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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission file number: 000-25279
CHEAP TICKETS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 99-0338363
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1440 Kapiolani Blvd., Honolulu, Hawaii 96814
(Address of principal executive offices) (Zip Code)
</TABLE>
(808) 945-7439
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
As of November 9, 1999, the Registrant had 23,868,591 shares of Common
Stock, $.001 par value per share, outstanding.
1
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INDEX
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Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)................................... 3
- Balance sheets at December 31, 1998 and September 30, 1999....... 3
- Statements of operations for the three and nine months ended
September 30, 1998 and 1999...................................... 4
- Statement of stockholders' equity for the nine months ended
September 30, 1999............................................... 5
- Condensed statements of cash flows for the nine months ended
September 30, 1998 and 1999...................................... 6
- Notes to financial statements.................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 11
Item 3. Quantitative and Qualitative
Disclosure regarding Market Risk................................... 17
PART II OTHER INFORMATION.................................................. 18
Item 1. Legal Proceedings.................................................. 18
Item 2. Changes in Securities and Use of Proceeds.......................... 18
Item 3. Defaults Upon Senior Securities.................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................ 18
Item 5. Other Information.................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................... 18
SIGNATURES......................................................... 19
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2
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CHEAP TICKETS, INC.
BALANCE SHEETS
(In thousands, except per share data)
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<CAPTION>
December 31, September 30,
1998 1999
---------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,974 $ 72,238
Marketable securities 4,935 90,261
Trade accounts and other receivables 924 4,899
Ticket inventories 286 176
Other current assets 726 1,094
------- --------
Total current assets 9,845 168,668
Property and equipment, net 2,999 9,294
Other assets 381 169
------- --------
$13,225 $178,131
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,681 $15,282
Accrued salaries 399 1,681
Accrued vacation 421 560
Accrued expenses and other liabilities 222 359
Current installments of long-term debt 221 222
Current installments of capital lease obligations 288 1,335
Deferred revenue, current - 400
Income taxes payable 140 739
------- --------
Total current liabilities 6,372 20,578
Long-term debt, excluding current installments 586 521
Capital lease obligations, excluding current installments 652 3,485
Deferred revenue, noncurrent - 1,300
Other noncurrent liabilities 94 76
------- --------
Total liabilities 7,704 25,960
Mandatorily redeemable cumulative preferred stock, $1 par value 4,136 -
(aggregate involuntary liquidation preference of $4,250,
plus unpaid cumulative dividends). Issued and outstanding
425 shares at December 31, 1998 and none at
September 30, 1999 (Note 3).
Stockholders' Equity:
Common stock, $.001 par value. Authorized 70,000 shares; 10 24
Issued and outstanding 14,474 shares at December 31, 1998 and
24,010 shares at September 30, 1999 (Note 4).
Additional paid-in capital 1,247 145,654
Unearned compensation (696) (408)
Retained earnings 824 6,901
------- --------
Total stockholders' equity 1,385 152,171
------- --------
$13,225 $178,131
======= ========
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3
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CHEAP TICKETS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
(unaudited)
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<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ----------------------
1998 1999 1998 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Non-published fares $ 46,823 $103,764 $122,994 $257,143
Published fare commissions and bonuses 3,614 6,391 8,054 16,112
-------- -------- -------- --------
Net revenues 50,437 110,155 131,048 273,255
Cost of sales 39,572 88,628 104,547 219,508
-------- -------- -------- --------
Gross profit 10,865 21,527 26,501 53,747
Selling, general and administrative expenses 9,535 18,393 24,093 44,289
-------- -------- -------- --------
Net operating income 1,330 3,134 2,408 9,458
Other income (deductions):
Interest income 113 1,297 269 2,181
Interest expense (36) (67) (118) (161)
Other, net (45) (8) (62) 13
-------- -------- -------- --------
Earnings before income taxes 1,362 4,356 2,497 11,491
Income taxes 559 1,786 1,024 4,711
-------- -------- -------- --------
Net earnings 803 2,570 1,473 6,780
Preferred stock dividends (85) - (255) (79)
Accretion of mandatorily redeemable
cumulative preferred stock discount (44) - (130) (37)
Redemption of mandatorily redeemable
cumulative preferred stock - - - (587)
-------- -------- -------- --------
Income available to common shares $ 674 $ 2,570 $ 1,088 $ 6,077
======== ======== ======== ========
Basic earnings per common share $ 0.05 $ 0.11 $ 0.07 $ 0.31
======== ======== ======== ========
Average common shares outstanding 14,474 22,607 14,598 19,711
======== ======== ======== ========
Diluted earnings per common share $ 0.04 $ 0.11 $ 0.06 $ 0.29
======== ======== ======== ========
Average diluted common shares outstanding 17,584 23,256 17,625 21,310
======== ======== ======== ========
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4
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CHEAP TICKETS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
(In thousands, except for per share data)
(Unaudited)
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<CAPTION>
Additional Total
Common Paid-In Unearned Retained Stockholders'
Stock Capital Compensation Earnings Equity
--------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 10 $ 1,247 $ (696) $ 824 $ 1,385
Net earnings - - - 6,780 6,780
14-for-1 common stock split 4 (4) - - -
Accrual of dividends on mandatorily
redeemable preferred stock - - - (79) (79)
Accretion to mandatorily redeemable
cumulative preferred stock redemption price - - - (37) (37)
Redemption of mandatorily redeemable
cumulative preferred stock - - - (587) (587)
Exercise of common stock warrants 3 (1) - - 2
Sale of common stock under public
offerings, net of expenses 6 144,624 - - 144,630
Exercise of stock options 1 7 - - 8
Amortization and forfeiture of stock
option compensation - (219) 288 - 69
----------- ------------- ------------- ----------- -----------
Balance, Septemer 30, 1999 $ 24 $ 145,654 $ (408) $ 6,901 $ 152,171
=========== ============= ============= =========== ===========
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5
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CHEAP TICKETS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
1998 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,473 $ 6,780
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 411 1,037
Stock option compensation (2) 69
Amortization of discount on marketable securities - (35)
Changes in operating assets and liabilities 1,341 10,444
------- -------
Net cash provided by operating activities 3,223 18,295
Cash flows from investing activities:
Capital expenditures (342) (2,913)
Proceeds from sale of property and equipment 501 11
Purchase of marketable securities - (103,806)
Proceeds from sale of marketable securities - 18,506
------- -------
Net cash provided by (used in) investing activities 159 (88,202)
Cash flows from financing activities:
Redemption of mandatorily redeemable cumulative preferred stock - (4,839)
Proceeds from issuance of common stock, net of expenses paid - 144,640
Proceeds from issuance of long-term debt 307 236
Principal payments on long-term debt (606) (299)
Principal payments on capital lease obligations (105) (567)
------- -------
Net cash provided by (used in) financing activities (404) 139,171
Net increase in cash 2,978 69,264
Cash and cash equivalents at beginning of period 6,254 2,974
------- -------
Cash and cash equivalents at end of period $ 9,232 $72,238
======= =======
Supplemental cash flow information:
Cash paid for:
Interest $ 118 $ 164
Income Taxes 425 4,172
Noncash investing and financing activities:
Unearned compensation for stock options granted 27 -
Acquisitions of new equipment through capital leases 254 4,446
Accrued and unpaid dividends on mandatorily redeemable preferred stock 255 -
</TABLE>
6
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CHEAP TICKETS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements of Cheap Tickets, Inc.
("Cheap Tickets") have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and reflect all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation for the periods reported. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to those rules or regulations, although management believes that the disclosures
made are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the
financial statements for the year ended December 31, 1998 and the notes thereto
included in Cheap Tickets' most recent Registration Statement on Form S-1 filed
with the Securities and Exchange Commission, which became effective on August
20, 1999. The results of operations for the three and nine months ended
September 30, 1999 are not necessarily indicative of results expected for the
full fiscal year or for any future period.
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 valuation allowance for deferred tax
assets and the allowance for doubtful receivables. Management believes that such
allowances have been appropriately determined in accordance with generally
accepted accounting principles.
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.
7
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New Pronouncements
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.
2. Net Income Per Share
In accordance with the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," a reconciliation of the numerator and
denominator of basic and diluted EPS is provided as follows (in thousands,
except per share data).
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<CAPTION>
Three months ended Nine months ended
September 30, Sepember 30,
----------------------- -------------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Numerator:
Income available to common shares ...... $ 674 $ 2,570 $ 1,088 $ 6,077
------- ------- ------- -------
Denominator:
Shares - basic.......................... 14,474 22,607 14,598 19,711
Effect of Dilutive Securities:
Common stock warrants ............... 2,969 -- 2,969 881
Stock options ....................... 141 649 58 718
------- ------- ------- -------
Shares - diluted........................ 17,584 23,256 17,625 21,310
------- ------- ------- -------
Basic earnings per share: ................ $ 0.05 $ 0.11 $ 0.07 $ 0.31
======= ======= ======= =======
Diluted earnings per share: .............. $ 0.04 $ 0.11 $ 0.06 $ 0.29
======= ======= ======= =======
</TABLE>
8
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Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period.
3. 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 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 $174,132 for the year ended December 31, 1998 and
$130,599 and $36,657 for the nine months ended September 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 $340,000 for the year ended December 31, 1998 and $255,000 for the
nine months ended September 30, 1998. For the nine months ended September
30,1999, dividends amounted to $78,712 which were subsequently paid at the
preferred stock redemption on March 24, 1999. Undeclared cumulative dividends
amounted to $510,000 as of December 31, 1998, 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
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.
4. Stockholders' Equity
Common Stock
In February 1999, Cheap Tickets increased its authorized common stock from
5,000,000 shares at $.01 par value to 70,000,000 shares at $.001 par value.
Cheap Tickets also effected a 14-for-one stock split. In these statements, all
per share accounts have been restated to reflect the stock splits.
Public Offerings
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. Concurrently with the issuance of 3,500,000
shares in the offering, warrants for 2,969,375 shares were exercised.
9
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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.
On August 20, 1999 Cheap Tickets completed a secondary public offering of
its common stock, whereby 5,750,000 shares were sold at an offering price of
$38.00 per share. Of the total shares sold, 2,500,000 were offered by Cheap
Tickets and 3,250,000 were offered by certain existing stockholders. Net
proceeds to Cheap Tickets were $89.6 million after underwriting discounts and
other related costs of issuance.
The total number of shares of common stock outstanding at September 30,
1999 was 24,010,471.
Preferred Stock
In February 1999, the authorized preferred stock of Cheap Tickets, Inc.
was increased from 5,000,000 shares at $1 par value to 10,000,000 shares at $.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, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, and liquidation preferences.
10
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.
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 30% in the third three months of
1999. At September 30, 1999, Cheap Tickets had approximately 1.8 million
registered online users. 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.
Gross profits include 1) the gross profit on non-published sales where Cheap
Tickets establishes the markup and retail price, and 2) commissions earned on
the sale of published fares sold. There is no cost of sale component for
published fare sales, whereas there is a cost of sale component for non-
published fare sales. Cheap Tickets earns higher profits on the sale of non-
published fares than on the sale of published fares.
Substantially all of Cheap Tickets' gross bookings represent sales of airline
tickets. For the year ended December 31, 1998 and the nine months ended
September 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.
11
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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
Three months ended September 30, 1999 and September 30, 1998
Net revenues. Net revenues for the third quarter increased $59.7 million, or
118.4%, to $110.2 million. Non-published fare sales increased $56.9 million, or
121.6%, to $103.8 million, reflecting a significant increase in the number of
non-published fare tickets sold. Commissions increased $2.8 million, or 76.9%,
to $6.4 million. The $2.8 million increase in commissions reflected two
factors: first, an increase in the number of published fares sold; and second,
an improvement in bonus overrides for higher volumes of gross bookings.
Non-published fare sales as a percentage of net revenues increased from 92.8% to
94.2%. Gross bookings of non-published fare sales increased from 61.7% to 69.3%
of total gross bookings.
The increase in net revenues benefitted from accelerating usage of Internet
commerce in the leisure travel market and improving recognition of the Cheap
Tickets brand name, particularly following Cheap Tickets' initial public
offering in March 1999 and secondary public offering in August 1999.
Net revenues through call centers and retail operations increased $32.6
million, or 71.8%, to $77.9 million. Of this $32.6 million increase, $11.5
million reflected the effect of a new call center. Increased productivity from
the remainder of the call centers and a higher percentage of calls answered due
to the implementation of Intelligent Call Routing (ICR) and Interactive Voice
Response (IVR) largely accounted for the rest of the increase.
Net revenues from Internet sales increased $25.5 million, to $29.4 million.
Net revenues through the Internet represented 26.7% of net revenues in the
third quarter of 1999, compared with 7.6% in the third quarter of 1998.
Gross Profit. Gross profit for the third quarter of 1999 increased $10.7
million, or 98.14%, to $21.5 million, reflecting a comparable percentage
increase in net revenues. As a percentage of net revenues, gross profit
decreased approximately 1% to 19.5% of net revenues. This percentage decrease
was caused by a change in the relative sales mix of non-published fares to
published fares, whereby published fares decreased from 38% of total gross
bookings for the third quarter of 1998 to 31% in the third quarter of 1999 (see
Overview section above for additional discussion of the impact of changes in our
relative sales mix on gross profit percentages).
Selling, General and Administrative Expenses. For the three months ended
September 30, 1999, selling, general and administrative expenses increased $8.9
million, or 92.92%, to $18.4 million, and decreased as a percentage of net
revenues from 18.9% to 16.7%. The decrease in selling, general and
administrative expenses as a percentage of net revenues was primarily
attributable to increased operating leverage. These decreases were partially
offset by increases in advertising, credit card charges and other general and
administrative expenses as a percentage of net revenues. Other general and
administrative expenses included consultants' fees for the implementation of
integrated voice response and intelligent call-routing systems to increase
reservation agents' productivity. In addition, advertising expenses increased by
$3.5 million, representing an increase from 1.93% to 4.02% of net revenues.
Advertising expenses targeted to increase Internet sales were $2.5 million
higher for the three months ended September 30, 1999, including a television
advertising campaign begun in August. Brand advertising, not specific to the
Internet, increased by $1 million, primarily in print media.
Net Earnings. Net earnings for the three months ended September 30, 1999
increased $1.8 million, or 219.6% to $2.6 million. The increase reflected
higher net revenues and lower selling, general and administrative expenses as a
percentage of net revenues as a result of more favorable operating leverage.
12
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Nine months ended September 30, 1999 and September 30, 1998
Net Revenues. Net revenues for the nine months ended Sepember 30, 1999
increased $142.2 million, or 108.51%, to $273.3 million. Non-published fare
sales increased $134.1 million, or 109.1%, to $257.1 million. The increase in
non-published fare sales reflected a significant increase in the number of non-
published tickets sold. Commissions increased $8.1 million, or 100.1%, to $ 16.1
million. The $8.1 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. Non-published fare sales as a percentage of net revenues
increased from 93.8% to 94.1%. Gross bookings of non-published fare sales
increased from 61.8% to 68.6% of total gross bookings.
The increase in net revenues benefitted from accelerating usage of Internet
commerce in the leisure travel market and improving recognition of the Cheap
Tickets brand name, particularly following Cheap Tickets' initial public
offering in March 1999 and secondary public offering in August 1999.
Net revenues through call centers and retail operations increased $76.3
million, or 62.7%, to $198.0 million. Of this $76.3 million increase, $35.4
million reflected the effect of nine 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 and a higher percentage of calls answered due to
the implementation of Intelligent Call Routing (ICR) and Interactive Voice
Response (IVR) largely accounted for the rest of the increase.
Net revenues from Internet sales increased $61.0 million, to $68.3 million for
the nine months ended September 30, 1999. Net revenues through the Internet
represented 25.0% of net revenues in 1999 compared with 5.5% for the same
period last year.
Gross Profit. Gross profit for the nine months ended September 30, 1999
increased $27.2 million, or 102.8%, to $53.7 million. As a percentage of net
revenues, gross profit decreased from 20.22% to 19.67%. This percentage decrease
was caused by a change in the relative sales mix of non-published fares to
published fares, whereby published fares decreased from 38% of total gross
bookings to 31% (see Overview section above for additional discussion of the
impact of changes in our relative sales mix on gross profit percentages).
Selling, General and Administrative Expenses. For the nine months ended
September 30, 1999, selling, general and administrative expenses increased $20.2
million, or 83.8%, to $44.3 million, and decreased as a percentage of net
revenues from 18.38% to 16.21%. The decrease in selling, general and
administrative expenses as a percentage of net revenues was primarily
attributable to decreases in compensation, telephone, rent and delivery expense
as a percentage of net revenues. These decreases were partially offset by
increases, as a percentage of net revenues, in advertising, credit card charges
and other general and administrative expense. Advertising expenses increased by
$6.6 million, representing an increase from 1.8% to 3.3% of net revenues. For
the first nine months of 1999, Internet advertising expenses were $4.1 million
higher and the increase in brand advertising for Call Centers was $2.5 million
higher than the comparable period last year.
Net Earnings. For the nine months ended September 30, 1999, net earnings
increased $5.3 million, or 360.1%, to $6.8 million. The increase reflected
higher net revenues and lower selling, general and administrative expenses as a
percentage of net revenues as a result of more favorable operating leverage.
13
<PAGE>
Seasonality
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.
Liquidity and Capital Resources
For the nine months ended September 30, 1999, Cheap Tickets generated cash
from operating activities of $18.3 million, compared with $3.2 million for the
nine months ended September 30, 1998. For the nine months ended September 30,
1999, cash generated from operating activities was comprised principally of net
earnings of $6.8 million, depreciation of $1.0 million and an increase in
accounts payable of $10.6 million. For the nine months ended September 30, 1998,
cash generated from operating activities was comprised principally of net
earnings of $1.5 million, depreciation of $411,000 and an increase in accounts
payable of $1.6 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 nine months ended September 30, 1999, Cheap Tickets used cash from
investing activities of $88.2 million compared with cash provided of $159,000
for the nine months ended September 30, 1998. Cash used in investing activities
for the nine months ended September 30, 1999 included purchases of short-term
marketable securities of $103.8 million, netted with proceeds from the sale of
marketable securities of $18.5 million. Capital expenditures for the nine months
ended September 30, 1999 and 1998 were $2.9 million and $342,000, respectively.
For the nine months ended September 30, 1999, Cheap Tickets received net
proceeds from the initial and secondary public offerings of $144.6 million after
reduction of underwriters fees and other costs of issuance less $4.8 million to
redeem mandatorily redeemable preferred stock and accumulated dividends.
At September 30, 1999 Cheap Tickets had on hand cash and cash equivalents of
$72.2 million and short-term marketable securities of $90.3 million. Cheap
Tickets' net working capital was $148.0 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 September 30, 1999. Outstanding long-term debt, net of current
installments, was $521,000 and capital lease obligations were $3.5 million at
September 30, 1999.
The Board of Directors has authorized the repurchase of up to $20 million of
Cheap Tickets outstanding common stock from time to time through periodic open
market transactions. Cheap Tickets intends to purchase shares under the program
in the open market from time to time depending on market conditions. As of
November 9, 1999, Cheap Tickets has repurchased approximately $2,550,000 of its
common stock. However, there can be no assurances that Cheap Tickets will, in
fact, continue to repurchase more shares. Cheap Tickets believes that all funds
required for the repurchase of common stock will be obtained from its available
cash resources and marketable securities.
Cheap Tickets believes that 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 $7.3 million was invested through September 30, 1999, or which
$2.9 million were cash purchases and $4.4 million was financed through capital
leases. If cash generated from internal operations is not sufficient to satisfy
Cheap Tickets' liquidity requirements, Cheap Tickets may seek to increase
available bank lines or sell equity or debt securities depending on a number of
factors, including market conditions. The sale of convertible debt or equity
securities could result in additional dilution to Cheap Tickets' stockholders.
There is no assurance that financing will be available in amounts or on terms
acceptable to Cheap Tickets, if at all.
14
<PAGE>
Year 2000 Compliance
Overview
Cheap Tickets has taken 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 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 developed a
contingency plan in the event that any of its critical computer systems are not
Year 2000 compliant by January 1, 2000.
15
<PAGE>
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 that 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 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.
16
<PAGE>
Risks Associated with Forward-Looking Statements
From time to time, Cheap Tickets may make certain statements that contain
"forward-looking" information or statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipate", "believe",
"expect", "estimate", "project", and similar expressions are intended to
identify such forward-looking statements. Forward-looking statements may be made
by management orally or in writing, including, but not limited to, in press
releases, as part of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this Report, and in Cheap
Tickets' other filings with the Securities Exchange Commission. Although Cheap
Tickets believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Such forward-looking statements are subject to
certain risks, uncertainties and assumptions, including, without limitation
those identified below. Should one or more of these risks or uncertainties
materialize, or should any of the underlying assumptions prove incorrect, actual
results of current or future operations may vary materially from those
anticipated, estimated, or projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates.
General
There are several risks and uncertainties that may affect the future operating
results, business and financial condition of Cheap Tickets, including, without
limitation: (1) the risk of reduction in consumer demand for Cheap Tickets'
products; (2) the risk of loss of one or more of the major airline carriers with
whom Cheap Tickets does business; (3) the risk that Cheap Tickets may not be
able to continue to provide its products at prices which are competitive or that
it can continue to market its products in a manner that appeals to consumers
even if price-competitive; (4) the risk that Cheap Tickets may not be able to
obtain its products on substantially similar terms, including cost, in order to
sustain its operating margins; (5) the risks associated with the exercise of
management's discretion in the use of proceeds from the initial public offering;
and (6) the risks inherent in legal proceedings. Readers are encouraged to refer
to Cheap Tickets' Registration Statement on Form S-1 which became effective
August 19, 1999 for a further discussion of Cheap Tickets' business and the
risks and opportunities attendant thereto.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE RE MARKET RISK
Not applicable.
17
<PAGE>
PART II--OTHER INFORMATION
Item 1. 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.
Cheap Tickets believes that this lawsuit is without merit and intends 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.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Please refer to the discussion in notes 3 and 4 of the Financial Statements
set forth in Part I, Item 1 and in the Section entitled "Liquidity and Capital
Resources" in Part I, Item 2.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
18
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.16+ 2000 Net Consolidator Program Agreement dated June 23, 1999
between Trans World Airlines, Inc. and Cheap Tickets, Inc.
27.1 Financial Data Schedule
+Portions have been omitted pursuant to a confidential treatment request.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the three months
covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEAP TICKETS, INC.
(Registrant)
/s/ Michael J. Hartley
Date: November 12, 1999
Michael J. Hartley
Chairman of the Board, Chief Executive Officer
/s/ Dale K. Jorgenson
Date: November 12, 1999
Dale K. Jorgenson
Chief Financial Officer and Vice President (Principal
Financial Officer and Principal Accounting Officer)
19
<PAGE>
Exhibit 10.16
Note: Portions of this exhibit indicated by "[*]" are subject to a
confidential treatment request, and have been omitted from this exhibit.
Complete, unredacted copies of this exhibit have been filed with the Securities
and Exchange Commission as part of the Company's confidential treatment request.
--------------------------
2000 NET CONSOLIDATOR PROGRAM
================================================================================
<TABLE>
<S> <C> <C> <C>
YOUR FIRM: CTI Proposal Date: June 18, 1999
1440 Kapiolani Blvd. Your Firm ARC: 1260167/05-51326
8th Floor Effective Date: November 1, 1999
Honolulu, HI 96814 Termination Date: October 31, 2000
(hereinafter "Your Firm") DISTRICT: LAX
AGREEMENT NO: CON20004
</TABLE>
This Agreement, when accepted shall constitute the entire Agreement between Your
Firm and Trans World Airlines, Inc. ("TWA") with respect to net fares applicable
to the markets identified herein, for air travel on TWA or Trans World Express
("TWE") commencing with the above Effective Date and continuing through the
above Termination Date, and is subject to the General Terms and Conditions set
forth on the following pages. This Agreement supersedes and replaces all
previous understandings and agreements, whether oral or written with respect to
the subject matter hereof.
The net fares offered to Your Firm are predicated on the following:
1. All travel must originate in the USA, with no westbound origination, and
must be round-trip, open-jaw, circle trip, or one-way. One way transatlantic
travel permitted at 60% of the applicable round-trip fare. Single open-jaw
is permitted at [*].
2. All travel must be sold consisting of a [*] minimum, ninety (90) day maximum
stay.
3. All fares are quoted in U.S. dollars and are payable in U.S. dollars
(regardless of the currency rate of exchange). Payment must be made in cash
only; payment by credit card or MCO is not acceptable.
4. Net fares, surcharges and applicable fees are not subject to commission.
5. Net fares are exclusive of fuel, departure, passenger facility, airport,
terminal and/or security taxes or surcharges, which when applicable must be
added to the fare collected from the passenger, and shown on the ticket(s)
when issued. Outbound date determines round trip seasonal fares only.
Surcharges, fees, sell-up differentials are applicable based on actual
differentials are applicable based on actual date of travel and must be
added to the fares regardless of departure date and/or season. Any passenger
routing must be the same as the routing of any TWA published fare for that
city pair.
6. Travel may not be combined with or ticketed in conjunction with any other
fare on TWA/TWE (except for fares listed in this Agreement) or any other
carrier or airline fare.
7. Net fares must be ticketed within [*] days of booking a reservation.
Reservations made within [*] days of departure must be ticketed within [*]
hours of booking.
8. No block space is permitted; group bookings (10 or more passengers) require
specific authorization from TWA's Group Desk, and are subject to the terms
and conditions applicable to TWA Group Desk sales procedures.
9. Net fares are subject to change upon fifteen (15) days prior written notice.
10. All sales are subject to audit by TWA. Booking or ticketing violations will
subject Your Firm to debit memo, cancellation of booking and/or immediate
termination of this Agreement, at the sole discretion of TWA.
11. During the term of this Agreement, Your Firm agrees to ticket an average of
[*] net flown (based on true origin and destination) passengers per month.
12. No tour conductor, student, infant, senior, site, agency discounts are
permitted.
13. All tickets must be issued on standard stock with TWA (015) validation. No
manual ticketing is permitted.
14. In the event of a departure date weather conditions or other operational
difficulty which results in a flight cancellation, delay or misconnection,
TWA will provide transportation on its next available flight in the same
class of service as originally ticketed, at no additional cost to passenger.
TWA does not guarantee reprotection of passengers on another airline.
15. No name changes allowed on ticketed reservations (PNR).
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
2000 NET CONSOLIDATOR PROGRAM
================================================================================
GENERAL TERMS AND CONDITIONS
1. This agreement shall become effective as of the date indicated above
provided one (1) copy, signed by Your Firm is returned to TWA within thirty
(30) days of the Proposal Date indicated on the front page of this
Agreement. In the event this Agreement is not so returned, it shall be
construed as an offer only and shall be deemed automatically revoked. Any
alterations, deletions or additions to the Terms and Conditions of this
Agreement will not be effective without the express written approval of TWA.
2. Either party may cancel this Agreement at anytime, with or without cause,
upon 30 days prior written notice to the other.
3. Your Firm can not promote TWA in conjunction with this program in any way
including, but not limited to, written advertisement or print through
newspapers, magazines, and/or facsimile solicitations.
4. Transportation shall be used in accordance with applicable tariffs and the
conditions of carriage and rules and regulations of TWA. Tickets may not be
used in conjunction with any special marketing programs conducted by TWA
from time to time. [*]
5. Tickets may not be endorsed over to other airlines for carriage, refund or
exchange. Individual passengers shall be responsible for payment of excess
baggage charges, upgrades and other charges incurred after issuance of
tickets.
6. Your Firm agrees to notify TWA promptly, in writing in the event there are
changes in the ownership, operation or control of Your Firm.
7. Your Firm agrees to take all reasonable and appropriate measures to keep
this Agreement confidential, with the exception of those details necessary
for the normal conduct of Your Firm's business.
8. Neither TWA nor Your Firm will in any manner or by any device, either
directly or indirectly, act in violation of any applicable law, governmental
order or regulation including the provisions of TWA's tariffs and Your
Firm's appointment or provision for the conduct of business as established
by ARC.
9. Tickets must be issued only at Your Firm's home office set forth on the
preceding page hereof and Your Firm's branch office locations filed as such
with the Airline Reporting Corporation ("ARC").
10. In the event TWA terminates your firms Your Firm Sales Agreement, this
Agreement shall also terminate as of the same date.
11. This Agreement is governed by the laws of the State of Missouri.
<PAGE>
1999 NET CONSOLIDATOR PROGRAM
================================================================================
<TABLE>
<CAPTION>
<S> <C>
MARKETS: USA to: All TWA International destinations except TLV/CAI/RUH
- ------- -----------
SURCHARGE DATES: See attached schedule
- ---------------
BOOKING CLASS: "T" Coach Transatlantic and Domestic
SELLUP: "V" Coach Transatlantic and Domestic
- -------------
FARES: See attached schedule
- -----
FARE BASIS CODE: TLCONS/TKCONS/THCONS
SELLUP: VLCONS/VKCONS/VHCONS
- ---------------
TICKET DESIGNATOR/ NF99
SELLUP: NF99
- ------------------
DISCOUNTS: NONE
- --------- ----
CHANGES: Reticketing (including the reissuance of lost tickets) is the responsibility of the Your Firm. All
- ------- changes/cancellations must be made at least 24 hours prior to the flight on which the passenger has
reservations.
Once ticketed, all changes will be subject to a $100 fee provided origin and destination do not
change, minimum/maximum stay requirements are met, and space in appropriate booking class is available.
CANCELLATION: A $150 cancellation penalty applies to refunded tickets provided the reservation was cancelled prior to
- ------------ departure. Refund is not available to NOSHOW reservations or partially used tickets. Refund request must
------------- ------
be submitted to TWA Passenger Refunds within 60 days of original travel date. In the event of death or
the hospitalization of the passenger, the cancellation penalty will be waived provided valid
documentation is provided.
TICKETING All tickets must be issued on standard stock with TWA (015) validation. All tickets must be booked
- --------- from direct access availability with ticket numbers appearing in PNR. For Non-Worldspan users, ticket
PROCEDURES: numbers must be transmitted via GFAX (OSI) field.
- ----------
Remarks (Endorsement Box) - Valid only on TWA/$100 change fee apply/$150 Cancellation
------------------------- penalty.
Fare Basis Box/
--------------
Ticket Designator Box - Assigned fare basis code/ticket designator code extended
----------------------- to all flight coupons. No dollar should appear on
flight coupon or passenger receipt.
Total Box (Flight coupon) - "Bulk Fare" and Government fees and taxes should appear
------------------------ on flight coupon. Prepaid Ticketing and MCO's are not
permitted.
FARE BASIS/BOOKING CLASSS TICKET DESIGNATOR AVIATOR MILES
------------------------- ----------------- -------------
(See seasonal fare page) [*] NF99 [*]
(See seasonal fare page) [*] NF99 [*]
</TABLE>
AGREED TO AND ACCEPTED BY: Trans World Airlines, Inc.
NAME: /s/ Tammy A Ishibashi /s/ Richard G. McBee
------------------------
TITLE: Executive V.P. Richard G. McBee
------------------------
DATE: 6-23-99 Staff Vice President - Sales Programs
------------------------
<PAGE>
CONSOLIDATOR
WINTER SEASON ROUNDTRIP NET FARES
---------------------------------
November 1, 1999 - December 15, 1999
January 1 - March 31, 2000
<TABLE>
<CAPTION>
NYC ZONE ZONE STL ZONE ZONE
1 2 3 4
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
PAR [*] [*] [*] [*] [*] [*]
-----------------------------------------------------------------------------------------------------
MAD [*] [*] [*] [*] [*] [*]
-----------------------------------------------------------------------------------------------------
BCN [*] [*] [*] [*] [*] [*]
-----------------------------------------------------------------------------------------------------
LIS [*] [*] [*] [*] [*] [*]
-----------------------------------------------------------------------------------------------------
MIL [*] [*] [*] [*] [*] [*]
-----------------------------------------------------------------------------------------------------
ROM [*] [*] [*] [*] [*] [*]
-----------------------------------------------------------------------------------------------------
LON [*] [*] [*] [*] [*] [*]
-----------------------------------------------------------------------------------------------------
</TABLE>
* ONLY APPLICABLE WITH CHI/DTT/CLE
ZONE 1 - ALB BDL BOS CHI CLE DTT ORF PHL PIT PWM RIC ROC WAS
ZONE 2 - MIA FLL FMY JAX ORL PBI SRQ TPA SDQ POP SJU SXM
ZONE 3 - ALO ATL BHM BMI BNA BRL CGI CID CMH CMI COU CVG DAY
DEC DFW DSM ELP EVV FSD FWA FYV GRR IAH ICT IND JLN
LEX LIT LNK MEM MFE MKC MKE MLI MSN MSP MSY MWA OKC
OMA PAH PIA RDU SBN SDF SGF SHV SPI SUX TBN TUL TYS
UIN
ZONE 4 - ABQ AUS COS DEN LAX LAS ONT PDX PHX RNO SAN SAT SEA
SFO SJC SLC SMF SNA
=============================================================================
Security Charge, U.S. Departure Tax, Westbound Customs,
Immigration Fee, Westbound Aphis Tax, Passenger Facility Charge
(PFC's) and Applicable Foreign Taxes are not included. [*]
---
=============================================================================
<TABLE>
<S> <C>
AIRFARES: Round-trip U.S. Origin Travel
WEEKEND SURCHARGE: Travel either direction on Friday/Saturday/Sunday add [*]
BOOKING CLASS: "T"
FARE BASIS: TLCONS
SELLUP: INTO "V" CLASS [*] ONE-WAY / [*] ROUND-TRIP
FARE BASIS: VLCONS
DISCOUNTS: NONE
OPEN JAW: Single open-jaw travel permitted at [*]
STOP OVERS: NONE
HOLIDAY SURCHARGE: TRAVEL ORIGINATING DECEMBER 16-24, 1999 SEE FOLLOWING PAGE
--------------------
MINIMUM STAY: [*] Night MAXIMUM STAY: 90 Days
ADVANCE PURCHASE: [*] Days after reservations are booked. Reservations made within [*] days of Departure must be
ticketed within [*] hours of booking.
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
CONSOLIDATOR
WINTER SEASON ROUNDTRIP NET FARES
---------------------------------
December 16 - December 24, 1999
<TABLE>
<CAPTION>
NYC ZONE ZONE STL ZONE ZONE
1 2 3 4
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
PAR [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
MAD [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
BCN [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
LIS [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
MIL [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
ROM [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
LON [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* ONLY APPLICABLE WITH CHI/DTT/CLE
ZONE 1 - ALB BDL BOS CHI CLE DTT ORF PHL PIT POP RIC ROC SDQ
SJU WAS PWM
ZONE 2 - MIA FLL JAX ORL PBI SRQ TPA
ZONE 3 - ALO ATL BHM BMI BNA BRL CGI CID CMH CMI COU CVG DAY
DEC DFW DSM ELP EVV FSD FWA FYV GRR IAH ICT IND JLN
LEX LIT LNK MEM MKC MKE MLI MSN MSP MSY MWA OKC OMA
PAH PIA RDU SBN SDF SGF SHV SPI SUX TBN TUL TYS UIN
ZONE 4 - ABQ AUS COS DEN ELP LAX LAS MFE ONT PDX PHX RNO SAN
SAT SEA SFO SJC SLC SMF SNA
================================================================================
Security Charge, U.S. Departure Tax, Westbound Customs,
Immigration Fee, Westbound Aphis Tax. Passenger Facility Charge
(PFC's) and Applicable Foreign Taxes are not included. [*]
---
================================================================================
<TABLE>
<S> <C>
AIRFARES: Round-trip U.S. Origin Travel
WEEKEND SURCHARGE: Travel either direction on Friday/Saturday/Sunday add [*]
BOOKING CLASS: "T"
FARE BASIS: TLCONS
SELLUP: INTO "V" CLASS [*] ONE-WAY / [*] ROUND-TRIP
FARE BASIS: VLCONS
DISCOUNTS: NONE
OPEN JAW: Single open-jaw travel permitted provided at [*].
STOP OVERS: NONE
MINIMUM STAY: [*] Night MAXIMUM STAY: 90 Days
ADVANCE PURCHASE: [*] Days after reservations are booked. Reservations made within [*] days of Departure must be
ticketed within [*] hours of booking.
</TABLE>
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<PAGE>
IMPORTANT!
Please Retain and Refer To At Time of Ticketing
BULK/NET TICKETING INSTRUCTIONS
TWA's Bulk/Net Fare Agreements with net fares to TWA destinations: Please refer
to the contract for the applicable markets, fares, fare basis codes, and ticket
designators. To issue tickets correctly please follow the instructions below.
1. Always use the APPLICABLE FARE BASIS CODE followed by the ASSIGNED TICKET
DESIGNATOR. IT IS EXTREMELY IMPORTANT THAT THIS COMPLETE CODE BE USED IN
THE FARE BASIS/TICKET DESIGNATOR BOX. Note: a slash is required between
-----
the fare basis code and the ticket designator.
2. Booking Class: Applicable booking class of the Bulk/Net fare specified in
your contract.
3. The following information must be printed on the ticket:
<TABLE>
<CAPTION>
<S> <C>
Remarks/Endorsement Box---------------------------VALID ON TWA ONLY/$$$$ CHANGE FEE/
NON-REFUNDABLE
(Replace $$$$ with applicable change
fee amount as stated in contract).
Fare Basis Box/Ticket Designator------------------ASSIGNED FARE BASIS CODE/TICKET DESIGNATOR
extended to ALL coupons and travel segments.
Equivalent Fare Paid Box (Auditors Coupon)--------ALLOCATE BASE FARE, TAX, PASSENGER FACILITY
CHARGES AND OTHER APPLICABLE GOVERNMENT FEES
AND TAXES. Total all amounts
Total Box (Flight Coupon)-------------------------"BULK FARE", plus government fees and taxes.
Fare amount must not be written on Passenger
Coupon or Flight Coupon.
</TABLE>
TICKETS ISSUED INCORRECTLY ARE SUBJECT TO DEBIT MEMOS
-----------------------------------------------------
<PAGE>
CONSOLIDATOR
WINTER SEASON ROUNDTRIP NET FARES
---------------------------------
December 25 - December 31, 1999
<TABLE>
<CAPTION>
NYC ZONE ZONE STL ZONE ZONE
1 2 3 4
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
PAR [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
MAD [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
BCN [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
LIS [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
MIL [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
ROM [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
LON [*] [*] [*] [*] [*] [*]
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* ONLY APPLICABLE WITH CHI/DTT/CLE
ZONE 1 - ALB BDL BOS CHI CLE DTT ORF PHL PIT POP PMW RIC ROC
SDQ SJU SXM WAS
ZONE 2 - MIA FLL FMY JAX ORL PBI SRQ TPA
ZONE 3 - ALO ATL BHM BMI BNA BRL CGI CID CMH CMI COU CVG DAY
DEC DFW DSM EVV FSD FWA FYV GRR IAH ICT IND JLN LEX
LIT LNK MEM MKC MKE MLI MSN MSP MSY MWA OKC OMA PAH
PIA RDU SBN SDF SGF SHV SPI SUX TBN TUL TYS UIN
ZONE 4 - ABQ AUS COS DEN ELP LAX LAS MFE ONT PDX PHX RNO SAN
SAT SEA SFO SJC SLC SMF SNA
<TABLE>
<S> <C>
AIRFARES: Round-trip U.S. Origin Travel
BOOKING CLASS: "T"
FARE BASIS: TLCONS
SELLUP: INTO "V" CLASS [*] ONE-WAY / [*] ROUND-TRIP
FARE BASIS: VLLCONS
DISCOUNTS: No Student/Infant/Child/Senior/tour
conductor/agency discounts permitted
MINIMUM STAY: [*] night
MAXIMUM STAY: 90 Days
STOP OVERS: NONE
SURCHARGE: NONE
TICKETING: Within [*] days of booking Reservations
</TABLE>
================================================================================
Security Charge/U.S. Departure Tax/Westbound Customs and Immigration
Fee/Westbound Aphis Tax/Passenger Facility Charge (PFC's) and Applicable
Foreign Taxes are not included. Travel may not be combined with or
ticketed in conjunction with other fares on TW except for fares listed in
this program or any other airline fare.
================================================================================
[*] The redacted portion, indicated by this symbol, is the subject of a
confidential treatment request.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 72,238
<SECURITIES> 90,261
<RECEIVABLES> 4,899
<ALLOWANCES> 0
<INVENTORY> 176
<CURRENT-ASSETS> 168,668
<PP&E> 11,779
<DEPRECIATION> 2,485
<TOTAL-ASSETS> 178,131
<CURRENT-LIABILITIES> 20,578
<BONDS> 4,006
0
0
<COMMON> 24
<OTHER-SE> 152,147
<TOTAL-LIABILITY-AND-EQUITY> 178,131
<SALES> 257,143
<TOTAL-REVENUES> 273,255
<CGS> 219,508
<TOTAL-COSTS> 44,289
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161
<INCOME-PRETAX> 11,491
<INCOME-TAX> 4,711
<INCOME-CONTINUING> 6,780
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,780
<EPS-BASIC> .31
<EPS-DILUTED> .29
</TABLE>
