lease, unless specifically modified at the time this Lease is executed, are
subordinated to any existing ground lease, deed of trust or mortgage encumbering
the Demised Premises.
<PAGE>
13.02. Signing of Documents. Tenant shall sign and deliver any instruments or
documents necessary or appropriate to evidence any attornment or subordination
or any agreement to attorn or subordinate. If Tenant fails to do so within ten
(10) days after written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver the attornment or
subordination document or agreement.
13.03. Estoppel Certificates.
A. Upon Landlord's written request, Tenant shall execute and deliver to
Landlord a written statement certifying: (1) whether Tenant is an assignee or
subtenant; (2) the expiration date of the Lease; (3) the number of renewal
options under the lease and the total period of time covered by the renewal
option(s); (4) that none of the terms or provisions of the Lease have been
changed since the original execution of the Lease, except as shown on attached
amendments or modifications; (5) that no default by Landlord exists under the
terms of the Lease (or if Landlord is claimed to be in default, stating why);
(6) that the Tenant has no claim against the landlord under the Lease and has no
defense or right of offset against collection of rent or other charges accruing
under the Lease; (7) the amount and date of the last payment of Rent; (8) the
amount of any security deposits and other deposits, if any; and (9) the identity
and address of any guarantor of the lease. Tenant shall deliver the statement
to Landlord within ten (10) days after Landlord's request. Landlord may forward
any such statement to any prospective purchaser or lender of the Demised
Premises. The Purchaser or lender may rely conclusively upon the statement as
true and correct.
B. If Tenant does not deliver the written statement to Landlord within the
ten (10) day period, Landlord, and any prospective purchaser or lender, may
conclusively presume and rely upon the following facts: (1) that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; (2) that this Lease has not been canceled or terminated except as
otherwise represented by Landlord; (3) that not more than one monthly
installment of Base Rent and other charges have been paid in advance; (4) there
are no claims against Landlord nor any defenses or rights of offset against
collection of Rent or other charges; and (5) that Landlord is not in default
under this Lease. In such event, Tenant shall be estopped from denying the
truth of the presumed facts.
13.04. Tenant's Financial Condition. Within ten (10) days after written
request from Landlord, Tenant shall deliver to Landlord Tenant's most recent
financial statements prepared as required by Tenant's corporate structure, as
are reasonably required by Landlord to verify the net worth of tenant, or any
assignee, subtenant, or guarantor of Tenant.* In addition, Tenant shall deliver
to any lender designated by Landlord any financial statements required by the
lender to facilitate the financing or refinancing of the Demised Premises.
Tenant represents and warrants to landlord that each financial statement is a
true, complete, and accurate statement as of the date of the statement. All
financial statements shall be confidential and shall be used only for the
purposes set forth in this Lease.
ARTICLE FOURTEEN: ENVIRONMENTAL REPRESENTATIONS AND INDEMNITY
14.01. Tenant's Compliance with Environmental Laws. Tenant at Tenants expense,
shall comply with all laws, rules, orders, ordinances, directions, regulations
and requirements of Federal, State, county and municipal authorities pertaining
to Tenant's use of the Property and with the recorded covenants, conditions and
restrictions, regardless of when they become effective, including, without
limitation, all applicable Federal, State and local laws, regulations or
ordinances pertaining to air and water quality, Hazardous Materials (as defined
in Section 14.05), waste disposal, air emissions and other environmental
matters, all zoning and other land use matters, and with any direction of any
public officer or officers, pursuant to law, which impose any duty upon Landlord
or Tenant with respect to the use or occupancy of the Property.
14.02. Tenant's Indemnification. Tenant shall not cause or permit any
Hazardous Materials to be brought upon, kept or used in or about the Property by
Tenant, its agents, employees, contractors or invitees without the prior written
consent of Landlord. If Tenant breaches the obligations stated in the preceding
Section or sentence, or if the presence of Hazardous Materials on the Property
caused or permitted by Tenant results in contamination of the Property or any
other property, or if contamination of the Property or any other property by
Hazardous Materials otherwise occurs for which Tenant is legally liable to
Landlord for damage resulting therefrom, then Tenant shall indemnify, defend and
hold Landlord harmless from any and an claims, judgments, damages, penalties,
fines, costs, liabilities or losses (including, without limitation, diminution
in value of the Property, damages for the loss or restriction on use of
_________________________
* Said financial statements shall not be required to be dated more recently than
the calendar quarter prior to Landlord's request, but shall not be dated later
than a year prior to said request. Landlord shall keep Tenant's financial
statements confidential and shall not disclose Tenant's financial statements to
third parties without Tenant's written consent, which consent shall not be
unreasonably withheld. Landlord may disclose Tenant's financial statements to
those individuals within Landlord's organization and financial institutions
involved with the Demised Premises, who examine Tenant's credit worthiness.
<PAGE>
rentable or unusable space or of any amenity or appurtenance of the Property,
damages arising from any adverse impact on marketing of building space or land
area, sums paid in settlement of claims, reasonable attorneys' fees, court
costs, consultant fees and expert fees) which arise during or after the Lease
Term as a result of the contamination. This indemnification of Landlord by
Tenant includes, without limitation, costs incurred in connection with any
investigation of site conditions or any clean-up, remedial work, removal or
restoration work required by any Federal, State or local government agency
because of Hazardous Materials present in the soil or ground water on or under
the Property. Without limiting the foregoing, if the presence of any Hazardous
Materials on the Property (or any other property) caused or permitted by Tenant
results in any contamination of the Property, Tenant shall promptly take all
actions at Tenant's sole expense as are necessary to return the Property to the
condition existing prior to the introduction of any such Hazardous Materials,
provided that Landlord's approval of such actions is first obtained. The
foregoing indemnity shall survive the expiration or termination of this Lease.
14.03. Landlord's Representations and Warranties. Landlord represents and
warrants, to the best of Landlord's actual knowledge, that: (i) any handling,
transportation, storage, treatment or usage of Hazardous Materials that has
occurred on the Property to date has been in compliance with all applicable
Federal, State, and local laws, regulations and ordinances; and (ii) no leak,
spin, release, discharge, emission or disposal of Hazardous Materials has
occurred on the Property to date and that the soil or groundwater on or under
the Property is free of Hazardous Materials as of the Commencement Date, unless
expressly disclosed by Landlord to Tenant in writing
14.04. Landlord's Indemnification. Landlord hereby indemnifies, defends and
holds Tenant harmless from any claim, judgments, damages, penalties, fines,
costs, liabilities, (including sums paid in settlements of claims) or loss,
including, without limitation, attorneys' fees, court costs, consultant fees,
and expert fees, which arise during or after the term of this Lease from or in
connection with the presence or suspected presence of Hazardous Materials in the
soil or groundwater on or under the Property, unless the Hazardous Material is
released by Tenant or is present solely as a result of the negligence or willful
conduct of Tenant. Without limiting the generality of the foregoing, the
indemnification provided by this Section 14.04 shall specifically cover costs
incurred in connection with any investigation of site conditions or any clean-
up, remedial work, removal or restoration work required by any Federal, State or
local governmental authority.
14.05. Definition. For purposes of this Lease, the term "Hazardous Materials"
means any one or more pollutant, toxic substance, hazardous waste, hazardous
material, hazardous substance, solvent or oil as defined in or pursuant to the
Resource Conservation and Recovery Act, as amended, the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the Federal
Clean Water Act, as amended, or any other Federal, State or local environmental
law, regulation, ordinance, or rule, whether existing as of the date of this
Lease or subsequently enacted.
14.06. Survival. The representations and indemnities contained in " Article 14
shall survive the expiration or termination of this Lease.
ARTICLE FIFTEEN: PROFESSIONAL SERVICE FEES
15.01. Amount and Manner of Payment. Professional service fees due to the
Principal Broker and Co-operating Broker shall be calculated and paid [DELETED]
pursuant to separate agreement between Landlord and Brokers.
A. [DELETED]
B. [DELETED]
15.02. Other Brokers. Both Landlord and Tenant represent and warrant to the
other party that they have had no dealings with any person, firm or agent in the
negotiation of this Lease other than the Broker(s) named in this Lease, and no
other broker, agent, person, firm or entity other than the Broker(s) is entitled
to any commission or fee in connection with this Lease.
15.03. [DELETED]
15.04. [DELETED]
15.05. Landlord's Liability. If this Lease is negotiated by Principal Broker in
cooperation with another broker, Landlord shall be liable for payment of all
Professional Service Fees to Principal Broker only, whereupon Landlord shall be
protected from any claims from a Cooperating Broker. The Principal Broker may
pay a portion of the Fee to any Cooperating Broker pursuant to a separate
agreement between the Brokers.
<PAGE>
15.06. [DELETED]
15.07. [DELETED]
15.08. [DELETED]
15.09. Intermediary Relationship.
[DELETED]
ARTICLE SIXTEEN: MISCELLANEOUS
16.01. Disclosure. Landlord and Tenant understand that a real estate broker is
qualified to advise on matters concerning real estate and is not expert in
matters of law, tax, financing, surveying' hazardous materials, engineering,
construction, safety, zoning, land planning, architecture or the ADA. The
Brokers hereby advise Tenant to seek expert assistance on such matters. Brokers
do not investigate a property's compliance with building codes, governmental
ordinances, statutes and laws that relate to the use or condition of a property
and its construction, or that relate to its acquisition. If Brokers provide
names of consultants or sources for advice or assistance, Tenant acknowledges
that the Brokers do not warrant the services of the advisors or their products
and cannot warrant the suitability of property to be acquired or leased.
Furthermore, the Brokers do not warrant that the Landlord will disclose any or
all property defects, although the Brokers will disclose to Tenant any actual
knowledge possessed by Brokers regarding defects of the Demised Premises and the
Property. In this regard, Tenant agrees to make all necessary and appropriate
inquiries and to use diligence in investigating the Demised Premises and the
Property before consummating this Lease. Landlord and Tenant hereby agree to
indemnify, defend, and hold the Brokers harmless of and from any and all
liabilities, claim, debts, damages, costs, or expenses, including but not
limited to reasonable attorneys' fees and court costs, related to or arising out
of or in any way connected to representations concerning matters properly the
subject of advice by experts. In addition, to the extent permitted by applicable
law, the Brokers' liability for errors or omissions, negligence, or otherwise,
is limited to the return of the Fee, if any, paid to the Brokers pursuant to
this Lease.
16.02. Force Majeure. If performance by Landlord of any term condition or
covenant in this Lease is delayed or prevented by any Act of God, strike,
lockout, shortage of material or labor, restriction by any governmental
authority, civil riot, flood, or any other cause not within the control of
Landlord, the period for performance of the term, condition or covenant shall be
extended for a period equal to the period Landlord is so delayed or prevented.
<PAGE>
16.03. Interpretation. The captions of the Articles or Sections of this Lease
are to assist the parties in reading this Lease and are not_a part of the terms
or provisions of this Lease. Tenant shall be responsible for the conduct, acts
and omissions of Tenant's agents, employees, customers, contractors, invitees,
agents, successors or others using the Demised Premises with Tenant's expressed
or implied permission. Whenever required by the context of this Lease, the
singular shall! include the plural and the plural shall include the singular,
and die masculine, feminine and neuter genders shall each include the other.
16:04. Waivers. All waivers to provisions of this Lease must be in writing and
signed by the waiving party. Landlord's delay or failure to enforce any
provisions of this Lease or its acceptance of late installments of Rent shall
not be a waiver and shall not prevent Landlord from enforcing that provision or
any other provision of this Lease in the future. No statement on a payment check
from Tenant or in a letter accompanying a payment check shall be binding on
Landlord. Landlord may, with or without notice to Tenant, negotiate, cash, or
endorse the check without being bound to the conditions of any such statement.
16.05. Severabi1ity. A determination by a court of competent jurisdiction that
any provision of this Lease is invalid or unenforceable shall not cancel or
invalidate the remainder of that provision or this Lease, which shall remain in
fill force and effect.
16.06. Joint and Several Liability. All parties signing this Lease as Tenant
shall be jointly and severally liable for all obligations of Tenant.
16.07. Amendments or Modifications. This Lease is the only agreement between
the parties pertaining to the lease of the Demised Premises and no other
agreements are effective unless made apart of this Lease. All amendments to this
Lease must be in writing and signed by all parties. Any other attempted
amendment shall be void.
16.08. Notices. All notices and other communications required or permitted
under this Lease must be in writing and shall be deemed delivered, whether
actually received or not, on the earlier of (i) actual receipt if delivered in
person or by messenger with evidence of delivery; or (ii) receipt of an
electronic facsimile transmission ("Fax") with confirmation of delivery; or (1)
upon deposit in the United States Mail as required below. Notices may be
transmitted by Fax to the Fax telephone numbers specified in Article One on the
first page of this Lease, if any. Notices delivered by mail must be deposited in
the U.S. Postal Service, first class postage prepaid, and properly addressed to
the intended recipient as set forth in Article One. After possession of the
Demised Premises by Tenant, Tenant's address for notice purposes will be the
address of the Demised Premises unless Tenant notifies Landlord in writing of a
different address to be used for that purpose. Any party may change its address
for notice by delivering written notice of its new address to an other parties
in the manner set forth above. Copies of all notices should also be delivered to
the Principal Broker, but failure to notify the Principal Broker will not cause
an otherwise properly delivered notice to be ineffective.
16.09. Attorneys' Fees. If on account of any breach or default by any party to
this Lease in its obligations to any other party to this Lease (including bid
not limited to the Principal Broker), it becomes necessary for a party to employ
an attorney to enforce or defend any of is rights or remedies under this Lease,
the non-prevailing party agrees to pay the prevailing party its reasonable
attorneys' fees and court costs, if any, whether or not suit is instituted in
connection with the enforcement or defense.
16.10. Venue. All obligations under this Lease, including but not limited to the
payment of Fees to the Principal Broker, shall be performed and payable in the
county in which the Property is located. The laws of the State of Colorado shall
govern this Lease.
16.11. Survival. An obligations of any party to this Lease which are not
fulfilled at the expiation or the termination of this Lease shall survive such
expiration or termination as continuing obligations of the party.
16.12. Binding Effect. This Lease shall inure to the benefit of, and be
binding upon, each of the parties to this Lease and their respective heirs,
representatives, successors and assigns. However, Landlord shall not have any
obligation to Tenant's successors or assigns unless the rights or interests of
the successors or assigns are acquired in accordance with the terms of this
Lease.
16.13. Consult an Attorney. This Lease is an enforceable, legally binding
agreement. Read it carefully. The brokers involved in the negotiation of this
Lease cannot give you legal advice. The parties to this Lease acknowledge that
they have been advised by the Brokers to have this Lease reviewed by competent
legal counsel of their choice before signing this Lease. By executing this
Lease, Landlord and Tenant each agree to the provisions, terms, covenants and
conditions contained in this Lease.
16.14. Offer. The execution of this Lease by the first party to do so
constitutes an offer to lease the Demised Premises. Unless within the number of
days stated in Section 1. 14 above after the date of its execution by the first
party to do so, this Lease is signed by the other party and a fully executed
copy is delivered to the first party, such offer to lease shall be automatically
withdrawn and terminated.
<PAGE>
ARTICLE SEVENTEEN: ADDITIONAL PROVISIONS
17.01. EARLY TERMINATION OPTION:
(A) Notwithstanding anything else contained herein, Tenant shall have the
right to terminate this lease at the end of the 84th month of the lease term. If
Tenant elects to terminate the lease early, Tenant shall give Landlord 180 days
prior written notice of said election to terminate. If Tenant does not notify
Landlord of termination as required above, then this lease shall run the full
ten (10) year term.
(B) Should Tenant exercise the Early Termination Option, Tenant shall pay a
penalty to Landlord with the payment of rent for the 84th month of the lease
term. Said penalty to include the following: (1) The balance of the Tenant
Occupancy Expense not previously amortized. The "Tenant Occupancy Expense" shall
include but not be limited to: physical Improvements, space planning, and design
fees; (2) Commission paid to brokers applicable to the unexpired portion of the
lease term; (3) six (6) months of base rent (months 85 thru 90 per the Rent
Schedule); and (4) Six (6) months of operating expenses estimated by Landlord
(based upon previous current activity).
(C) Should Tenant exercise the Early Termination Option, but enter Into a
binding agreement with Landlord to design and build a new facility, the six (6)
month rent and operating expense portion of the option penalty shall be waived.
17.02. PARKING:
Tenant shall be allocated 175 parking stalls (based upon the 25,000 square
footage of Demised Premises). If available, at Landlord's discretion,
Landlord will deliver additional' parking stalls on the site for Tenant's use.
17.03 GENERATOR:
Tenant shall have the right to install an enclosed backup generator on the site
outside the building. Landlord reserves the right to approve the site and
configuration of said generator/enclosure prior to construction and/or
installation. Tenant shall not be required to pay additional rent for the space
which it takes for this purpose.
LANDLORD TENANT
CONNELL DEVELOPMENT CO. CHEAP TICKETS, INC.
- ------------------------------------------------------------------------------
By [Signature]: /s/ Thomas H. Stewart By [Signature]: /s/ Mike Hartley
---------------------------- -----------------
Name: Thomas H. Stewart Name: Mike Hartley
----------------- -----------------------
Title: Vice President Title: President and CEO
----------------- ----------------------
Date of Execution: 12/22/98 Date of Execution: 12/17/98
------------------------- ------------
PRINCIPAL BROKER COOPERATING BROKER
<PAGE>
BACH COMMERCIAL BROKERAGE COMPANY PALMER McALLISTER CO.
- --------------------------------------------------------------------------------
By [Signature]:___________________________ By [Signature]:___________________
Name: Stephen G. Bach Name: Kenton R. Mau
------------------------------------- -----------------------------
Title: Chief Operating Officer Title: Senior Marketing consultant
------------------------------------ ----------------------------
Copyright Notice: This form is provided for the use of members of the North
Texas Commercial Association of Realtors, Inc. Permission is hereby granted to
make limited copies of this form for use in a particular Texas real estate
transaction. Contact the NTCAR office to confirm that you are using the current
version of this form.
<PAGE>
EXHIBIT A
A TRACT OF LAND IN THE SOUTHEAST QUARTER OF SECTION 22, TOWNSHIP 13 SOUTH, RANGE
67 WEST OF THE 6TH P.M., IN THE CITY OF COLORADO SPRINGS, EL PASO COUNTY,
COLORADO, MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT THE SOUTHEAST
CORNER OF SAID SECTION 22; THENCE N 00 (degrees) 33'33" E, ALONG THE EASTERLY
LINE OF THE SOUTHEAST CORNER OF SAID SECTION, 30.13 FEET TO A POINT ON THE
NORTHERLY RIGHT-OF-WAY LINE OF EXISTING GARDEN OF THE GODS ROAD AND THE TRUE
POINT OF BEGINNING; THENCE CONTINUE N 00 (degrees) 33'33" E, ALONG SAID EASTERLY
LINE, 1603.33 FEET TO A POINT ON THE SOUTHEASTERLY RIGHT-OF-WAY LINE OF EXISTING
80 FOOT WIDE WILSON ROAD; THENCE 5 42 (degrees) 00'29" W, ALONG SAID
SOUTHEASTERLY RIGHT-OF-WAY LINE, 577.33 FEET; THENCE 5 16 (degrees) l4'44" E,
PARALLEL WITH AND 31.25 FEET WESTERLY OF THE NORTHEASTERLY LINE OF AN EXISTING
UTILITY EASEMENT DESCRIBED IN DEED RECORDED IN BOOK 1615 AT PAGE 308 OF THE
RECORDS OF EL PASO COUNTY, COLORADO, 1222.81 FEET TO A POINT ON THE AFORESAID
NORTHERLY RIGHT-OF-WAY LINE OF GARDEN OF THE GODS ROAD; THENCE 5 89 (degrees)
25'39" E, ALONG SAID NORTHERLY RIGHT-OF-WAY LINE, 28.64 FEET TO THE TRUE POINT
OF BEGINNING.
<PAGE>
EXHIBIT B
MOUNTAIN SHADOWS BUSINESS PARK - BUILDING 1
[Floor Plan of Building No. 1]
<PAGE>
ADDENDUM A TO LEASE
EXPENSE REIMBURSEMENT
Demised Premises/Address: 4805 N. 30th Street, Colorado Springs, CO 80903
-----------------------------------------------
[Check all boxes which apply. Boxes not checked do not
apply to this Lease.]
A. Expense Reimbursement. Tenant shall pay the Landlord as additional Rent a
portion of the following expenses (collectively the "Reimbursement") which are
incurred by or assessed against the Demised Premises [check all that are to
apply]:
[X] Ad Valorem Taxes:
[X] Insurance Premiums;
[X] Common Area Maintenance (CAM) Expenses;
[X] Operating Expenses;
[X] [DELETED]
B. Expense Reimbursement Limitations. The amount of Tenant's Reimbursement
shall be determined by one of the following methods as described in Section 4
below [check only one]:
[DELETED]
[X] Pro Rata Adjustment;
[DELETED]
C. Expense Reimbursement Payments. Tenant agrees to pay any end-of-year lump
sum Reimbursement within thirty (30) days after receiving an invoice from
Landlord. Any time during the Lease Term (or any renewals or extensions)
Landlord may direct Tenant to pay monthly an estimated portion of the projected
future Reimbursement amount. Any such payment directed by Landlord shall be due
and payable monthly on the same day that the Base Rent is due. Landlord may, at
Landlords option and to the extent allowed by applicable law, impose a Late
Charge on any Reimbursement payments which are not actually received by Landlord
on or before the due date, in the amount and manner set forth in Section 3.03 of
this Lease. Any Reimbursement relating to partial calendar years shall be
prorated accordingly. Tenant's Pro Rata Share of such Reimbursements shall be
based on the square footage of useable area contained in the Demised Premises in
proportion to the square footage of useable building area of the Property.
Tenant may audit or examine those items of expense in Landlords records which
relate to Tenant's obligations under this Lease. Landlord shall promptly refund
to Tenant any overpayment which is established by an audit or examination. If
the audit or examination reveals an error of more than five percent (5%) over
the figures billed to Tenant, Landlord shall pay the reasonable cost of the
audit or examination. SEE PARAGRAPH 11.
D. Definitions.
1. Ad Valorem Taxes. All general real estate taxes, general and special
assessments, parking surcharges, rent taxes, and other similar governmental
charges levied against the Property for each calendar year.
2. Insurance Premiums. All Landlords insurance premium attributable to
the Property, including but not limited to insurance for fire, casualty, general
liability, property damage, medical expenses, and extended coverage, and loss of
rents coverage for six months' Rent.
3. Common Area Maintenance Expenses. Common area maintenance expenses
("CAM") means all costs of maintenance, inspection and repairs of the common
areas of the Property, including but not limited to those costs for security,
lighting, painting, cleaning, decorations and fixtures, utilities, ice and snow
removal, trash disposal, project signs, minor roof defects, pest control,
project promotional expenses, property owners' association dues, wages and
salary costs of maintenance personnel, and other expenses benefiting all the
Property which may be incurred by Landlord, in its discretion, including sales
taxes and a reasonable service charge for the administration thereof. The
"common area" is defined as that part of the Property intended for the
collective use of all tenants including, but not limited to, the parking areas,
driveways, loading areas, landscaping, gutters and downspouts, plumbing,
electrical systems, exterior walls, sidewalks, malls, promenades (enclosed or
otherwise), meeting rooms, doors, windows, corridors and public rest rooms. CAM
does not include depreciation on Landlord's original investment, cost of tenant
improvements, real estate brokers' fees, Landlord's management office and
overhead expenses, or interest or depreciation on capital investments.
<PAGE>
4. Operating Expenses. All costs of ownership, building management,
maintenance, repairs and operation of the Property, including but not limited to
taxes, insurance, CAM, reasonable management fees, wages and salary costs of
building management personnel, overhead and operational costs of a management
office, janitorial, utilities, and professional services such as accounting and
legal fees. Operating Expenses do not include the capital cost of management
office equipment and furnishings, depreciation on Landlord's original
investment, roof and structural maintenance, the cost of tenant improvements,
real estate brokers' fees, advertising, or interest or depreciation on capital
investments.
5. Roof and Structural Maintenance Expenses. All costs of maintenance,
repair and replacement of the roof, roof deck, flashings, skylights, foundation,
floor slabs, structural components and the structural soundness of the building
in general.
6. [DELETED]
7. Pro Rata Adjustment. Tenant shall pay to Landlord as additional Rent
Tenant's Pro Rata Share of the total amount of Landlord's Ad Valorem Taxes,
Insurance Premiums, CAM, Operating Expenses, [DELETED] whichever are applicable,
for every calendar year during the Lease Term and during any extension of this
Lease.
8. [DELETED]
9. [DELETED]
10. Tenant Obligations Performed by Landlord. There may be expenses that
are specific to Tenant, for example, janitorial services, which Tenant desires
Landlord provide at Tenant's cost. Tenant shall pay these expenses to Landlord
monthly in advance, subject to adjustment after the end of each calendar year
based upon the actual cost.
11. Estimated Monthly Payments. Subject to adjustment after the end of
each calendar year on the basis of the actual cost for such year, Tenant shall
pay monthly as Additional Rent estimated costs for ad valorem taxes, insurance
premiums, common area maintenance expenses, operating expenses and tenant
obligations performed by Landlord. Initially, Landlord estimates CAM, tax and
insurance to commence at the rate of $2.75 per square foot. Operating expenses
and tenant obligations performed by Landlord are to be determined as an estimate
(TBD) and outlined in the Commencement Date letter to be executed at
commencement of the Lease Term.
13. Cost Adjustment of Monthly Payments. Within a reasonable time before
commencement of each calendar year during the Lease Term or as soon as
reasonably practical thereafter, Landlord shall deliver to tenant a reasonable
estimate of anticipated costs for the forthcoming calendar year. Tenant shall
pay to Landlord, as additional rent, commencing on the commencement date and
continuing on the first day of each calendar month thereafter, an amount equal
to one-twelfth (1/12d) of the product obtained by multiplying the estimated
costs times Tenant's Prorata Share. The estimated monthly charge for Tenant's
Prorata Share of the costs may be adjusted semiannually by Landlord during the
calendar year on the basis of Landlord's reasonably anticipated costs. Any costs
incurred by Landlord during the year, which were not included in determining the
estimated costs may be billed separately to Tenant according to Tenants Prorata
Share of the Costs.
13. Itemized Statement of Costs. Within ninety (90) days following the end
of each calendar year, Landlord shall furnish Tenant with a detailed itemized
statement covering the calendar year just expired, showing the actual costs for
that year, the amount of Tenant's Prorata Share of the costs for such calendar
year, and the monthly payments made by Tenant during the year for such costs. If
the Tenant's Prorata Share of the actual costs exceeds its prior payments,
Tenant shall pay Landlord the deficiency within fifteen (15) days after receipt
of the annual statement. If the payments for the calendar year exceed Tenant's
Prorata Share of the actual costs, Landlord shall apply the excess against
payments toward costs next due. In the event the term of this Lease expires, or
this lease is otherwise terminated, Landlord shall compute the credit or
deficiency up to the date the Lease expired or was terminated, and payment by
Tenant or refund by Landlord, whichever is applicable, shall be made within
thirty (30) days after such expiration or termination. Landlord must provide
reconciliation within 180 days after the end of each calendar year, at a
minimum. Should Landlord not provide reconciliation at least within said 180
day period, Tenant shall not be obligated to pay additional amounts reflected as
due per the reconciliation submitted later than 180 days after the end of a
calendar year.
<PAGE>
ADDENDUM B TO LEASE
RENEWAL OPTIONS
Demised Premises/Address. 4805 N. 30th Street. Colorado Springs, CO 80903
-----------------------------------------------
A. Option to Extend Term. Landlord grants to Tenant Two (2) option(s) (the
-------
"Option") to extend the Lease Term for an additional term of (60) months each
(the "Extension"), on the same terms, conditions and covenants set forth in this
Lease, except as provided below. Each Option may be exercised only by written
notice delivered to the I ancilord no earlier than One Hundred Sixty (60) months
each the (the "Extension") , on the same terms, conditions and covenants set
forth in this Lease, except as provided below. Each Option may be exercised only
by written notice delivered to the Landlord no earlier than One Hundred Eighty
(180) days before, and no later than One Hundred Twenty (120) days before, the
expiration of the Lease Term or the preceding Extension of the Lease Term,
whichever is applicable. If Tenant fails to deliver Landlord written notice of
the exercise of an Option within the prescribed time period, such Option and any
succeeding Options shall lapse, and there shall be no further right to extend
the Lease Term. Each Option may only be exercised by Tenant on the express
condition that, at the time of the exercise, Tenant is not in default under any
provisions of this Lease. [DELETED]
B. Calculation of Rent. The Base Rent during the Extension(s) shall be
determined by one of the following methods [check one]:
[DELETED]
[X] 2. Fair Market Rental Value. The Base Rent during the Extension shall be
the Fair market Rental determined as follows:
a. The "Fair Market Rental" of the Demised Premises means the price that
a ready and willing tenant would pay as of the commencement of the Extension as
monthly rent to a ready and willing landlord of demised premises comparable to
the Demised Premises if the property were exposed for lease on the open market
for a reasonable period of time, and taking into account the term of the
Extension, the amount of improvements made by Tenant at its expense, the
creditworthiness of the Tenant, and all of the purposes for which the property
may be used and not just the use proposed to be made of the Demised Premises by
Tenant. Upon proper written notice by Tenant to Landlord of Tenant's election to
exercise the renewal Option, Landlord shall within fifteen (15) days thereafter
notify Tenant in writing of Landlords proposed Fair Market Rental amount and
Tenant shall thereupon notify Landlord of Tenant's acceptance or rejection of
Landlord's proposed amount. Failure of Tenant to reject Landlords Fair Market
Rental amount within days after receipt of Landlords notice shall be deemed
Tenant's acceptance of Landlords proposed Fair Market Rental amount within
thirty (30) days after receipt of Landlord's notice shall be deemed Tenant's
acceptance of Landlord's proposed Fair Market Rental amount.
b. If Landlord and Tenant have not been able to agree on the Fair Market
Rental amount prior to the date the option is required to be exercised, the rent
for the Extension shall be determined as follows: Within thirty (30) days
following the exercise of the option, Landlord and Tenant shall endeavor in good
faith to agree upon a single Appraiser (defined below). If Landlord and Tenant
are unable to agree upon a single Appraiser within the thirty day period, each
shall then appoint one Appraiser by written notice to the other, given within
ten (10) days after the thirty day period. Within ten (10) days after the two
Appraisers are appointed, the two Appraisers shall appoint a third Appraiser. If
either Landlord or Tenant fails to appoint its Appraiser within the prescribed
time period the single Appraiser appointed shall determine the Fair Market
Rental amount of the Demised Premises. Each parry shall bear the cost of the
appraiser appointed by it and the parties shall share equally the cost of the
third appraiser. The term "Appraiser" means a Stare Certified Real Estate
Appraiser licensed by the State of CO to value commercial property.
c. The Fair Market Rental Value of the Demised Premises shall be the
average of two of the three appraisals which are closest in amount as described
below, and the third appraisal shall be disregarded. If the Fair Market Rental
is not determined prior to the commencement of the Extension, then Tenant shall
continue to pay to Landlord the Rent applicable to the Demised Premises
immediately prior to the Extension until the Fair Market Rental amount is
determined. and when it is determined, Tenant shall pay to Landlord within ten
(10) days after receipt of such notice the difference between the Rent actually
paid by Tertant to Landlord and the new Rent determined under this Lease.
C. [DELETED]
<PAGE>
ADDENDUM C TO LEASE
RIGHT OF FIRST REFUSAL FOR ADDITIONAL SPACE
Demised Premises/Address: 4805 N. 30th Street, Colorado Springs, CO 80903
-----------------------------------------------
A. During the initial Lease Term, and any extension thereof, Tenant shall have
a right of first refusal (the "Right of First Refusal") to lease the additional
space shown on Exhibit B, FLOOR PLAN OR SITE PLAN, attached to this Lease,
described or known as Mountain Shadows Business Park - Building 1, containing
approximately 10,750 square feet of area (the "Additional Space"), on the same
terms and conditions as per this agreement. When Landlord receives a legally
sufficient offer which Landlord desires to accept to lease the Additional Space
from a third party, Landlord shall notify Tenant in writing and Tenant shall
thereafter have ten (10) days in which to accept or reject the offer in writing.
If Tenant rejects the offer or fails to properly and timely accept the offer
[DELETED], then Landlord shall be free to lease the Additional Space to the
third party [DELETED]. If Landlord does not enter into a lease with the third
party, the Right of First Refusal shall continue to apply and Landlord shall be
required to submit any future offer to Tenant in the foregoing manner.
B. The Right of First Refusal shall, at Landlord's election, be null and void
if Tenant is in default under the Lease on the date Landlord would otherwise
notify Tenant of the offer concerning the Additional Space or at any time
thereafter and prior to commencement of the lease for the Additional Space.
After Tenant validly exercises the Right of First Refusal provided herein, the
parties shall execute an amendment to the Lease adding the Additional Space, or
a new lease for the Additional Space, or such other documentation as Landlord
may reasonably require, promptly after Landlord prepares the documentation, in
order to confirm the leasing of the Additional Space to Tenant. An otherwise
valid exercise of the Right of First Refusal contained herein shall be fully
effective, whether or not such confirming documentation is executed.
C. The Right of First Refusal shall apply only with respect to the entire
Additional Space and may not be exercised with respect to only a portion
thereof, unless only a portion first becomes the subject of a legally sufficient
offer acceptable to Landlord (in which case, the Right of First Refusal shall
apply to the portion subject to the offer). If the Additional Space, or any
portion thereof, is the subject of an offer which includes other building space
at the Property, and the offer is acceptable to Landlord, the Right of First
Refusal shall apply to the entire building space which is the subject of the
offer, and Tenant shall be obligated to either accept or refuse to lease the
entire space. [DELETED]
D. If Tenant exercises the Right of First Refusal, Landlord does not guarantee
that the Additional Space will be available on the commencement date for the
lease thereof if there are additional improvements required to be built or if
the then existing occupants of the Additional Space hold over for any reason
beyond Landlord's reasonable control. In such event, Tenant's sole recourse
shall be that the Rent with respect to the Additional Space shall be abated
until Landlord legally delivers possession of the Additional Space to Tenant.
Tenant's exercise of such Right of First Refusal shall not operate to cure any
default by Tenant of any of the terms or provisions in the Lease, nor to
extinguish or impair any rights or remedies of Landlord arising by virtue of the
default. If the Lease or Tenant's right to possession of the Demised Premises
terminates in any manner before Tenant exercises the right herein provided, or
if Tenant has subleased or assigned all or any portion of the Demised Premises,
then immediately upon such termination, sublease or assignment, the Right of
First Refusal shall simultaneously terminate and become null and void. [DELETED]
E. [DELETED]
<PAGE>
ADDENDUM F TO LEASE
CONSTRUCTION OF IMPROVEMENTS
Demised Premises/Address: 4805 N. 30th Street, Colorado Springs, CO 80903
-----------------------------------------------
A. Construction of improvements.
1. Landlord agrees to construct (or complete) a building and interior
finishes and other improvements upon the Demised Premises in accordance with
detailed Plans and Specifications to be promptly prepared by Landlord and
delivered to Tenant. Upon approval by Tenant, two or more sets of the Plans and
Specifications shall be signed by both parties, with one signed set retained by
Tenant. Changes to the Plans and Specifications may be made only by written
addenda signed by both parties.
2. Upon approval of the Plans and Specifications and issuance of a building
permit (which will be promptly applied for and diligently pursued by Landlord),
Landlord shall promptly begin construction and pursue the construction to its
completion with reasonable diligence and in a good and workmanlike manner.
B. Completion Date.
1. It is estimated by Landlord that the building and other improvements
will be completed by May 31, 1999.
------------
2. Landlord shall notify Tenant in writing within five (5) days of the
Date of Completion. Tenant shall then promptly inspect the building and other
improvements, and if they have in fact been completed in accordance with the
Plans and Specifications, the Lease Term shall begin upon the Date of Completion
or on the Commencement Date, whichever is later. If Tenant reasonably determines
that the improvements have not been completed in accordance with the Plans and
Specifications, Tenant may deliver a written objection to Landlord specifying
the deficiencies. If Tenant does not, within ten (10) days after Landlord's
notice of completion, deliver to Landlord either a written objection or a
written Letter of Acceptance of the improvements, then Tenant shall be deemed to
have approved the improvements as constructed and the date of Landlord's notice
of completion shall be the Date of Completion.
3. If the building and other improvements have not in fact been completed
in accordance with the Plans and Specifications, and Tenant has delivered to
Landlord a written objection specifying the items deemed incomplete, then
Landlord shall promptly proceed to finish the incomplete items, and the Lease
Term shall begin upon the date that the items are in fact complete.
4. Completion, as used in this Addendum, means substantial completion.
Substantial completion will be deemed to have occurred when (i) Landlord obtains
a Certificate of Occupancy issued by the local municipal authorities whose
jurisdiction includes the Demised Premises, and (ii) the construction is
sufficiently complete in accordance with the Plans and Specifications so that
the Tenant is able to occupy or utilize the Demised Premises for its intended
use, except for minor "punch list" items remaining to be completed.
C. Letter of Acceptance. Upon Completion of the improvements to the Demised
Premises, Tenant agrees to execute and deliver to Landlord, with a copy to the
Principal Broker, a Letter of Acceptance, addressed to Landlord and signed by
Tenant (or its authorized representative) acknowledging that construction has
been completed in accordance with the Plans and Specifications, acknowledging
acceptance of the improvements (subject to "punch list" items being completed),
acknowledging the Date of Completion, and acknowledging the Commencement Date of
the Lease Term.
D. Taking of Possession. The taking of possession of the Demised Premises by
Tenant shall be deemed conclusively to be acknowledgment by Tenant that
construction has been completed in accordance with Plans and Specifications
(except for latent defects and "punch list" items) whether or not a Certificate
of Occupancy has been obtained, and that the Lease Term has begun as of the Date
of Completion.
E. Failure to Complete. If the building and other improvements have not been
completed in accordance with the Plans and Specifications by the date in B(1)
----------------
above, or by such date as extended by application of Section 16.02, Tenant
- -----
shall have the right and option to terminate this Lease by giving written notice
of Tenant's intention to terminate as of a certain date specified by Tenant in
the notice of termination (the "Termination Date"). The notice must be given to
Landlord not less than fifteen (15) days prior to the Termination Date. If the
building and other improvements have not been completed by the Termination Date,
<PAGE>
this Lease shall terminate, unless further extended by Tenant in writing, with
no further liability of one party to the other.
F. EXTENSION OF COMPLETION DATE.
The completion date shall be extended one (1) day for each day that Landlord's
General Contractor is unable to work because of delays caused by rain, snow, or
extreme cold. [DELETE] In order to obtain the benefit of these extensions of the
Date of Completion or any extension by application of Section 16.02, Landlord
must promptly notify Tenant in writing of the occurrence of such event(s). Such
notice must specify the date upon which such event occurred and the estimated
number of days that the work is anticipated to be delayed.
G. WARRANTY OF CONSTRUCTION.
Notwithstanding anything to the contrary contained herein (including without
limitation Sections 6.01, 6.02 and 7.01), Landlord represents and warrants to
Tenant that the Demised Premises shall be constructed in accordance with the
Plans and Specifications in a good and workmanlike manner free of latent,
structural or construction defects and in compliance with all applicable laws
and regulations including all zoning laws and the ADA. Such representation and
warranty shall survive for a period of one (1) year after the Date of
Completion, and Landlord agrees to promptly correct any defect or item of non-
compliance for which Tenant delivers to landlord written notice prior to the
expiration of such period.
H. FINISH-OUT.
Tenant shall have a finish-out allowance of $26.00 per square foot to be used
for Tenant improvements, space planning, and design documents (including plans
and specifications) (Tenant Occupancy Expense). Tenant may select high quality
non-standard materials, if the design selection so dictates. However, Tenant
shall pay any costs over and above the allowance amount to Landlord upon receipt
of an invoice from Landlord after the Date of Completion. If Tenant requests,
Landlord will amortize the cost over and above the allowance amount over the
initial ten year term of the lease, at an interest rate of nine (9%) percent per
annum.
1. TENANT OCCUPANCY EXPENSE.
The Tenant Occupancy Expense shall include, but shall not be limited to, all
items necessary to open and maintain an office for Tenant's business in a
generally accepted manner and according to all prevailing government codes, with
the exception of all work to improve and to construct on the Property site a new
"Shell" building in which the Demised Premises are to be located and to improve
said site as outlined below, in accordance with the general site plan attached
to this lease as a part of this Addendum "F". It is understood and agreed that
in the construction of said building, Landlord shall furnish and install the
following general features:
a. Total site improvements consisting of all exterior paving, sidewalks,
landscaping, lawn sprinkler, lighting and utilities per approved
development plan.
b. An architcctural painted tilt-up concrete wall panel shell building
complete with concrete flooring, and glass exterior storefronts with
windows per city approved permit plans, as well as, at all overhead door
openings.
c. All utilities will be stubbed to the building including electrical,
water, fire protection, gas and sewer. All distribution will be covered in
the tenant finish allowance except the sanitary sewer, which will be
distributed in a floor leave-out for future tenant connections.
d. The HVAC system units will be set on the roof with all duct
distribution being covered in the tenant allowance.
e. The electrical service for the total building will be 1600 amps,
3-phase, 208/210 voltage at the main panel.
It is understood and agreed that Tenant finish-out improvement work would
include but not be limited to interior walls, doors, ceilings, toilet
facilities, exterior wall insulation, lighting, fire protection piping,
etc...
<PAGE>
MOUNTAIN SHADOWS BUSINESS PARK FILING NO. 1
DEVELOPMENT PLAN
[SURVEY OF PROPERTY]
<PAGE>
ADDENDUM G TO LEASE
RULES AND REGULATIONS
Demised Premises/Address: 4805 N. 30th Street, Colorado Springs, CO 80903
-----------------------------------------------
A. Application. The following standards shall affect and shall be observed by
Tenant, Tenant's employees and invitees, for the mutual safety, cleanliness,
care, protection, comfort and convenience of all tenants and occupants of the
Property, and shall be applicable to the building(s), to the parking garages, if
any, to the common areas, driveways, parking lots, and to the Demised Premises,
including the land situated beneath and any appurtenances thereto.
B. Consent Required. Any exception to these Rules and Regulations must first
be approved in writing by Landlord. For purposes of these Rules and Regulations,
the term "Landlord" includes the building manager, the building manager's
employees, and any other agent or designee authorized by Landlord to manage or
operate the Property.
C. Rules and Regulations:
1. Tenant may not conduct any auction, "flea market" or "garage sale" on
the Demised Premises nor store any goods or merchandise on the
Property except for Tenant's own business use. Food may not be
prepared in the Demised Premises except in small amounts for
consumption by Tenant. Vending machines or dispensing machines may not
be placed in the Demised Premises without Landlord's written approval.
The Demised Premises may not be used or occupied as sleeping quarters
or for lodging purposes. Animals may not be kept in or about the
Property.
2. Tenant shall not obstruct sidewalks, driveways, loading areas, parking
areas, corridors, hallways, vestibules, stairs and other similar areas
designated for the collective use of tenants, or use such areas for
Tenant's storage, temporary or otherwise, or for any purpose other
than ingress and egress to and from the Demised Premises. Tenant shall
comply with parking rules and guidelines as may be posted on the
Property from time to time.
3. Tenant shall not make any loud noises, unusual vibrations, unpleasant
odors, objectionable or illegal activities on the Property. Tenant
shall not permit the operation of any equipment in the Demised
Premises that could annoy other occupants of the Property. Tenant
shall not interfere with the possession of other tenants of the
Property.
4. Tenant may not bring any flammable, explosive, toxic, noxious,
dangerous or hazardous materials onto the Property.
5. Installation of security systems, telephone, television and other
communication cables, fixtures and equipment must comply with Section
7.04 of die Lease, except that routine installation and construction
of normal communication devices which do not require any holes in the
roof or exterior walls of the Property do not require the written
approval of Landlord.
6. Movement into or out of the building through public entrances, lobbies
or corridors which requires use of a hand truck, dolly or pallet jack
to carry freight, furniture, office equipment, supplies and other
large or heavy material, must be limited to the service entrances and
freight elevators only and must be done at times and in a manner so as
not to unduly inconvenience other occupants of the Property. All
wheels for such use must have rubber tires and edge guards to prevent
damage to the building. Tenant shall be responsible for and shall pay
all costs to repair damages to the building caused by the movement of
materials by Tenant.
7. Requests by Tenant for building services, maintenance and repair must
be made in writing to the office of the building manager designated by
Landlord and must be dated. Tenant shall give prompt written notice to
Landlord of any significant damage to or defects in the Demised
Premises or the Property, especially including plumbing, electrical
and mechanical systems, heating, ventilating and air conditioning
systems, roofs, windows, doors, foundation and structural components,
regardless of whose responsibility it is to repair such damage.
8. Tenant shall not change locks or install additional locks on doors
without the prior written consent of Landlord. If Tenant changes locks
or installs additional locks on the Property, Tenant shall within five
days thereafter provide Landlord with a copy of each separate key to
each lock. Upon termination of Tenant's occupancy of the Demised
<PAGE>
Premises, Tenant must surrender all keys to the Demised Premises and
to the Property to Landlord.
9. Harmful liquids, toxic wastes, bulky objects, insoluble substances and
other materials which may cause clogging, stains or damage to plumbing
fixtures or systems must not be placed in the lavatories, water
closets, sinks, or drains. Tenant must pay the costs to repair and
replace drains, plumbing fixtures and piping which is required because
of damage caused by Tenant.
10. Tenant shall cooperate with Landlord and other occupants of the
Property in keeping the Property and the Demised Premises neat and
clean. Nothing may be swept, thrown or left in the corridors,
stairways, elevator shafts, lobbies, loading areas, parking lots or
any other common areas on the Property. All trash and debris must be
properly placed in receptacles provided therefor.
11. Landlord has the power and authority to regulate the weight and
position of heavy furnishings and equipment on the floor of the
Demised Premises, including safes, groups of filing cabinets,
machines, and any other item which may overload the floor. Tenant
shall notify the Landlord when heavy items are to be taken into or out
of the building, and the placement and transportation of heavy items
may be done only with the prior written approval of Landlord.
12. No window screens, blinds, draperies, awnings, solar screen films,
window ventilators or other materials visible from the exterior of the
Demised Premises may be placed in the Demised Premises without
Landlord's approval. Landlord is entitled to control all lighting that
maybe visible from the exterior of the building.
13. No advertisement, sign, notice, handbill, poster or banner may be
exhibited, distributed, painted or affixed upon the Property. No
directory of tenants is allowed on the Property other than that
provided by Landlord.
14. Tenant agrees to cooperate with and assist Landlord in the prevention
of peddling, canvassing and soliciting on the Property.
15. Tenant accepts any and all liability for damages and injuries to
persons and property resulting from the serving and sales of alcoholic
beverages on or from the Property.
16. Any person entering and leaving the building before and after normal
working hours, or building hours if posted by Landlord, whichever
applies, maybe required to identify himself to security personnel by
signing a list and giving the time of day and destination or location
of the applicable Demised Premises. Normal building business hours are
established by Landlord from time to time.
D. Revisions. Landlord reserves the right to revise and/or rescind any of
these Rules and Regulations and to make additional rules which Landlord may
determine are necessary from time to time for the safety, care, cleanliness,
protection, comfort and convenience of the tenants and occupants of the Property
and for the care, protection and cleanliness of the building. Revisions and
additions will be binding upon the Tenant as if they had been originally
prescribed herein when furnished in writing by Landlord to Tenant, provided the
additions and revisions apply equally to all tenants occupying the Property.
E. Enforcement. Any failure or delay by Landlord in enforcing these Rules and
Regulations will not prevent Landlord from enforcing these Rules and Regulations
in the future. If any of these Rules and Regulations is determined to be
unenforceable, it shall be severed from this Lease without affecting the
remainder of these Rules and Regulations.
<PAGE>
RENT SCHEDULE ADDENDUM "H" FILE NAME: CHEAPRPS
CHEAP TICKETS, INC.
11/19/98 Page 1 of 3
GUARANTEED MINIMUM RENTAL (BASE RENT):
INITIAL SQUARE FOOTAGE 15,000 11.50 $172,500.00 $14,375.00
ADD COMMITTED S.F. 10,000 11.50 $115,000.00 $ 9,583.33
TOTAL SQUARE FOOTAGE 25,000 $287,500.00 $23,958.33
MONTHS 1 THRU 3 43,125.00 14,375.00 /MONTH
MONTHS 4 THRU 12 258,749.97 215,624.97 23,958.33 /MONTH
MONTHS 13 THRU 24 5,175.00 293,250.00 24,437.50 /MONTH
MONTHS 25 THRU 36 5,750.00 299,115.00 24,926.25 /MONTH
MONTHS 37 THRU 48 305,097.36 25,424.78 /MONTH
MONTHS 49 THRU 60 311,199.24 25,933.27 /MONTH
MONTHS 61 THRU 72 317,423.28 26,451.94 /MONTH
MONTHS 73 THRU 84 323,771.64 26,980.97 /MONTH
MONTHS 85 THRU 96 330,247.08 27,520.59 /MONTH
MONTHS 97 THRU 108 336,852.12 28,071.01 /MONTH
MONTHS 109 THRU 120 343,589.16 28,632.43 /MONTH
--------------
3,119,294.85
==============
SECURITY DEPOSIT: $ 28,632.43
==============
ESTIMATED CAM, INSURANCE & TAXES (CIT): $2.75 PER YEAR
10,000 S.F. $2,291.67 /MONTH
15,000 S.f. $3,437.50 /MONTH
ESTIMATED COMMENCEMENT OF LEASE 06/01/99
<TABLE>
<CAPTION>
ESTIMATED
$2.75 TENANT
MONTH ESTIMATED DUE ESTIMATED BASE ESTIMATED ESTIMATED OBLIGATIONS TOTAL
DATES RENT CAM, TAX & INS OPERATING PERFORMED RENT PMT.
CHARGES EXPENSES BY LANDLORD DUE COMMENTS
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
1 06/01/99 14,375.00 2,291.67 TO BE 16,666.67
DETERMINED
2 07/01/99 14,375.00 2,291.67 TBD TBD 16,666.67
3 08/01/99 14,375.00 2,291.67 TBD TBD 16,666.67
4 09/01/99 23,958.33 3,437.50 TBD TBD 27,395.83
5 10/01/99 23,958.33 3,437.50 TBD TBD 27,395.83
6 11/01/99 23,958.33 3,437.50 TBD TBD 27,395.83
7 12/01/99 23,958.33 3,437.50 TBD TBD 27,395.83 ADJUST ADDITIONAL RENTS
BASED ON ACTUALS.
8 01/01/00 23,958.33 3,437.50 TBD TBD 27,395.83
9 02/01/00 23,958.33 3,437.50 TBD TBD 27,395.83
10 03/01/00 23,958.33 3,437.50 TBD TBD 27,395.83
11 04/01/00 23,958.33 3,437.50 TBD TBD 27,395.83
12 05/01/00 23,958.33 3,437.50 TBD TBD 27,395.83
13 06/01/00 24,437.50 3,437.50 TBD TBD 27,875.00 2% INCREASE
14 07/01/00 24,437.50 3,437.50 TBD TBD 27,875.00
15 08/01/00 24,437.50 3,437.50 TBD TBD 27,875.00
16 09/01/00 24,437.50 3,437.50 TBD TBD 27,875.00
17 10/01/00 24,437.50 3,437.50 TBD TBD 27,875.00
18 11/01/00 24,437.50 3,437.50 TBD TBD 27,875.00
19 12/01/00 24,437.50 3,437.50 TBD TBD 27,875.00 ADJUST ADDITIONAL RENTS
BASED ON ACTUALS.
20 01/01/01 24,437.50 3,437.50 TBD TBD 27,875.00
21 02/01/01 24,437.50 3,437.50 TBD TBD 27,875.00
22 03/01/01 24,437.50 3,437.50 TBD TBD 27,875.00
23 04/01/01 24,437.50 3,437.50 TBD TBD 27,875.00
24 05/01/01 24,437.50 3,437.50 TBD TBD 27,875.00
25 06/01/01 24,926.25 3,437.50 TBD TBD 28,363.75 2% INCREASE
26 07/01/01 24,926.25 3,437.50 TBD TBD 28,363.75
27 08/01/01 24,926.25 3,437.50 TBD TBD 28,363.75
</TABLE>
<PAGE>
RENT SCHEDULE ADDENDUM "H" FILE NAME: CHEAPRPS
CHEAP TICKETS, INC.
11/19/98 Page 2 of 3
<TABLE>
<CAPTION>
$2.75 ESTIMATED ESTIMATED ESTIMATED TENANT
ESTIMATED DUE ESTIMATED BASE CAM, TAX & INS OPERATING OBLIGATIONS TOTAL RENT PMT.
MONTH DATES RENT CHARGES EXPENSES PERFORMED BY LANDLORD DUE COMMENTS
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
28 09/01/01 24,926.25 3,437.50 TBD TBD 28,363.75
29 10/01/01 24,926.25 3,437.50 TBD TBD 28,363.75
30 11/01/01 24,926.25 3,437.50 TBD TBD 28,363.75
31 12/01/01 24,926.25 3,437.50 TBD TBD 28,363.75 ADJUST ADDITIONAL RENTS
BASED ON ACTUALS
32 01/01/02 24,926.25 3,437.50 TBD TBD 28,363.75
33 02/01/02 24,926.25 3,437.50 TBD TBD 28,363.75
34 03/01/02 24,926.25 3,437.50 TBD TBD 28,363.75
35 04/01/02 24,926.25 3,437.50 TBD TBD 28,363.75
36 05/01/02 24,926.25 3,437.50 TBD TBD 28,363.75
37 06/01/02 25,424.78 3,437.50 TBD TBD 28,862.28 2% INCREASE
38 07/01/02 25,424.78 3,437.50 TBD TBD 28,862.28
39 08/01/02 25,424.78 3,437.50 TBD TBD 28,862.28
40 09/01/02 25,424.78 3,437.50 TBD TBD 28,862.28
41 10/01/02 25,424.78 3,437.50 TBD TBD 28,862.28
42 11/01/02 25,424.78 3,437.50 TBD TBD 28,862.28
43 12/01/02 25,424.78 3,437.50 TBD TBD 28,862.28 ADJUST ADDITIONAL RENTS
BASED ON ACUALS.
44 01/01/03 25,424.78 3,437.50 TBD TBD 28,862.28
45 02/01/03 25,424.78 3,437.50 TBD TBD 28,862.28
46 03/01/03 25,424.78 3,437.50 TBD TBD 28,862.28
47 04/01/03 25,424.78 3,437.50 TBD TBD 28,862.28
48 05/01/03 25,424.78 3,437.50 TBD TBD 28,862.28
49 06/01/03 25,933.27 3,437.50 TBD TBD 29,370.77 2% INCREASE
50 07/01/03 25,933.27 3,437.50 TBD TBD 29,370.77
51 08/01/03 25,933.27 3,437.50 TBD TBD 29,370.77
52 09/01/03 25,933.27 3,437.50 TBD TBD 29,370.77
53 10/01/03 25,933.27 3,437.50 TBD TBD 29,370.77
54 11/01/03 25,933.27 3,437.50 TBD TBD 29,370.77
55 12/01/03 25,933.27 3,437.50 TBD TBD 29,370.77 ADJUST ADDITIONAL RENTS
BASED ON ACTUALS.
56 01/01/04 25,933.27 3,437.50 TBD TBD 29,370.77
57 02/01/04 25,933.27 3,437.50 TBD TBD 29,370.77
58 03/01/04 25,933.27 3,437.50 TBD TBD 29,370.77
59 04/01/04 25,933.27 3,437.50 TBD TBD 29,370.77
60 05/01/04 25,933.27 3,437.50 TBD TBD 29,370.77
61 06/01/04 26,451.94 3,437.50 TBD TBD 29,889.44 2% INCREASE
62 07/01/04 26,451.94 3,437.50 TBD TBD 29,889.44
63 08/01/04 26,451.94 3,437.50 TBD TBD 29,889.44
64 09/01/04 26,451.94 3,437.50 TBD TBD 29,889.44
65 10/01/04 26,451.94 3,437.50 TBD TBD 29,889.44
66 11/01/04 26,451.94 3,437.50 TBD TBD 29,889.44
67 12/01/04 26,451.94 3,437.50 TBD TBD 29,889.44 ADJUST ADDITIONAL RENTS
BASED ON ACTUALS.
68 01/01/05 26,451.94 3,437.50 TBD TBD 29,889.44
69 02/01/05 26,451.94 3,437.50 TBD TBD 29,889.44
70 03/01/05 26,451.94 3,437.50 TBD TBD 29,889.44
71 04/01/05 26,451.94 3,437.50 TBD TBD 29,889.44
72 05/01/05 26,451.94 3,437.50 TBD TBD 29,889.44
73 06/01/05 26,980.97 3,437.50 TBD TBD 30,418.47 2% INCREASE
74 07/01/05 26,980.97 3,437.50 TBD TBD 30,418.47
75 08/01/05 26,980.97 3,437.50 TBD TBD 30,418.47
76 09/01/05 26,980.97 3,437.50 TBD TBD 30,418.47
77 10/01/05 26,980.97 3,437.50 TBD TBD 30,418.47
78 11/01/05 26,980.97 3,437.50 TBD TBD 30,418.47
79 12/01/05 26,980.97 3,437.50 TBD TBD 30,418.47 ADJUST ADDITIONAL RENTS
BASED ON ACTUALS.
80 01/01/06 26,980.97 3,437.50 TBD TBD 30,418.47
81 02/01/06 26,980.97 3,437.50 TBD TBD 30,418.47
82 03/01/06 26,980.97 3,437.50 TBD TBD 30,418.47
83 04/01/06 26,980.97 3,437.50 TBD TBD 30,418.47
</TABLE>
<PAGE>
RENT SCHEDULE ADDENDUM "H" FILE NAME: CHEAPRPS
CHEAP TICKETS, INC.
11/19/98 Page 3 of 3
<TABLE>
<CAPTION>
$2.75 ESTIMATED ESTIMATED ESTIMATED TENANT
ESTIMATED DUE ESTIMATED BASE CAM, TAX & INS OPERATING OBLIGATIONS TOTAL RENT PMT.
MONTH DATES RENT CHARGES EXPENSES PERFORMED BY LANDLORD DUE COMMENTS
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
84 05/01/06 26,980.97 3,437.50 TBD TBD 30,418.47 TENANT MAY
TERMINATE AT END
OR 84TH MONTH
W/180 DAY NOTICE
0.00 2% INCREASE
85 06/01/06 27,520.59 3,437.50 TBD TBD 30,958.09
86 07/01/06 27,520.59 3,437.50 TBD TBD 30,958.09
87 08/01/06 27,520.59 3,437.50 TBD TBD 30,958.09
88 09/01/06 27,520.59 3,437.50 TBD TBD 30,958.09
89 10/01/06 27,520.59 3,437.50 TBD TBD 30,958.09
90 11/01/06 27,520.59 3,437.50 TBD TBD 30,958.09
91 12/01/06 27,520.59 3,437.50 TBD TBD 30,958.09 ADJUST ADDITIONAL
RENTS BASED ON
ACTUALS.
92 01/01/07 27,520.59 3,437.50 TBD TBD 30,958.09
93 02/01/07 27,520.59 3,437.50 TBD TBD 30,958.09
94 03/01/07 27,520.59 3,437.50 TBD TBD 30,958.09
95 04/01/07 27,520.59 3,437.50 TBD TBD 30,958.09
96 05/01/07 27,520.59 3,437.50 TBD TBD 30,958.09
97 06/01/07 28,071.01 3,437.50 TBD TBD 31,508.51 2% INCREASE
98 07/01/07 28,071.01 3,437.50 TBD TBD 31,508.51
99 08/01/07 28,071.01 3,437.50 TBD TBD 31,508.51
100 09/01/07 28,071.01 3,437.50 TBD TBD 31,508.51
101 10/01/07 28,071.01 3,437.50 TBD TBD 31,508.51
102 11/01/07 28,071.01 3,437.50 TBD TBD 31,508.51
103 12/01/07 28,071.01 3,437.50 TBD TBD 31,508.51 ADJUST ADDITIONAL
RENTS BASED ON
ACTUALS.
104 01/01/08 28,071.01 3,437.50 TBD TBD 31,508.51
105 02/01/08 28,071.01 3,437.50 TBD TBD 31,508.51
106 03/01/08 28,071.01 3,437.50 TBD TBD 31,508.51
107 04/01/08 28,071.01 3,437.50 TBD TBD 31,508.51
108 05/01/08 28,071.01 3,437.50 TBD TBD 31,508.51
109 06/01/08 28,632.43 3,437.50 TBD TBD 32,069.93 2% INCREASE
110 07/01/08 28,632.43 3,437.50 TBD TBD 32,069.93
111 08/01/08 28,632.43 3,437.50 TBD TBD 32,069.93
112 09/01/08 28,632.43 3,437.50 TBD TBD 32,069.93
113 10/01/08 28,632.43 3,437.50 TBD TBD 32,069.93
114 11/01/08 28,632.43 3,437.50 TBD TBD 32,069.93
115 12/01/08 28,632.43 3,437.50 TBD TBD 32,069.93 ADJUST ADDITIONAL
RENTS BASED ON
ACTUALS.
116 01/01/09 28,632.43 3,437.50 TBD TBD 32,069.93
117 02/01/09 28,632.43 3,437.50 TBD TBD 32,069.93
118 03/01/09 28,632.43 3,437.50 TBD TBD 32,069.93
119 04/01/09 28,632.43 3,437.50 TBD TBD 32,069.93
120 05/01/09 28,632.43 3,437.50 TBD TBD 32,069.93 ADJUST ADDITIONAL
RENTS BASED ON
ACTUALS.
TOTAL 3,119,294.85 409,062.51 3,528,357.36
RENT
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 15, 1999 relating to the financial statements of
Cheap Tickets, Inc., which appear in such Registration Statement. We also
consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Honolulu, Hawaii
August 2, 1999
<PAGE>
EXHIBIT 99.2
CONSENT OF EXPERT
July 30, 1999
We consent to the inclusion in this Registration Statement on Form S-1 of
references to our firm under the caption "Experts."
/s/ Ching & Lee
Honolulu, Hawaii
